Political obstacles to Latvia’s Baltic energy proposal

  • 2011-11-24

SO CLOSE: To diversify natural gas supplies to the Baltics, Valdis Dombrovskis has suggested connecting Lithuania’s pipeline network to the Polish grid.

Estonia, Latvia and Lithuania have continued their disagreement about where to build a liquefied natural gas (LNG) terminal in the region. The latest complication arose when Latvian Prime Minister Valdis Dombrovskis suggested that the LNG terminal plans be postponed and a natural gas pipeline from Poland to Lithuania be constructed instead.
Political concerns among the Baltic states, along with Europe’s financial crisis and Russia’s maneuvers in the region, will prevent any such projects from launching in the near to medium term, however.

During a meeting of the Baltic prime ministers on Nov. 10, in response to the continuing deadlock, Latvian Prime Minister Valdis Dombrovskis suggested that the construction of an LNG terminal in the Baltics be postponed in favor of the construction of a natural gas pipeline linking Lithuania and Poland.

Although this plan makes sense from a technical perspective, its proposal and the ongoing disagreement among the Baltic States highlight the political concerns in the region. These concerns, along with the constraints and desires of outside players Russia and Europe, will continue to stall energy development in the Baltics.

Each of the Baltic States has been vying to host a new LNG import terminal; such a facility would allow the Baltics to diversify away from Russian natural gas supplies, raise the host country’s profile within the European Union and, more importantly, come with EU funding. Lithuania and Latvia in particular are competing for the LNG project. Lithuania argues that with the closure of its Ignalina nuclear plant at the end of 2009, it needs an alternative energy source, and Latvia argues that its central location would be the most conducive to an LNG facility. This competition has stalled any progress toward an LNG plant for more than a year.

Dombrovskis’ proposal for the construction of a natural gas pipeline between Poland and Lithuania took Estonia and Lithuania by surprise. If the proposal were accepted, it would end the competition among the Baltic States over the LNG project. Furthermore, Poland is connected to Germany’s natural gas pipeline system, and Latvia is connected to Lithuania, so a pipeline linking Poland and Lithuania would get the Baltic States the energy supplies they need.
However, Estonia and Lithuania were not prepared to give up their LNG ambitions at the time the proposal was made. Delegates from both countries said they would consider the proposal but said the European Union should conduct a study to determine which project would be best. This indicates that the hindrances to Latvia’s proposal are more political than technical, something which Riga could well be aware of.

The first obstacle is Lithuania’s complicated relationship with Poland, not only because of tensions stemming from issues regarding the sizable Polish minority in Lithuania, but also in the realm of energy. The countries’ very public spat over the PKN Orlen refinery in Lithuania, which Poland owns and has been trying to sell, has not set a good precedent for cooperation between the two on energy issues.

Second, Latvia has a reputation as the Baltic State most likely to cooperate with Russia. This does not necessarily mean that Riga is doing Moscow’s bidding, but the Russo-Latvian relationship has impeded Baltic-wide projects in the past, just as Latvia is doing now with the pipeline proposal. Latvia knows of the political challenges to its pipeline proposal, and it could be hoping that an independent review of the various proposals would favor Latvia’s argument that its central location makes it the most practical option for a new LNG plant.

The final hindrance to energy development in the Baltics is Russia itself, which has been doing everything it can to sow disunity in Europe. Moscow has also been working to prevent or disrupt any energy projects that would help the Europeans diversify their energy supplies away from Russia. With Europe experiencing a financial crisis, the investment climate for such energy projects is not particularly favorable, which also plays to Russia’s advantage.

The construction of an LNG facility in the Baltics would therefore be an unprecedented development for the region, as it faces many challenges. Although increased use of LNG is often cited as an effective way for Europe to lessen its dependence on Russian energy supplies, LNG facilities are concentrated in Western Europe. There are no LNG terminals in Eastern or Central Europe, and the only LNG project under construction is the Swinoujscie plant on Poland’s Baltic coast, which is set to come online in 2014.

If the Baltic States followed Latvia’s pipeline suggestion, this LNG plant would give the Baltics at least part of the energy diversification they have been seeking. But the numerous political obstacles in the region, combined with Europe’s financial issues and Russia’s concerted efforts to create chaos in Europe, likely will keep Latvia’s proposal from moving forward in the near to medium term.

Reprinted with permission from Stratfor