Lithuania-to-Estonia gas flow unaffected by tighter spread

Estonia will continue to import Lithuanian spot gas despite a falling Russian long-term contract price, market sources have told ICIS.

According to Estonian system operator Elering, the average Russian import price in the country was at least €5/MWh more expensive than traded prices at Lithuania’s GET Baltic exchange between January-May. The price spread between the two Baltic States was at its widest when Russian long-term contract gas into Estonia was €7.60/MWh higher than its Lithuanian equivalent in March.

Since the opening up of the Lithuanian and Estonian markets, those Estonian shippers which can diversify their procurement have been nominating down their long-term contracts and instead importing from Lithuania instead.

As the premium of the Russian long-term contract over Lithuanian spot prices has eroded month on month, there had been concern from some sources that the reduced arbitrage opportunity would limit Lithuanian imports.

The price spread between the two gas markets started to narrow in June, and in August Elering estimated the Estonian-Russian gas price was at €20.95/MWh, which was €2.60/MWh above its Lithuanian GET Baltic equivalent.

But despite the lower profit margin, gas will continue to flow from Lithuania to Estonia, market sources have told ICIS.

“We are continuing to trade, it doesn’t really affect us, there may be less incentives for arbitrage, but whenever there is price difference, trade will happen,” said Marko Allison, a partner from independent energy trader BEP.

“We have trades [in place] up to the end of the year,” he added.

Since the beginning of this year, Estonia has been importing up to a quarter of its total monthly gas demand from Lithuania, and market participants expect this volume to maintain at similar level for the rest of the year.

The market share of Lithuania gas supply in Estonia could stay at the same level as some of the supply contracts have been locked in from earlier in the year, sources said.

The lower gas prices was primarily caused by the global decline in oil prices, which pulled Russian Gazprom’s oil-indexed supply contract lower with Estonian incumbent Eesti Gaas lower.

Consequently, some expect that gas prices could fall further following the downtrend in oil.

If prices in Estonia were to fall below those in Lithuania, there could be an opportunity to sell the cheaper Estonian gas to Lithuania, said Allison.

Prior to the operation of Lithuania’s Klaipeda LNG terminal in October 2014, Gazprom was the only supplier in the Baltic region. Unlike Lithuania’s incumbent, Estonia did not receive a 20% discount from Gazprom. As a result gas prices in Estonia are usually higher than in Lithuania.

The LNG delivery at the Klaipeda terminal provided an opportunity for Estonia to import alternative gas supply sourced from Lithuania in December 2014, which was the first time non-Russian supply was delivered into the Baltic country.

Lithuanian imports – which need to transit Latvia – were conducted last month by traders BEP, Reola Gaas, Estonian power utility Eesti Energia and utility VKG group. yoke.wong@icis.com