Port gets set for independence day

Port gets set for independence day

A €174 million floating gas processing factory – coming soon to Lithuania – is attracting worldwide attention. Colin Donald reports

Independence is coming to Lithuania later this year, specifically to the Port of Klaipeda.
I refer to the vessel “FRSU Independence”, a giant floating regasification and storage unit, commissioned by the state-owned energy terminal Klaipedos Nafta from the Norwegian company Höegh LNG .

Construction of the 170,000 cubic metres- capacity giant ship was completed in March in the shipyards of Pusan, South Korea, and it is ready to set sail sometime in the autumn.
This extraordinary vessel is aptly named. Through its decision in 2012 to proceed with the project, Lithuania has struck a bold blow for energy diversification. With one stroke it is freeing itself from the caprices of its “single supplier” –  the euphemism by which Russia is known in Klaipedos Nafta’s corporate-speak.

The effect has been almost instantaneous. Russia has offered to cut its gas prices by around 20%, allowing backers of the project to suggest it has already repaid its investment.
This is not just another infrastructure project. The commissioning of the factory ship, the construction of the jetty by which it will be moored, and the pipeline that will connect it to the gas grid are unlike anything previously attempted by a northern European nation.

The monthly visits of the Lithuanian Prime Minister Algirdas Butkevicius, and the stream of international visitors coming to he deep water port to inspect the work-in-progress attest to the fact that Klaipeda’s €174m floating liquefied natural gas (LNG) terminal is a project of national significance.

Or should that be international? To start with, the idea of a vast, “portable” energy processing factory with a minimal environmental footprint is an innovation which is already attracting worldwide attention to Lithuania. And that is separate from the all-important

implications for strategic energy supply, in terms of energy policy and pricing, which make the introduction of a new source of gas for the Baltic States the single most significant business infrastructure development in the region. No surprise then that the pressure to deliver it, on time, on budget and with minimum environmental disruption is intense.

For a man under so much pressure, Tadas Matulionis, project director for Klaipedos Nafta and the man responsible for ensuring that timetabled promises are kept, exudes an air
of business-like calm.

Matulionis, highly qualified and experienced in the complex science of managing overlapping and interdependent “critical paths”, claims that he can afford to be cool given the quality of the teams managing the components of the project. Perhaps the most extraordinary aspect is that it has all happened so fast.   

“We made our final investment decision in spring 2012, and now, two years later, we are approaching completion by the end of this year.” Matulionis explains. “That’s two and a half years approximately.“

This September marks the first anniversary of work commencing on site, this being the start of putting in the 134 giant piles for the structure – now looking more like a row of mini oil rigs than the piers of a jetty – work completed by the early spring of this year. Not bad progress, considering how recently that the final investment decision was made.

“[This progress] has been possible for two reasons, one is that we have made the right choice of technology, and secondly, because of the strategic importance of the project we have very high level governmental support enabling us to complete some of the planning procedures within the shortest possible terms. We have been fast-tracked through all the processes,” Matulionis says.

Such special treatment is not that surprising.  The LTL124 million [€36m] turnover company Klaipedos Nafta may be listed on the Vilnius stock exchange but it is two thirds-owned by the the Lithuanian government, which owns the port. Along with the port authority and the city government it has transformative plans for what in Soviet times was a closed, military city,  and which has since suffered depopulation. The security of Government involvement also helped to win favourable terms from their Norwegian ship-chartering partners Höegh, who have been in the LNG market for 40 years.

“Basically that gives us a lot of confidence in the operations of the terminal, and this is in addition to the technology that we bring to the project ourselves.”

Long before this new gas terminal was conceived, indeed for almost half a century before, the company which also runs state oil and petroleum reserves deeper inside has been operating as an oil and petroleum products transhipment terminal. The port authority itself is an arm of the Vilnius Government.

Says Matulionis: “We are not a Government agency but we have been er... entitled with
the right to implement this project as the company that is considered the best prepared for the process.”

We are talking on the deck of the motorboat that Klaipedos Nafta uses to show off work in progress to curious visitors. It is a glorious summer’s day, with the wooded banks of the Curonian Spit in the background. This is the bifurcated narrow finger of land that stretches from Klaipeda (known as Memel in previous centuries) all the way south to the Russian province of Kaliningrad.

Close by the steel and concrete stumps of the jetty, is an island formed from the spoil of generations of earlier dredging of this former Soviet naval base that is now a bird sanctuary. Its proximity was the cause of restrictions on the construction timetable, a factor which complicated an already challenging schedule.

“It has been very tough I would say, the schedule is as short as theoretically could be. We have been working without any [time] “buffers”. There has been huge pressure on our team. To squeeze everything into such a short time frame we had to do nearly everything in parallel rather than sequentially.”

The Curonian Spit helps ensure that, uniquely amongst other Baltic States ports, Klaipeda is virtually ice free all year round, and sheltered from the choppy waters of the Baltic Sea. In Lithuanian eyes, these geographical advantages were good enough reason to cut through ponderous international discussions about the prospect of a new EU-funded regional gas terminal, and just start building.

From our boat, we are looking at a row of platforms known as “dolphins”, resting on angled giant steel piles, with Latvian construction company BMG hard at work pouring concrete and welding steel. These are the basis of the 450m-long jetty that comprise the only permanent, visible part of the project.   

One of the platforms of the jetty already has a giant, hinged yellow tentacle emerging from it. This is the articulated “high pressure loading arm” though which the gas will be transferred into the port’s new 3km-long pipeline.

After its long voyage from the Sea of Japan, the €400m’s worth of FRSU will enter the bay of Klaipeda and perform a giant turn before mooring on the landward side of the jetty. The channel and the turning circle have been dredged to a depth of 14.5m, more than enough to accept the largest LNG carriers available, or those likely to be built soon.

Gas Terminal

There it will stay for the foreseeable future, a securely-moored floating factory about 300 metres from bow to stern, equipped not only with storage tanks of its own, but also with the complex, state-of-the-art plant required to turn super-cold (-163 C°) and super-compressed (600 times density) cargoes of liquefied gas back into gas.

At times the vessel may be sent off to collect gas itself, and in due course may be replaced and sent off to another part of the world. It is extraordinary to think of what is essentially a seaworthy factory moving across the oceans to fetch its own raw material.

The giant LNG tankers will themselves berth next to the vessel and disgorge their cargoes into its processing parts, to be turned into gas and fed into the region’s pipeline system, much of which will have to be repurposed and recalibrated, as the network of pipe branches was designed solely with the intention of piping Russian gas to the sea, not piping gas from the sea towards the Russian border. The old order is being overturned.

Matulionis explains that construction of the pipeline itself is one of the most impressive parts of the project in terms of engineering complexity. It goes from the jetty into the water underground all the way to a refinery junction, 3km from where the ships are berthed. This makes it one of the longest underground drillings of this type in Europe, accomplished by HDD (horizontal direct drilling technology).  Its 30-40m depth was necessary in order to future-proof this vital pipeline from whatever Klaipeda’s state-owned port’s development plans may be in the future, so that “in whatever circumstances we are not affected
by further construction works”.

The speed and efficiency of the KN’s construction process is all the more remarkable for the fact that they are breaking new ground. This kind of marine based facility has been around for only about five years, pioneered by the Brazilian company Petrobas. In European terms, Klaipeda is only the second FSRU in Europe, after Livorno in Italy whose LNG terminal came online in 2011, although the Dubai government-owned facility at Jebel Ali port, also publicly-owned is a closer parallel.

The vessel Independence itself is a long term charter for this vessel with Höegh LNG.
“Basically their four decades of experience in this market gives us a lot of confidence in the operations of the terminal, and this is in addition to the technology that we bring to the project,” Matulionis says.

“We have a lot of interest from other countries, but in fact not as much as we might have had as we have been building the project so quickly that not everyone has had time to notice that we have appeared on the map!”

“In the last year we have had quite a few visits from abroad, not least because we are on time and on budget and we are doing it in a short time frame, so of course people are curious.”

While the LNG industry has been in existence for half a century, the concept of floating facilities materialised only about five years ago, since then its significant cost advantages over land-based terminals have become clear.

I ask about Lithuania’s decision to adopt the new technology.  

“From the very introduction of natural gas into the area until now, there has been a single supplier [Russia]. For some time it has been unacceptable to depend on this source. This is not only true for Lithuania but also for the broader region. Latvia, Estonia and Finland also get 100% of their natural gas supplies from a single supplier and until now there has been no physical possibility of choosing an alternative supplier.”

“That situation became even less acceptable when that dominant supplier gave a number of signals starting in the winter of 2008 [the start of the Russia-Ukraine gas dispute] that it was not the most reliable supplier, and in other periods since it has become obvious that gas supplies are not only commercial or technical matters but there is also quite a bit of political interest involved in this issue.”

Russian threats over the security of the gas supply contributed to moves by the European Union to stipulate alternative sources of energy, culminating in a requirement for member states to plan for alternative sources of all major energy areas such as gas or electricity.
That directive has been transposed into Lithuanian national legislation along with that of other EU countries.

“It was understood that with all the European gas networks being physically rather far away from ourselves, the only way of introducing an alternative source was to build an import terminal. With natural gas there are only two ways of transporting it, either through a pipeline, which is how the majority of gas still flows worldwide, or by liquefying it.”

“It is only in the last decade or so that the global LNG market, has started not only expanding but changing in a way that more so-called spot trading appeared. This model is based not so much on the long term 10-25-year contract but on the supplier going to the market and offering their LNG cargoes to whoever wants to buy it at short notice.”

This spot market, where buyers are able to go to the market for better terms, is expanding rapidly, and is expected to expand even further with new capacities that are expected to come online in Australia and elsewhere, and new price-setting mechanisms being pioneered in the US in which liquefication fees and profit margin are packaged in with prices set by the US gas exchange prices.

For Lithuania of course, the purpose was not so much to pioneer new energy supply business models, but to assert more control over its own energy prices.

The Klaipeda facility was conceived as a short and medium term measure to ensure security of supply for every winter, irrespective of what happens to the pipeline coming from “the East”. The by-product has been to create an exciting new market for the wider region, which previously did not exist.

“It is expected that as a consequence of introducing competition, the prices here will reflect what is happening on the global market, which is significant because if you look at the figures, Lithuania is constantly number one or two in terms of the gas price levels in Europe.

Despite being closer to the source we have been paying significantly more than anyone else in Europe.”

I ask, somewhat disingenuously why Russia’s gas suppliers charged Lithuania so much?  
Matulionis smiles. “I think that it’s quite obvious in a situation where there is no alternative, where there is no choice, you basically charge as much as you can. “In a way it was not helpful [to Russia] either because gas consumption has declined over time with households and businesses turning to alternative energy sources, probably as a consequence of gas being so expensive that an alternative became competitive.”

“[In parallel] we thought we would go ahead and do this because the gas consumption is the highest here.” And natural gas constitutes the highest proportion in the energy mix in Lithuania.”

“So basically the pain because of the high prices and the vulnerability of supply was the highest here.”

“And the government seemed to be the least willing to continue with discussions that may take years to complete and in 2010-2011 it decided that irrespective of the regional discussions there should be a short term measure implemented to cut this monopoly
as soon as we could.”

Indeed discussions are still ongoing between Finland and Estonia, with Latvia having withdrawn from consideration of the pan-Baltic project. But Klaipedos Nafta are insisting
their new terminal will be accessible to all who want to buy gas, although some who invest in infrastructure insist on restricting such access until they have recovered their capital expenditure.

Says Matulionis: “It was considered that if we were building yet another monopoly it would not help towards creating an open market.”

“We are a completely open terminal. Everyone gets to use our capacity on the same terms,
at the same price.”

Lithuania’s bold gambit appears to have worked. In May, Russia’s Gazprom and its Lithunanian equivalent Lietuvos Dujos agreed a reduced the gas price for Lithuanian consumers approximately 20% less than the previous $480/1000 m3. The agreement will stand until January, 2016.

Given that major infrastructure projects, especially internationally important ones, tend to get bogged down for years or decades (Rail Baltica is just one example), there is much to admire in this daring project by Klaipedos Nafta and the Lithuanian state whose implications are at once technical (introducing potentially transformative new technology to the region), political-strategic and commercial.

When the gas starts to flow early next year, Tadas Matulionis will not be the only Lithuanian who will be celebrating.