The Baltic gas market: a microcosm of Europe’s struggle to quit Russian gas

The Baltic gas market was, until eight years ago, entirely dependent on Russia for supplies. Even as recently as 2021, 74 per cent of the region’s 5.6bcm of gas demand was met by imports from Russia. However, following Russia’s invasion of Ukraine in February 2022, all four countries have announced the intention to give up Russian gas, albeit with varying degrees of urgency. But a lack of connections to outside markets, and limitations on pipeline capacities in the region, mean that replacing Russian gas in the short term will be extremely difficult for the coming winter, particularly given such currently elevated gas prices. This paper examines the Baltic gas market and its attempts to replace Russian gas, with particular focus on pipeline capacities, LNG projects, and the turn to renewables and hydrogen. It argues that the region’s main alternative supply project — the floating storage and regasification unit (FSRU) to be placed either in Estonia or Finland — will be insufficient to meet peak demand in the winter, and that there are scant alternatives. Supply side constraints are worsened by Lithuania and Latvia’s decision to ban imports from Russia, which could cause large price spikes in the region. Either significant demand reduction, a resumption of Russian imports, or both will be necessary if the region is to get through the winter period avoiding a crisis. In the longer term, successful implementation of planned LNG infrastructure and pipeline capacity upgrades could allow for LNG to replace Russian gas more easily.

By: Brendan A’Hearn