At the moment, European energy markets are heavily dependent on Russian supplies. This is especially true of the countries with direct land borders to the big bear, including Finland and the Baltic States – Estonia, Latvia, and Lithuania –, which import virtually all of their gas from Russia.



The Baltic Sea may become the future LNG entry point to EU markets

This situation has significant geopolitical implications. Northern European states, with their long and harsh winters, find their foreign policy options limited when dealing with Russia, as it is vital to maintain a stable supply of gas at consistent prices to ensure steady economic activity. Russia, however, is well known for using its energy monopoly for political gains, most notably in Eastern Europe.

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As a result, Finland and the Baltic countries are eager to diversify their energy supplies to include non-Russian gas sources, and the European Union has also recognized this concern. Thus the European Commission is currently planning to subsidize a regional liquid natural gas (LNG) terminal so that the states surrounding the Baltic Sea can have direct access to global LNG markets. The big question at the moment is: Which country should get the terminal?

This question has been debated in the region for a few years now, but no answer has been found. At first, the European Commission stated that the terminal would only be eligible for funding if it qualifies as a Project for Common Interest (PCI), meaning that it would have to benefit two or more EU member states. It was decided that Finland and the Baltics could decide among themselves where the terminal should be built, with the idea that the common interest would lead to a mutually beneficial conclusion.

But having a large, EU-funded LNG terminal provides significant domestic advantages and the decision has instead created competition. The future host country will gain direct access to global markets, meaning they can store the gas as is, instead of in a processed form via pipeline, reducing transaction costs. It will also provide an attractive infrastructure project, spurring local employment as well as funded up to 50 percent by the EU.

As such, the states have been unable to come up with a verdict, and have deferred the decision back to the European Energy Commissioner, Gunther Oettinger. Considering Lithuania has opted to build its own, smaller terminal, and the fact that Latvia would be geographically inappropriate, the focus is now narrowed to whether the LNG terminal will be built in the Finnish city of Inkoo, or Muuga/Paldiski in Estonia.



Planned gas pipeline between Finland and Estonia has not helped settle on a decision for placing EU-funded LNG terminal

Both countries have made their cases. Finland argues that it should get the terminal because it consumes more gas than the three Baltic States combined, and has the most at stake in terms of energy security. Estonia claims that it makes more sense to build the terminal on its shores because it provides the greatest connections to all the states concerned in the project. Latvia would logically benefit most from an Estonian-based terminal, but has been surprisingly quiet on the matter.

Both Finland and Estonia are preparing proposals to the European Commission, and hope that they will come up with a resolution soon. However, though the Commission is expected to formally announce the Baltic LNG project within the coming weeks, Finland and Estonia will still have to submit formal project applications, and the final choice is unlikely to be made before December. This means any construction won’t take place before mid-2014 at the earliest.

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Regardless of the terminal’s future location, an 80 km gas pipeline is arranged to connect Finland and Estonia’s gas networks, meaning that both countries are guaranteed big benefits from the terminal. What is more interesting is how Russia will react to all of this.

At the moment, the Russian-owned gas giant Gazprom is seeking to construct its own LNG terminal at Russia’s Baltic territory in Kaliningrad. This will come into direct competition with any EU-backed LNG terminal, and is bound to become a source of tension between the two political entities. On top of this, the EU is currently pressing antitrust charges against Gazprom, further testing the gas giant’s temper.

The gas networks of the Baltic Sea are set to become a focal point in geopolitical energy concerns during the next few years, with the case revolving around whether Russia will lose ground in a key energy market. Which country will get to host the LNG terminal, and how Russia will respond, will certainly have substantial ramifications and is worth watching.

By. Karl Sorri