April 27, 2018
Croatian LNG Terminal: Now or Never?
By David Koranyi
From a purely market perspective, the Croatian terminal is a classic case of redundant infrastructure. However, from a security of supply perspective, it is absolutely vital. Furthermore, as in the case of Lithuania, which recently constructed its own LNG terminal, its presence would significantly enhance the negotiating power of the countries in the region in purchasing gas from Russia. The mere presence of options could give countries leverage in their negotiations that was previously lacking. Timing is also critical, as Hungary and Ukraine are both slated to renegotiate their gas supply arrangements with Russia in the next two years.
While the project is more important now than ever before, building an LNG receiving terminal in Croatia has been on the agenda since the late 1980s. The project went through various iterations over the course of the last thirty years, but discussions revolved around a land-based terminal. The latest proposal by LNG Croatia, the project consortium, aims to put in place a floating regasification and storage unit (FSRU) with an initial import capacity of 2.6 billion cubic meters annually. This represents a long overdue and realistic shift in thinking that corresponds with market realities and technological change.
The Croatian government’s endorsement of the FSRU concept two years ago was a major step forward. Securing European Union (EU) funding from the Connecting Europe Facility to the tune of €125 million was another, underscoring that the European Union considers this a strategically important project. The project would increase the LNG import capacity of central and eastern European states, as all of the EU’s terminals, save the Polish, Lithuanian, and Greek terminals, are situated in the Western part of the continent.
However, while EU support is critical, EU funds only cover a fraction of the total costs, which amounts to more than €400 million.
The private sector cannot be expected to foot the bill. Gas exporters will not finance such an investment as there is already huge overcapacity in LNG receiving terminals in Europe while gas prices are rather depressed. The European Union as a whole has an LNG import capacity of over 200 billion cubic meters (bcm), out of which it only utilized 47.4 bcm in 2017.
In the United States, the Trump Administration designated gas exports as a key policy priority. Yet due to various legal and policy constraints, US Trade and Development Agency (USTDA) or Overseas Private Investment Corporation (OPIC) funding does not seem to be feasible for the terminal in Croatia.
Thus, the remaining funds need to come from the region. Regrettably, Croatia recently concluded a ten-year agreement with Gazprom on gas imports for around 1 bcm, while the remaining two-thirds of the Croatian gas demand is covered by domestic sources. Russian influence remains strong in certain Croatian (and Hungarian) political circles, acting against the LNG terminal. This may be connected to local and environmental opposition to the project. The unresolved dispute between Croatian energy company INA and Hungarian energy company MOL and the lack of reverse flow capabilities due to a missing compressor station on the Croatian side are major stumbling blocks, undermining trust between the two countries.
After more than thirty years, it is time to realize the Croatian LNG terminal. This requires regional unity and public investment by the three states that are the most to gain: Croatia, Hungary, and Ukraine.
Resolving or at least setting aside disputes will be key. This shall be supported by a concerted effort from Washington and Brussels. Once confirmed, the new US special envoy on international energy affairs at the State Department should prioritize regional engagement and continue his predecessor’s intensive mediation efforts.
Furthermore, the creation of a regional consortium of (state-owned) gas buyers from Ukraine, Hungary, and Croatia, supported by preferential loans from the European Investment Bank and/or the European Bank for Reconstruction and Development to put up the required investment, will be essential. US energy diplomacy should work together with the European Commission and regional stakeholders to bring the key stakeholders to the table. Dragging this project across the finish line is in the interest of the region, as it will bring safer supplies and potentially cheaper gas; the European Union, as it will contribute to overall European energy security and diversification of supplies; and the United States, in terms of providing energy security for allies, diminish Russian influence in the region, and provide a potential outlet for US LNG exports.
David Koranyi is a senior fellow for energy diplomacy at the Atlantic Council’s Global Energy Center. You can follow him on Twitter @DavidKoranyi