Intensification of natural gas cooperation between the Baltic States and Finland

For many years, the Baltic States and Finland have actively worked to strengthen energy security, focusing on the creation of a unified natural gas market, increasing trade, and—since the outbreak of the full-scale war in Ukraine—coordinating anti-crisis measures in the energy sector. One key aspect of this effort was the adoption of amendments to Latvia’s Energy Act (Enerģētikas likums), which now allows the Inčukalns underground gas storage (UGS) facility to store reserves from Lithuania, Estonia, and Finland as part of their strategic gas reserves.

Steps toward a unified natural gas market. The Baltic States and Finland have long cooperated in strengthening regional energy security, particularly within the electricity ( “IEŚ Commentaries”, no. 512) and natural gas markets. Years ago, recognising their heavy reliance on Russian gas supplies and following the outbreak of the war in Ukraine, these countries took decisive actions to establish an integrated natural gas market. The goal was to enhance security through two key measures; first, trade was expanded, enabled by the development of regional import and transport infrastructure[1]. Second, market integration was pursued through the launch of a unified natural gas market involving Latvia, Estonia, and Finland (known as the FinEstLat market) on January 1, 2020. This integration introduced single transmission tariffs, reducing administrative burdens, increasing market competition, and optimising the use of energy infrastructure. These steps are part of broader efforts to build a single natural gas market across the European Union, driven by transmission operators in these countries[2].

Enhanced energy cooperation. The war in Ukraine has accelerated the push for better coordination, particularly in times of crisis. A significant milestone was the signing of agreements under the solidarity measure (Article 13 of the Regulation)[3], which ensures that protected customers can receive natural gas supplies during an energy crisis. These agreements, concluded in 2022, improved coordination of crisis measures and enhanced regional cooperation in the natural gas market[4]. More recently, the Latvian parliament (Saeima) took another step in this direction by adopting new legal provisions on September 12, 2024. These regulations further strengthen the security of natural gas supplies and respond to the growing need for trade. Under the revised Energy Act, the Inčukalns UGS in Latvia can now hold natural gas reserves from Lithuania, Estonia, and Finland as part of their strategic reserves. According to EU legislation, including Directive 2009/73/EC[5], member states must ensure free access to storage infrastructure, which includes cross-border cooperation on natural gas storage. In line with these regulations, the Inčukalns UGS is available for use by the Baltic States and other EU countries. However, member states are required to maintain their own stockpiles of natural gas, and currently, only Latvia possesses such a UGS in the region, as neither Estonia, Lithuania, nor Finland have comparable storage facilities.

Challenges and limitations in the Baltic Sea region. While Latvia’s latest legal amendments aim to establish a regional system for natural gas supply security based on a unified market, there are still two major factors hindering full integration. First, the region has a limited number of suppliers, as the market was long dominated by Russia ( “IEŚ Commentaries”, no. 587; “IEŚ Commentaries”, no. 724). However, given the current geopolitical situation, the shared perception of threats is driving efforts towards greater market harmonisation. Second, Lithuania has been reluctant to fully engage in the development of a unified natural gas market. Lithuania’s position stems from its advantageous infrastructure, which ensures its national energy security, including the Klaipėda LNG terminal and the GIPL gas pipeline. As a result, the timeline for Lithuania’s integration into the FinEstLat market has been postponed multiple times, with the current target set for October 2024. While Lithuania supports market integration, it expresses concerns that the current arrangements may not benefit all participants equally. There is a fear that Lithuania’s position could be weakened in an integrated market, where it would become just one of several equal players compared to its current role as a key regional security provider. Another issue is the inter-operator compensation mechanism, which governs the division of natural gas transport costs within the region.

Conclusions

• The Latvian Saeima’s approval of new legal regulations governing natural gas reserves concludes many months of efforts, including: 1) multilateral intergovernmental negotiations, and 2) the process of securing approval from national energy regulators in Lithuania, Estonia, and Finland regarding the use of the Inčukalns UGS. These measures have enhanced energy security and strengthened regional cooperation, giving individual countries better access to the only gas storage facility in the region.
• Latvia’s existing infrastructure stabilises supply and supports the functioning of the regional natural gas market while also promoting integration within the broader process of building a single EU gas market. Increased cooperation enables the full use of the regional infrastructure and aids in diversifying the sources and routes of natural gas supplies. The effectiveness of these measures was demonstrated during the repair of the Balticconnector gas pipeline (8 October 2023 – 22 April 2024).
• Lithuania’s unique position, due to its LNG terminal in Klaipėda and the GIPL gas pipeline, allows it to secure alternative gas supplies independent of Russia. Therefore, Vilnius has remained cautious about joining the FinEstLat market, as it gains less from integration compared to Latvia, Estonia, and Finland, which are more reliant on the shared gas market. To facilitate Lithuania’s full integration into the regional system, it will be essential to develop mechanisms that recognise and incorporate the strategic advantages Lithuania brings to the table in the creation of a unified natural gas market.

[1] In the Baltic States and Finland, transport capacities (including the Poland-Lithuania and Estonia-Finland interconnectors) and import capacities (regasification terminals in Świnoujście, Klaipėda, Pori, Tornio, Inkoo, and Hamina) were expanded.

[2] The single market has led, among other things, to the elimination of internal tariffs for the transmission of natural gas in the region and has introduced a unified system of entry tariffs supported by an inter-operator compensation mechanism.

[3] Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of natural gas supply and repealing Regulation (EU) No 994/2010.

[4] The agreements were concluded between: Latvia and Estonia (4 January 2022, i.e., before the outbreak of a full-scale war in Ukraine), Latvia and Lithuania (10 March 2022), and Estonia and Finland (25 April 2022).

[5] Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC.