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Natural gas supplier and trader UAB Litgas, part of Lietuvos Energija Group, has signed a liquefied natural gas (LNG) supply contract with Norwegian company Statoil ASA.

As part of the agreement, from 2015 Statoil will be contracted to supply an annual volume of 540 million cubic metres (cbm) of natural gas (approximately 950,000 cbm of LNG) to ensure continuous operations of the Klaipeda LNG terminal. Litgas has an obligation to ensure this supply volume as the designated supplier approved by a decree of the Ministry of Energy.

Under the mid-term contract signed with Statoil, the first LNG cargo is expected to be delivered to the Klaipeda terminal at the end of December 2014, so that the terminal will be able to start commercial operation from January 1, 2015. Each year Statoil is contracted to deliver 6-7 such cargoes to Klaipeda port.

"This strategic contract will help to ensure the availability of an alternative natural gas import source which will enable us and other Lithuanian companies to procure natural gas on international markets from various suppliers at any time," said Dominykas Tučkus, general manager of UAB Litgas.

"We are delighted to sign a contract with LITGAS. At the same time this contract marks our first step with LNG business in the Baltic Sea region. We hope that will evolve into long-term partnership and will bring mutual benefits to both parties," remarked Geir Heitmann, vice president of Statoil LNG Trading and Operations.

The contract is also said to provide "possibilities" for cooperation in LNG reloading, which is a new type of activity in the Baltic Sea region. Gas in liquid form would be pumped to smaller tonnage vessels at the Klaipeda terminal and shipped to small terminals. Successful development of commercial reloading operations would increase the usage of the terminal and would at the same time lower its maintenance costs, which are being covered by Lithuanian consumers.

The price of LNG supplied to Lithuania will be linked to the value of the National Balancing Point (NBP) index - Great Britain’s natural gas exchange. Daily NBP prices are published on Bunker Index at http://www.bunkerindex.com/prices/futures.php.

"This type of pricing is new to Lithuania and this means that the price of natural gas supplied by LITGAS will depend on changes in the supply and demand for natural gas, including LNG on the international markets as well as seasonal temperature fluctuations," added Tučkus. "Linking to natural gas indices is a common practice in North Western Europe which makes it possible to abandon the indexation of natural gas prices to oil prices which dominates in Eastern Europe and often results in natural gas prices that have no relation to the ones prevailing in the rest of Europe."

Based on exchange data of the last 4 months, the price of LNG in Lithuania would be in a range of LTL 900-1000 (USD 344.7 - 383.0) per 1,000 cbm adjusted for the calorific value. "However, the natural gas market is seasonal in nature and prices in winter tend to be higher, especially in cold weather," notes Tučkus.

Like other natural gas suppliers, Litgas says it will provide information on the latest prices of supplied natural gas to the National Commission for Energy Control and Prices which, in its turn, draws up and publishes market reports.

According to the scheme established in legislation, Litgas as the designated supplier has an obligation to supply 540 million cbm of natural gas per annum through the LNG terminal for five years. This volume will be sold to regulated heat and electricity producers (electricity and heat producers that are subject to the regulated heat prices, receive subsidised electricity generation quotas or generate electricity under public service obligations). Their off-take will be proportionate to their gas consumption volume.

Litgas says it is also ready to supply more gas than it is currently required by legislation. The company has already entered into 12 non-binding Master Sale and Purchase agreements (MTA/MSPA) with global suppliers. MSPA agreements enable Litgas to trade on the spot market and to offer natural gas to Lithuanian market from companies whose aggregate supply accounts for more than half of total global LNG supply.

Under these MSPA agreements, Litgas has also organised a tender for the purchase of the commissioning cargo. The bid submitted by Statoil was recognised to be the most economically advantageous offer (in terms of technical and financial criteria) out of 16 different bids provided by 9 companies.

The commissioning cargo is to be supplied to Klaipeda port in autumn on a delivered ex-ship (DES) basis. The parcel is due to be used for terminal testing purposes in order to ensure that comprehensive operation of Klaipeda LNG terminal is possible.