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Rewriting the regional gas market: the future of the Krk terminal

Despite the difficult circumstances imposed on the global gas market, in Central and Eastern Europe, there was a rapid development of infrastructure projects in the past couple of years. The expansion of new connections and supply routes opened up the possibility for the countries in the region to import gas from alternative sources but also reshuffled the cards for regional players.

One of the gamechanger projects was the Krk LNG terminal, which started commercial operations at the beginning of this year. With an annual regasification capacity of around 2.6 billion cubic metres (bcm), the Krk terminal was a strategic project in terms of security of supply and diversification, not only for Croatia but also for the whole region.

“We became the biggest entry point in our system supplying 40 per cent of the market in Croatia,” said Hrvoje Krhen, Managing Director of LNG Croatia to CEENERGYNEWS at the 36th International Scientific & Expert Meeting of Gas Professionals in Opatija.

In May we also completed our first small-scale reloading operation, which was the first of its kind in the Mediterranean.

By introducing this new additional service, the LNG terminal continues to affirm its importance on Europe’s energy map and now that ship-to-ship service has been already tested the terminal plans to set its foot in ship-to-truck LNG transfer as well.

Talking about the potentials for small scale LNG in the region Danijel Bukša, responsible for Technical Sales and Global Projects at Siemens Energy highlighted that a reality today might be a gamechanger tomorrow pointing out the small-scale LNG can also be an efficient and economic solution to reduce emissions in the heavy-duty and the maritime sector as well as for railways.

At the beginning of this year, the first LNG cargo was delivered for Hungarian Gas Trade’s (MFGK) Croatian subsidiary MFGK Croatia, which was the first element of the package of agreements signed by MFGK that includes a total of 6.75 bcm regasification capacity booking at Krk until 2027.

“From the beginning of 2021, MFGK Croatia has successfully discharged the total amount of 4.44 TWh at Krk Terminal from five different vessels,” said Marjan Vugrinec, CEO of MFGK Croatia adding that MFGK plans to have two more deliveries until the end of September.

The commissioning of the Krk Terminal opened a new age in the region’s natural gas supply since it provides a commercial connection with the globalising LNG market and direct access to natural gas sources and market players previously unavailable for the regional market.

Szabolcs I Ferencz, Chairman and CEO of FGSZ, Hungarian Transmission System also underlined the increasing significance of LNG in Central and Eastern Europe, however, he reminded that new transport routes are also challenging traditional gas transport models and require much higher flexibility.

“There is a huge rationale to develop LNG supply routes,” started Mr Ferencz. First of all, it leads to supply source diversification, which is an important factor in a region where most of the countries traditionally rely on one single supplier. It also requires comparatively less investment. As Mr Ferencz explained updating or expanding the already existing infrastructure would be less costly than investing in new ones. Finally, it also contributes to regional market flexibility as in a highly volatile market environment LNG offers quicker adjustment.

“FGSZ could have a huge role in developing LNG supply routes,” underlined Mr Ferencz. On the border with Ukraine, the virtual interconnection point was launched last year, now the priority is the development of firm capacities between Hungary and Ukraine.

It would be a big step as there is an opportunity to import gas volumes from the Krk terminal via Hungary to Ukraine, which would also justify the possible extension of the current 2.6 bcm regasification capacity of the Croatian terminal.

The Hungarian infrastructure can receive up to 7 bcm gas annually from Croatia. Ukraine has a total consumption of 30 bcm per year, while they can produce about 20 bcm, pointed out Mr Ferencz adding that given the opportunity Hungary would be ready to guide LNG cargoes to Ukraine.

The Gas Transmission System Operator of Ukraine was also looking into strengthening cooperation with the Krk terminal’s as a potential strategic partner to diversify supply sources.

“If we look at the Hungarian infrastructure, we are 99 per cent ready,” said Pál Ságvári, Vice President of the Hungarian Energy and Public Utility Regulatory Authority. Hungary still has to create non-interruptable firm capacities with Ukraine, but the negotiations are already ongoing between the two sides.

“The other major issue is the logistical bottleneck between Hungary and Croatia, as currently, mainly due to logistical costs, physically the gas cannot reach Hungary,” said Mr Ságvári.

Now that the Krk terminal is up and running we should consider the integration of the Hungarian and Croatian gas market to boost liquidity on both sides and to extend the current reach of the Krk terminal physically and also commercially.

LNG physically has an impact on the Croatian market and commercially on the Hungarian market. Hungary proposes to create a situation where there is a physical impact on the Hungarian and further commercial impact on the most promising potential markets.

The first step of this is market coupling, which involves an implicit allocation mechanism of capacities while maintaining authorities on balancing and virtual trading point as well as keeping the tariffs on the border. The second step is to eliminate the tariff on the Hungarian and Croatian border to create one joint virtual trading point, however, this is a long-term vision, that needs more harmonisation on the regulatory and TSO side according to Mr Ságvári.

“The benefits are huge because it drives down consumer prices and values the terminal as an asset, the TSOs can keep their regulated income and strategically this is the first step if we want to increase the commercial reach of the terminal,” concluded Mr Ságvári.

Further elaborating on the potential synergies between the two markets Dániel Garai, CEO of CEEGEX Central Eastern European Gas Exchange pointed out that although market merger and trading region might be a bit out of reach, for now, the market coupling is a viable first step and the focus should be on establishing the circumstances for this initial move. Market coupling is realised on a spot basis, on intraday and day-ahead products. Based on the calculations of CEEGEX, while maintaining the tariffs, the market coupling could bring social welfare of at least 2 million euros.

Mr Garai explained that the idea is coming in a way from the power market, which is ahead of the gas market in terms of integration. But CEEGEX also looked at the example of the Baltic region, where they mix different models of integration.

“The market design will be crucial and we believe it’s possible to create a win-win setup that brings benefit for the whole market and the main stakeholders on both the Croatian and the Hungarian market,” he concluded.

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