LNG import quotas in Lithuania – Economic effects of breaking Gazprom's natural gas monopoly

Abstract

Until 2014, Russia's Gazprom had a natural gas monopoly in Lithuania. In order to break the Russian monopoly, the Lithuanian state financed an import terminal for liquefied natural gas (LNG) in Klaipėda. In addition to building the terminal, Lithuania signed a long-term contract (LTC) which can be interpreted as a minimum import volume quota for LNG having higher marginal supply costs than Russian gas. This study assesses the potential of such a minimum import volume quota to mitigate the market power of a monopolistic supplier. A market consisting of a dominant supplier with low marginal supply costs and a competitive fringe with high marginal supply costs is analyzed. It is shown that there is a minimum import volume quota for fringe supplies that optimizes the consumer surplus, which is adjusted by a compensation paid for the fringe's market entry. Therefore, the Lithuanian decision to incentivize the market entry of high-cost LNG can be rationalized.