Energy island no more? Finland and Estonia in a changing Baltic gas market

This article analyses the extent to which two Baltic Sea states – Finland and Estonia – have developed their energy governance and physical infrastructures in order to end their status as inhabitants of the ‘Baltic energy island’ and to benefit from the economic profits that such a move implies. As the European gas market has developed over the past two decades, the Baltic region has remained isolated from these developments. A lack of physical interconnections with the broader European gas market, and a continued dependence on a single supplier (Russia) has led the region to be characterised as an ‘energy island’. Moreover, the dependence of small markets on a single large supplier signifies a lack of market development, with related higher prices and concerns over monopoly behaviour and energy supply insecurity. The development of the regional market, and its integration into the broader European market, requires a combination of governance and material infrastructure solutions. The article begins by defining the ‘Baltic energy island’ and introducing the European Commission’s Baltic Energy Market Interconnection Plan (BEMIP). The second part of the article examines the energy mixes and levels of gas import dependency of Finland and Estonia, and the role of their national gas companies (Gasum and Eesti Gaas respectively) in securing gas imports, in order to demonstrate the material conditions that the two markets face. The third section then analyses the development of physical infrastructure (LNG terminals and cross-border pipelines), governance reforms (in particular the implementation of the EU 3rd Gas Directive), and the changing commercial relations of Gasum and Eesti Gaas with the main regional supplier, Gazprom. In doing so, this section provides an analysis of the interplay between materiality (physical infrastructure), governance (gas sector regulation), and energy economics (markets, prices, and relations with suppliers) in shifting the ‘Baltic energy market’ from an ‘energy island’ to a part of the broader European gas market. The article concludes that, over the past five years both Finland and Estonia have begun to implement strategies to reduce their gas import dependency on a single supplier (Russia). While neighbours in their proximity, Poland and Lithuania, have already broken this monopoly with new LNG terminals, Finland and Estonia are still going through the process. Finland has begun the construction of its own LNG import terminals, while Estonia has gained access to Lithuanian LNG. However, cross-border pipelines remain a challenge despite support from the European Commission under the BEMIP programme, just as plans for a shared Baltic LNG terminal foundered, due to national self-interest and the difficulties in developing regional cooperation between Finland, the three Baltic states and Poland. The paper will demonstrate the current ‘energy island’ status of the Baltic region, explain the progress that is currently being made in developing new sources of gas imports and reforming national gas markets, and highlight the difficulty of developing shared regional projects in the form of cross-border gas pipelines.