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

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  • Schulte, Simon
  • Weiser, Florian

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.

Suggested Citation

  • Schulte, Simon & Weiser, Florian, 2019. "LNG import quotas in Lithuania – Economic effects of breaking Gazprom's natural gas monopoly," Energy Economics, Elsevier, vol. 78(C), pages 174-181.
  • Handle: RePEc:eee:eneeco:v:78:y:2019:i:c:p:174-181
    DOI: 10.1016/j.eneco.2018.10.030
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    References listed on IDEAS

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    More about this item

    Keywords

    Natural gas market; Liquefied natural gas; Volume quota; Market power;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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