The Baltic Course

Fuel market on the move

By Sandis Casno (BNS/Baltic Transport and Energy)

Eastern capital considerably strengthened its positions on the Estonian market in the past six months. Construction of new gas stations has been initiated, also by local operators. In Latvia domestic companies dug in for their own share launching a competitive war against western investors, while the former leader of the Lithuanian market is going downhill. All three Baltic states and the European Union (EU) are eagerly looking forward to the idea of producing alternative bio-fuels. Meanwhile, Baltic efforts towards complying to the many EU standards have also set expectations for growing fuel prices

Capital shuffle in Estonia

Several trends prevailed on the Estonian fuel market in the past six months. Eastern capital taking a significant foothold is one of them. LUKoil Eesti, a subsidiary of Russia's LUKoil oil giant, bought out seven gas stations from the liquidating NB Tanklad this January. LUKoil Eesti may also take over another remaining four NB Tanklad stations. NB Tanklad board representative Alexander Kannuss said that a regular meeting of shareholders on January 9 finally resolved to wind up the company. LUKoil Eesti has been operating the chain since last May.

In October 2001 LUKoil Eesti bought 12 gas stations from its long-standing partner OilStop. All these stations will gradually switch to work under the LUKoil trade mark. The Estonian company's market share was 12% last year. This year LUKoil Eesti plans to take at least 15% of the market. According to the company's strategic development plan, LUKoil Eesti intends to introduce uniform equipment in all gas stations it owns across Estonia and renovate them all to standards. The company is also working to increase its wholesale turnover, mostly that of fuel oil sold in the amount of 360,000 tons last year.

Another major Russian fuel supplier, Peterburgskaya Toplivnaya Kompaniya (St.Petersburg Fuel Company) or PTK, opened its first gas station in Estonia in mid 2001, planning to sell fuel to consumers along Estonia's eastern border.

Another important trend for Estonia is the construction of new gas stations planned by LUKoil Eesti.

The Alexela gas station chain in Estonia, the last of its kind controlled by national capital, was sold to a Swiss company in early April, Amando Holding, covering for its Russian owner Valery Sikorsky.

The deal was arranged the Estonian-Russian Business Chamber. Its president Oleg Karpikov also sits on the council of Alexela Oil. Mr. Karpikov already released a statement, assuring the public that Sikorsky's money was of legitimate origin, having been earned  in the banking business in Russia. 

The sale of Alexela in fact marks the end of local capital presence in the gas station business in Estonia. Now Estonian businessmen are left only with separate small gas stations in provincial areas where the larger players don't yet dare set foot. The rest is split between large Western companies and Russia's LUKoil. The situtation is similar also in Latvia.

Lithuanian leader leaves the stage

Dutch company Kopcke International never made the planned investments after privatizing Lietuvos Kuras in 1999, the largest gas station chain at the time. In early 2001 the actual operator of the Lithuania fuel retailer, Baltic Petroleum, initiated bankruptcy proceedings against Lietuvos Kuras. Creditors resolved to liquidate the company on the verge of bankruptcy after it rejected a restructuring plan, which proposed to reorganize Lietuvos Kuras and incorporate it into Bahamas-registered Bowfield and Lithuanian companies Eurovista and Baltic Petroleum.

Mecislovas Vitkauskas, a representative of the Draugo Petys company, appointed as the administrator for Lietuvos Kuras, said liquidation will begin this year. Claims by Lietuvos Kuras creditors total 109 million litas. LUKoil Baltija is the largest of the creditors.

Gas stations owned by Lietuvos Kuras will cease business as soon as the bankruptcy procedure begins. Last August the Lithuanian Competition Council allowed LUKoil Baltija to lease 9 Lietuvos Kuras gas stations. Previously 80 Lietuvos Kuras gas stations were leased to various operators. Thus, LUKoil Baltija, running 84 gas stations, takes the leading position on the Lithuanian oil product retail market. LUKoil Baltija boosted its oil product imports to Lithuania with imports accounting for 40% of the company's sales. The company imports fuel to Lithuania from refineries in Perm (Russia), LUKoil Baltija board chairman Ivan Paleichik explained to Lietuvos Rytas newspaper.

Latvian retailers get in the ring

DINAZ Group fuel trader last year opened 27 gas stations in the Latvian capital Riga alone, taking fourth place among the largest retail chains. The Latvian Fuel Traders' Association (LFTA) executive director Uldis Sakne told the BC  that  the major Western operators in Latvia are Statoil with 34 gas stations and Neste with 30 stations. Both companies share an oil product terminal in port Riga. Shell has 19 gas stations across Latvia and the state-owned Latvijas Nafta has 31 stations.

LUKoil Baltija R with its 21 gas stations takes the fifth place among the largest fuel retailers and members of the LFTA, the next is Viada, the latter representing local capital managing 20 gas stations, and both have announced flaring future plans. Viada is to reorganize itself into a concern in the first quarter of this year. Viada director general Alla Moroz said the concern will consist of at least nine companies named after the region in which they operate across Latvia. The central company will be Viada Centrs, responsible for accounting and administrative functions.  

LUKoil Baltija R entertains even grander plans - in three or four years it may become the largest fuel retailer in Latvia, suggested Russian magazine Neft i Kapital (Oil and Capital). LUKoil Baltija R head Haim Kogan believes the company will advance to poll position easily, because LUKoil reportedly provides 90% of the Latvian fuel imports that come mostly from its own plant in Perm and the Kirishi refinery.

Kogan dismissed fuel made by Lithuania's Mazeikiu Nafta as too expensive. He also said one can not rely on oil product deliveries from Belarus refineries. According to Kogan, fuel imports through Latvian port terminals are not profitable either, as the arrangement adds USD 10 to fuel prices per ton.   

Last year LUKoil Baltija R bought two gas stations outside Riga from Scandinavian Neste. In early 2001 Neste Latvija announced its intention to automate all its gas stations, a move it is slowly carrying out, while the stations bought by LUKoil Baltija R were not suitable for switching over to automated services.

Another Scandinavian company, Statoil, also joined the automatic gas station trend last year, planning to open 65 automated gas stations across the Baltics by 2005.

Latvijas Nafta, the state owned gas station chain, being in fact insolvent, has hope to strengthen its position on the market with the help of none other than LUKoil. This may be Latvia's chance to finally sell-off the company after two earlier failed attempts. Latvijas Nafta operates mainly in the rural areas of Latvia, and does not plan to squeeze into the crowded market of the capital city.

LUKoil, which has previously bought the Riga oil base reservoir facility from Latvijas Nafta was mentioned as a potential player in privatization of the company by Latvijas Nafta manager Nils Martirovs. When privatization began, the company owned 110 gas stations across Latvia and 15 oil base reservoirs. Now Latvijas Nafta has 31 stations and 5 oil  bases left. According to figures provided by the Latvijas Nafta administrator, Dace Grinberga, to date the company has accounts payable of 11 million lats but its assets have been evaluated at 5 million lats. The administrator said the creditors will probably be offered a choice between a settlement, an open auction or an auction with selected bidders.  

Prices not expected to stay put

There are a number of factors affecting fuel price growth in the Baltics.

On the Lithuanian market, prices rose early this year because of an excise tax hike. Excise taxes on diesel fuel will be raised again in 2004 as Lithuania in its EU pre-accession talks refused a transition period for increasing diesel excise taxes, Lithuania also being the only EU candidate to request a transition period for raising excise taxes on diesel fuel. Lithuanian diesel fuel is the cheapest among all EU candidates, and so far Lithuania is the only Baltic state intending to increase excise taxes on diesel and liquefied gas in the near future. Last year the Lithuanian parliament passed a new law on excise taxes for fuel under which excise taxes on diesel will be raised from 560 litas to 720 litas per ton as of January 1 this year. The excise tax rate will also grow for fuel oil (from 20 litas to 45 litas per ton), gasoline (from 1,210 litas to 1,250 litas) and liquefied gas (from 170 litas to 200 litas).

The projected development of fuel reserves is also expected to lead to growing prices. To build up a three-month reserve of 165,900 tons would cost Lithuanian some 373 million litas. Another 30 million litas will be required to upgrade the oil reservoirs. In October 2001 Lithuania decided to ask the EU for a six-year transition period for the required fuel reserves. If the EU gives its consent, annual costs for building storage facilities would be from 37 million to 69 million litas till 2010.

In Latvia prices are also expected to jump if retailers are forced to pay for the storage of state oil reserves, as required by EU directives. Implementation of storage options chosen by the Latvian government will cost 44.384 million lats. If businessmen have to lay out 20 million lats, fuel prices will jump some 0.03 lats per liter, said Sakne. Under the currently adopted concept, however, costs to be covered by businesses are set at 31.626 million lats, i.e., fuel prices per liter may grow 0.04 lats or more. Costs for creating the reserves will be covered by the state in the amount of 12.758 million lats.

The price growth depending on costs of establishing the reserves may turn out to be gradual. The reason for this is the closure of the energy chapter for Latvia at EU negotiations in Brussels. Latvia managed to agree with the EU on a transition period till late 2009 for forming a step-by-step required three-month fuel reserve, Latvian chief EU negotiator, Andris Kesteris, told BNS. In 2001 the Latvian Cabinet of Ministers adopted a draft concept, developed by the Economics Ministry for establishing national fuel reserves. The government resolved that 30 percent of the storage costs will be paid by the state and 60 percent by businesses.

The EU is also behind the fuel price hike in Estonia where the government decided not to increase excise taxes on fuel until 2003. But this decision may get in the way of Estonia's aspirations to EU membership, pointed out the SL Ohtuleh newspaper. This may serve as a reason for actually raising the excise tax and, consequently, retail prices. At present Estonia boasts one of the lowest fuel prices in Europe.

The dark side

The Estonian Energy Market Inspectorate (EEMI) recently accused owners of major gas station chains of selling low-quality diesel fuel, an offense earlier suspected only of smaller companies. Instead of diesel, the gas stations turned out to be selling light fuel oil, which has an excise tax at 2.5 Estonian kroons lower than diesel. Heavy oil products meant for thermal energy production and not subject to any excise tax were also sold as vehicle fuel in order to evade excise taxes, reported daily Aripaev.

According to the statistics, every year Estonian diesel imports fall some  175-200 thousand tons short of actual consumption. At the same time, light fuel oil imports make up some 250 tons although no more than 50 tons are used to produce heat.

The EEMI blacklist includes such companies as Shell Eesti, Alexela Oil and Olerex,although the retailers themselves think the inspectorate has jumped to conclusions. In early January the EEMI inspected gas stations of the above mentioned companies and found below-standard fuel in seven stations. The retailers claimed that samples were taken in amounts too small to make any reliable conclusion.

By the second half of 2001 the EU suggested that Estonia should introduce fuel quality standards meeting general European requirements. It is believed that 21 percent of all fuel on the Estonian market fails to live up to this level. The European Commission gave Estonia six months to deal with the problem. Previously experts also noted the problem of fuel quality, and the figures mentioned were similar to those estimated by the EU.

Links between major brands and low-quality fuel are out in the open in Latvia. In April 2001 the Latvian Anti-Smuggling Center exposed a scheme at several Statoil gas stations in Riga, that reportedly sold heating oil instead of diesel fuel. Statoil claimed then that it had itself become a victim of fraudulence, the fuel having been sold to Statoil as diesel from a seemingly trustworthy company. The Bank of Latvia recently said that tax intake on oil products was insufficient and, naturally, would be reflected in the country's black market economy.

Production of low-sulfur diesel fuel in Lithuania will be possible in 2005, as Mazekiu Nafta plans to upgrade its facilities for the purpose, said the company's CEO Jim Scheel. The so-called winter diesel will be used in Finland, Sweden, Norway, Estonia and other countries of the region.

Conflicts with authorities

The last six months were marked by a series of conflicts between state authorities and private fuel traders. The Latvian tax authority, the State Revenue Service (SRS), annulled a wholesale license held by Viada, claiming that the fuel company's staff had obstructed an inspection by the Financial Police. The fuel retail license held by Viada was not withdrawn, however. The company turned to the Riga Central Court, seeking to reverse the SRS Licensing Commission's decision.

Viada director general Alla Moroz said that the Financial Police officers began the inspection by asking to produce the previous year's balance sheet, although the company had submitted it to the SRS in due time and no irregularities were discovered.

Statoil also found itself in a fix last September. This company was also in danger of losing its license as its reports failed to mention the sale of liquefied car gas at one of its stations. In the end the SRS allowed Statoil, one of Latvia's top tax-payers, keep its retail license. But the tax authority did take away a license issued toDinaz Nafta (now re-named as Agalas) for production, wholesale and imports. The SRS said Dinaz Nafta had repeatedly failed to declare imported fuel. Until mid-2000 there was only one Dinaz company. Later Dinaz Group took over the network of gas stations and Dinaz Nafta - wholesale trade in oil products.  The SRS also imposed on former Dinaz Nafta a default interest for non-payment of taxes on oil product imports and a massive fine in the amount of 11 million lats, mainly for tax evasion.

The SRS Excise Goods Board's licensing commission also turned down the applications by two off-shore companies, American Oil Company and American United Company, seeking licenses to do business with oil products as it was established that the applicants been linked to officials from Dinaz Nafta. These off-shore companies are also involved in the Baltic Oil Terminal project, envisaging construction of an oil terminal in the port of Riga, set to handle 10 million tons per year by 2004. By refusing these companies licenses, the SRS made the sizeable project quite a bit more difficult to carry out.

Bio-fuel replacements

The European Commission has approved an action plan for the use of alternative fuels. According to the plan, 20 percent of all vehicles are to switch to alternative fuels by 2020. The European Commission directive will allow EU member states to cut excise taxes on bio-fuel. The Commission said that natural gas, bio-fuel and hydrogen will each be able to take 5 percent of the total fuel consumption market in 20 years time.

Full of hope, Lithuania expects a favorable outcome concerning bio-fuel production. LUKoil Baltija plans to invest 15-20 million litas in a bio-fuel plant to be built near Mazeikiai. Construction is to begin in March 2002 and will be completed by fall.

The Lithuanian parliament even lowered value-added tax on Lithuanian- made bio-fuel by 9 percent. At present small amounts of bio-fuel are already produced by the Stumbras, Plunges Grudai and Telsiu Bioenergija companies. 

In Latvia, there are two companies that initially intended to compete in the production of bio-fuel. These are Delta-Riga and Jaunpagasts Plus. Production launched by Delta-Riga in a plant located in Naukseni, a county of Valmiera in north-eastern Latvia, was suspended over the need for further adjustments to equipment. But Jaun-pagasts Plus never got the massive state guarantee it had planned, needed for taking a loan to build a bio-fuel plant.

Meanwhile only Alexela Oil has displayed interest in making bio-fuel in Estonia. Tallinn Technical University developed the technology for producing ethanol fuel, which is quite cheaper than traditional fuels.


Leading fuel trade companies in Estonia


Number of stations

Lukoil Esti


Alexela Oil


Shell Eesti


Hydro Texaco -- Uno X


Statoil Eesti


Source: BNS/Baltic T&E


Leading fuel trade companies in Lithuania


Number of stations

LUKoil Baltija


Statoil Lietuva


Neste Lietuva


Shell Lietuva


Hydro Texaco -- Uno X


Source: BNS/Baltic T&E


Leading fuel trade companies in Latvia


Number of stations

Latvija Statoil


Neste Latvija


Latvijas nafta


Dinaz Group


LUKoil Baltija R




Source: BNS/Baltic T&E

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