The Baltic Course

Diversifying supplies

The enlarged EU faces a growing demand for energy sources

By Maris Biezaitis

In mid December, Faouzi Bensarsa, head coordinator of the European Union's INOGATE energy program visited Latvia for a couple of days during which he caught a glimpse of the western port city of Ventspils and met the Minister of Transpor-tation. This wasn't his first time in Latvia, but in between a round of Christmas shopping through the streets of Old Riga, The Baltic Course and Ritums Rozenbergs from the daily Neatkariga Rita Avize caught up with him to hear his views on how the Baltics stand between the EU and Russia on the all important energy market

Europe's gas challenge

This year is set to see the establishment of a liberal energy market in the Baltics, allowing consumers to choose between suppliers. All three of the Baltics have agreed upon the move and are preparing the necessary legislative changes related to restructuring of the sector, according to EU directives. Initially only the largest companies will qualify to choose their suppliers, while increased prices have even caused some such Baltic consumers to think about building their own power plants.

With oil transit and energy sources significantly contributing to the national economies of the Baltic states, the three countries have laden themselves with controversial views as to the future role of energy transit. With no such supplies of oil or gas themselves, although both Latvia and Lithuania are exploring oil fields under the Baltic Sea, and a market demand even projected by some to skyrocket in the near future, many are keen to see how these three countries stand in respect to future developments of the European continent's energy market.

The European Union is struggling to secure a liberal and plentiful energy market. Faouzi Bensarsa says that with EU enlargement  "we will have a direct border with the former Soviet Union, and the overall energy balance of the new enlarged EU will be deteriorated, which by the way will be the largest market in the world with 500 million inhabitants. This is because we are integrating consuming markets and not a single producer. So the dependency from external sources will increase."

Coal and nuclear power doesn't seem to have much of a bright future in Europe, "so what we are expecting is that the share of gas in our energy balance will increase considerably and our future development will be very much gas oriented. That's why we say that we face a European gas challenge for the next 20 years," said Mr. Bensarsa.

Top issue

A challenge for Europe indeed, but how promising could this be for the Baltic markets? Individually each country makes up a population less than many of Europe's larger cities and all together they barely scrape a market of 8 million inhabitants. This is felt by Balts on all levels of business, many global companies choosing better to concentrate on heavier and thus more serious markets nearby, frequently latching the three Baltic countries as a bonus to markets such as Poland. Poland and Norway signed an intentional agreement last year for Norwegian gas supplies but there are many other alternatives that are being studied. With the Baltics being a small market, Bensarsa said that "a big market has to be found in order to involve gas companies. I believe that this is what Norway is doing with Poland, which is a market of regional character together with the Baltic States."

Mr. Bensarsa claims that the main issue is related to the liberalization of the gas market, and for the time being safety and transparency of the network are key issues, including serious investments in technological problems.

Yet the Baltics may in future be playing a larger role than many expect today. Mr. Bensarsa went on to say that "when it comes to gas itself today, its a little more complicated than the established free oil markets."

This is mainly because Europe depends on three main sources: Russia, Norway and Algeria. Keeping in mind that the North Sea is passing its depletion period, Europe's dependency on Russia and Algeria will increase, which challenges Europe to diversify its supplies.

Nevertheless, compared to other international markets "we are actually in the best geographically located situation, because we are consumers surrounded by plenty of oil and gas. Norway, Algeria, the Middle East, the Caspian, which is an important replacement for Norwegian oil, and Russia," said Bensarsa 

In the end it will be the businesses and economies that decided on the future of this sector. The growing demand of the northern Baltic market leads Bensarsa in claiming that "the safety and security of energy supplies to the Baltic region is an issue of top importance for consideration in the coming years, in the overall framework of the enlarged EU, and the general security of supplies." He also said that Underground gas storage facilities are key issues to work on under the framework of EU enlargement and security of energy supplies in order to maintain a balance between countries.

Liberal power

«Reforms in the Baltic electricity sector are irreversible, there is no other option.»

Estonia is going through rough waters in an attempt at updating its main oil shale-fueled power plants through privatization of its national electricity grid and all three Baltic states seem to be restructuring in preparation for a liberal market. Latvia already once attempted to privatize its national electricity company, but saw political and public opposition. In general the Balts seem to feel they have little say in the political scene, and when they get the chance, many are still fixed on the idea of the state holding on to such profit making utilities as the electricity networks and other large companies. For better of for worse, the privatization process will soon be over and the Baltics are hot to step into the European Union where the liberalization of electricity and gas markets is well under way. The European Commission is calling for an accelerated liberalization process, so "reforms in the Baltic electricity sector are irreversible, there is no other option," said Bensarsa, adding that another key issue for the region will be replacing Lithuania's Ignalina nuclear power plant after it is closed down over the coming decade.

Benefit analysis

For electricity the Baltics may be supplying themselves more or less, even exporting in cases like Lithuania and Estonia, but much of the energy sector money today still depends on the transit of oil supplies from Russia. This has proven to be a lucrative business, and after loosing control over the Baltics, Moscow is eager to take back as much of the profit as possible, and by any means. It may seem to the Baltics that by introducing favorable railway rates for Russian port destinations and forcing exporters to pay off a multi-million dollar pipeline is bending the rules of fair competition, but who's going to tell them off? Russia is a sovereign country, and what it is doing is competing. Russia has concentrated hefty weight on developing two of its own independent terminals - Novorisiisk on the Black Sea and Primorsk on the Baltic Sea. "These export outlets will allow Russia not to depend on transit countries and reach Rotterdam in order to have a direct influence on international prices, so on one side its fair competition, nobody can oppose it. The question is whether this is the most profitable way to do things," said Bensarsa, adding that such investments in Primorsk should be weighed out in comparison to existing networks, for example through Belarus to Ventspils. "It may be more profitable to go to Rotterdam through Ventspils, than to build a multi-million dollar terminal." With the Primorsk terminal and the Baltic Pipeline System launched, it seems that somebody's scales must have been put to use.

A dialogue for all

With Europe and Russia depending on one another so much for energy sources, the EU-Russian dialogue must be a hefty weight to pull and Bensarsa says its based on long-term perspectives for the next 10 to 20 years. "There will be a need for strong cooperation in the energy sector between the Russian Federation and the enlarged EU with Russia being a producing country and the EU a consuming country, and both our economies depend on this. But the EU-Russian dialogue is devoted to implementing the best conditions for increasing production in Russia and the involvement of EU companies in the investments in Russia, making production and exports to the EU safer and more commercially viable."

This leads to several issues like the reform of the investment sector, so when a foreign company is asked to invest in Russia, these investments need to be protected and access to pipelines must be provided. But speaking of EU companies, Bensarsa says: "I'm not only talking of the big EU companies I'm speaking also of the candidate country companies which will have to invest in Russia, too."

Safety comes first

Russia has just launched its Baltic Pipeline System and Primorsk oil terminal on the Gulf of Finland leading to crude oil export schedules for the first quarter of 2002 cut down for the Baltic state-bound pipeline. Primorsk is set to handle 1.8 million tons of crude form January to March, just as mush has been set for Ventspils (around half that handled in the first quarter last year), while the Butinge terminal and the Mazeikiai refinery are set to get 1.2 and 1.5 million tons of oil respectively (also down on last year's amounts). The Mayor of Ventspils, Aivars Lembergs recently claimed that the Primorsk terminal will not effect Ventspils, but it seems that time will tell, as Russia plans to also add an oil product pipeline to Primorsk.

With the EU keen on keeping up its public relations for handling and burning-off fossil fuels, it is doing all it can to reduce the risk of environmental accidents and pollution. Safety and maintenance of the networks is a key priority for the EU. Maritime oil transportation on the Baltic Sea is ever increasing, and so is the number of accidents. Only a day before speaking with Mr. Bensarsa, news broke out of an oil spill off the Finnish coast of the Baltic Sea from an unknown ship, and the last spill at Lithuania's Butinge open-sea oil terminal during November dumped around 60 tons of crude into Baltic waters. Besides this, Russia, Lithuania and Latvia are all exploring oil deposits under the sea, and Russia is ferociously constructing new oil export terminals. Mr. Bensarsa put it this way: "Overall safety is a major issue on which we should work very seriously. We don't want a second Erika [Europe's largest spill in the past 20 years in late 1999 off the coast of Brittany, France] in the Baltic Sea - because here it will be ten times more dangerous and the reason is obvious, because its ice, and when you have ice and oil that mixes with ice, you can not pump it, it stays and it deteriorates your environment for ever."

As for the Butinge issue, having been plagued with accidents since launched in late 2000, Bensarsa said it will probably be looked at in the framework of the EU accession negotiations with Lithuania.

Work is also being done on enhancing the safety of energy transportation in pipelines. "We have agreed with Russia to implement a satellite monitoring system for accident prevention in the oil, gas and electricity sector. This satellite monitoring system will concern not only Russia but security in all of Europe. This system for example would have an immediate use in the Baltic region here for the detection of oil spills and any gas line that may explode. This issue of safety requires the cooperation of all the countries involved. It is needed in the framework of the EU-Russian dialogue - but by the EU we mean the enlarged EU, not the EU of today, but the EU of tomorrow."

The Baltic role

Some experts forecast that Russia's oil transit plans may still boost business for Baltic ports, but in any case, competition is getting tougher. The EU is working with Russia on issues concerning the climate for private investments and production sharing agreements, facilitating smooth development according to EU standards. But there are other steps that concern transit countries.

These projects can not be developed without the participation of the transit countries, "we can not imagine sitting down to work with Transneft on transit through the Baltics without Ventspils. We do not work like this," said Bensarsa.

«We don't want a second Erika on the Baltic Sea.»

The EU is negotiating a developed regional energy program for overall energy supplies with the Baltics.  Participation in the INOGATE program, an instrumental cooperation program for the security of EU oil and gas supplies, which also includes Latvia's Western Pipeline System project and others, promises an array of benefits for the Baltics and one of the key issues is the increase of oil and gas transit in the Baltic region, which also leads to an increase in the security of these supplies. Mr. Bensarsa says that the EU is discussing ways of enhancing transit with Russia, adding that Latvia has an impressive strategic piece of equipment - the Ventspils terminal. "It is a five-star terminal, its ISO certified, its extremely well managed, and it s in the interest of everybody that it is fully used."

Full use also means diversification and not only dealing with exports. The expected EU integration of the Baltic states will mean that certain European technical requirements for products such as gasoline and diesel will have to be adopted, and the refineries will have to do so too. Neither the Mazeikiai refinery in Lithuania, nor refineries in Russia can supply enough fuel of such quality, so investments in a refinery could be considered seriously, said Bensarsa, adding that "I'm not saying it would definitely be commercially viable, but it should be studied seriously, because time is short and in a couple of years when you become a member of the EU you will be obliged to use the same gasoline we use in Paris or Belgium.

Ventspils is extremely important for these future options."

The Baltics seem to be participating and taking the issue of supplies very seriously and a working program of regional character with the aim of enhancing oil transit through the Baltic states and issues related to the safety of oil and gas transportation onshore and offshore, as well as environmental issues is being developed. Some time mid next year a regional conference may also be organized in Ventspils on this subject, said Bensarsa.




By Maris Biezaitis
Sandis Casno (BNS/Baltic Transport&Energy)

After some feigned hints of a possible pan-Baltic electricity operator, the national electricity grids of the three Baltic states are continuing their cooperation towards developing a common power market.

Estonia's power transition period
Estonia is likely to get a period of transition for opening of its energy market from the European Union, important for ensuring the renovation of the Narva power plant energy blocks.
Juri Kao, board chairman of the Estonian Employers' Central Union and chairman of the Eesti Energia power utility, said speaking on the issue of opening the electricity market that the state must make up its mind about how big a proportion of Estonia's energy consumption Estonian Energy must guarantee. He said that it was on that decision that Eesti Energia's further investments and the price of electricity depended.
Estonia can defend itself against a possible invasion of Russian electricity by applying EU policies, which dictate that the electricity market must be opened only with respect to countries whose market is open to the same degree, Einari Kiesel, head of the Economic Affairs Ministry's energy department, said. Kao added that electricity trade in Russia was on a very corrupt basis, quoting examples that on several occasions Eesti Energia had been offered amounts of electricity for short periods under very confused circumstances. According to Kisel, Estonia is applying for a transition period of five years from the European Union in the opening of the electricity market. The EU directive demands that the electricity market be opened to 35 percent.

Electricity bridges between Lithuania and Poland, as well as Estonia and Finland are still on the drawing board, but the Baltic grid looks like its already going on with the groundwork needed to sell itself in favor of these projects. This is not to say that the Baltic grids don't need their current links to the Russian network, let alone imports and exports, Russia's North-Western power grid also serves as a frequency booster for the Baltic grid which spans Estonia, Latvia, Lithuania, Russia's Kaliningrad enclave and a part of Belarus. The grid recently carried out an experiment by cutting off from Russia's main power supply for a period of two hours. The short cut-off on April 5 was needed for testing various indicators, and concluded that the independent operation of the Baltic grid without Russia is possible, but would raise prices and cost much in investments for automatic capacity regulating management.

The experiment showed that the system can operate independently in crisis situations, reported the Baltic electricity grids. Member of the board of Estonia's national power company Eesti Energia, Lembit Vali, told BNS that the need for the Baltic grids' separation may arise at any moment if for example the 750 kilovolt line from Russia should break down, he said. The purpose of the separation was to get confirmation of calculations showing that the Baltic system was able to function alone and maintain frequencies. Some power blocks failed during the test, but in general things went smoothly and none of the consumers even noticed a thing.

The test was announced to have confirmed the ability of the Baltic power grids to function independently from the Russian system.

Baltic energy companies doing well
When this issue was being published, we had no information yet on the results for 2001 expected by Eesti Energia, but Lithuania's Lietuvos Energija posted an unaudited pre-tax profit of 159.5 million litas, which is 53% more than in the previous year. These results included the consolidated profit of the company's two distribution and two production companies. Meanwhile, Latvenergo reported an estomated profit of 30 million lats on a net turnover of 180 million lats. The estimated profit is around 50 percent bigger than Latvenergo posted in 2000, with turnover up from 166 millio lats. The company expects profits to reach 6.7 million lats in 2002.

The Baltic system can function on its own for a long period of time, but that comes expensive and is quite complicated. With full independence of the system, power tariffs should be around 15 percent higher than the regular tariffs, Vali said.

To keep the Baltic grids independent, more reserve capacities would have to be kept operational.

The hydroelectric power resource could in this case not be used for power production but would have to be employed to regulate the system whereby a part of the hydro-resource would be idle.

Latvia's Latvenergo reported that if in case the Baltic system was to work independently for long-term periods, regulating capacities should be controlled automatically, which is currently not possible due to the sizable investments needed. Latvenergo added that independent operation is more expensive, and therefore no break off from the Russian system is expected in the near future.

The operation was controlled by the Baltic energy systems coordination center DC Baltija based in Riga. The results will reportedly be used for regulating the frequencies between Baltic state grids and the Russian electricity grid, as well as for possible future power links to the European electricity grid.

Kaliningrad officials reported that their power grid was sustained during the test and that the region's usual power from the Leningrad region nuclear power plant was replaced by power from Lithuania's Ignalina nuclear power plant during the test. With Lithuania and the three Baltic states set firm on joining the EU, this could cause a few problems for the Kaliningrad enclave and its power supplies, at least until it completes building its new combined heat and power plant run in natural gas, set to launch the first block in 2005, followed by a second in 2010.

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