The Baltic Course

Gas price cuts - a spoof

By Olga Pavuk

The president of Itera Latvija gas company, Juris Savickis, told the BC that gas market liberalization in the Baltics will not lead to a price reduction as expected by the public, but on the contrary - to a price hike.

Mr. Savickis, would you please answer the simple question: what are Itera Latvija and Latvijas gaze - competitors or partners?

We are neither competitors nor partners - Itera Latvija is a co-owner in Latvijas Gaze (LG), holding 25% of the shares along with Russia's Gazprom (25%) and two German companies, Ruhrgas (27%) and E.ON Energie AG (22%). We cannot be competitors because LG has a monopoly on natural gas supplies to Latvian consumers. Yet LG sort of stands on two feet, getting gas from both Gazprom and Itera Latvija. We deliver 30 percent of it with the rest provided by Gazprom

What will Itera get out the gas market liberalization concept adopted by Latvia?

As a businessman, I will always support free competition. But the problem is very complicated. My opinion, if you please, is that no liberalization can be done in respect of a product, in this case gas, if in itself it is available in limited quantities. To be honest, the move looks more like demagogy. I believe that gas market liberalization in the Baltics will not lead to a price reduction as expected by the public, but on the contrary - to a price hike. It suits me well as a businessman but definitely not as a Latvian resident interested in seeing growth in his country. A conflict of interests is obvious.

They say that liberalization is needed to allow us to get gas from Norway.

To build a gas mains from Norway will take very a lot of money - several billions of US dollars. It will take a few hundred years to get a return on this from selling gas to Latvia, Lithuania and Estonia. No Western company would entertain such business plans. In the West the maximum return period in the energy sector is 15 years. From the economic viewpoint it is senseless to speak about supplying Norwegian gas to the Baltics. Even if the Norwegians took 50 percent of the Baltic market, there's no way they could get a return on the gas mains construction costs.

And what about Poland?

A pipeline to Poland - maybe. But the scope will be different there. Poland is the largest gas consumer in Eastern Europe and closer to Norway, too.

The project of a gas mains to the Baltics is more a political than economic one. Norwegian gas resources will last some 15-20 years while in Russia they are available in practically unlimited quantities. In fact, the Polish-Norwegian project is geopolitics in its purest form. This is about relations between Russia, Ukraine and Poland. It would even play into Latvia's hands, if Norwegian gas competed with Russian gas. But Russia will definitely come out of this battle as a winner.

How much environmental danger is there in a gas mains laid on the seabed? Why do they build underwater gas and oil pipelines in the first place?

Let's say that underwater gas mains are less dangerous than oil pipelines. Why does it have to be under water? Firstly, to avoid transit charges. And secondly, to be independent from other countries - most of the pipelines have been laid in neutral waters.  

A different opinion is that Norwegian gas is more expensive than Russian due to the better quality. Is that so?

Both are practically the same by quality. Norwegian gas is more expensive mostly due to infrastructure costs. The quality depends on the presence of sulfur in gas but it is more an environmental matter.  

Itera has subsidiaries in Lithuania and Latvia but not in Estonia and Finland. Why?

Itera has operations in 24 countries, where there is economic benefit in it. Itera Latvija does do business in Estonia. We bought a blocking stake (10%) of B-category shares in Eesti Gaas. So far Itera has no presence in Finland due to an absence of mutual business, but this does not mean that the situation will not change in future.   

Gazprom supported construction of the Trans-Baltic gas pipeline from Finland to Germany through the Baltic Sea. Does Itera intend to join this project?

This is up to the Russians. For me the most profitable thing would be to build a pipeline through Latvia. And we are doing our best to convince our Russian partners of it. Several projects for laying the pipeline through Latvia have already been drafted. Itera Latvija also has such a proposal.

According to some sources, the Incukalns underground gas storage facility near Riga is being used only to one-tenth of its capacity while construction of another gas reservoir in Dobele, central Latvia, is already being contemplated. What's the purpose of this project?

In fact Incukalns is being used up by 75-80 percent of its capacity. As for Dobele, this project would be of interest only if the reservoir is connected to the transit pipeline between Europe and Russia, running close-by Latvia, possibly through Lithuania.

What is your forecast of the price dynamics for gas supplied from Russia and other CIS states as compared to Norwegian and Danish gas for the next 5-10 years?

Gas prices are tied to fuel oil prices, and hence to the price of oil. I can say only one thing: there's no way gas will get cheaper.

Itera Latvija recently announced that it is ready to start developing its own gas deposits in Yamala, Russia? When do you expect work on this new project to begin?

We have been working on it for more than a year already. We need licenses and loans of at least 300 million US dollars. We are negotiating with Western banks, after all, it is an investment in Russia. I have already covered some distance and will keep working until I accomplish it.

What is your vision of Latvian operations after the next 5-10 years?

I think gas consumption in Latvia will double. The key objective is to work on expanding sales. First, by the gasification of towns and villages as today even such developed regions as Ventspils in north-west Latvia does not use natural gas because it is supposedly not profitable to build a pipeline to reach it. The same is also true about the eastern Latvian region of Latgale. Second, by boosting gas consumption through displacing other energy resources by around 15-20 percent. Third, by building new facilities using gas, mainly electric power plants, like the one in Liepaja in Latvia's south-west, for example.



Political liberalization

By Olga Pavuk,
Zidrunas Damauskas
(Lietuvos Rytas),
Hannes Tamme
(Radio Ku-Ku)

Natural gas consumption in Europe may double over the next ten years. The Baltic states keep returning to the question of gas market liberalization with ever increasing frequency, as well as to projects on importing gas from Nordic countries, a move that would rid the Baltics from excessive dependence on Russia. The topic was brought back to the foreground again recently by the agreement of the century signed in July 2001 between Denmark and Poland on a two-year construction project for a 320 km long underwater gas pipeline.

Latvia's exclusive status

In late October the Latvian government adopted its gas market liberalization concept, approving the option of gradual transition to free prices and establishing exclusive status for the state. Latvian Economy Minister Aigars Kalvitis said that initial liberalization will mean different rates for the transmission and distribution of gas, as well as creating incentives for new suppliers to enter the local market. The minister said that gas market liberalization was not likely to result in problems similar to complications brought about by plans of cutting the monopoly period currently enjoyed by the Lattelekom fixed-line telephone company by ten years, because the license held by Latvijas Gaze (LG) gas utility already contains a provision on market liberalization.

Under the concept, legislative amendments opening the door for new gas suppliers are to be passed in 2002. This means that any company will be able to do without intermediation by

Latvijas Gaze in making deals with suppliers from Russia, Kazakhstan or Turkmenistan on the purchase of gas not only for their own needs but also for mass distribution. Latvia was able to secure the exclusive rights to gradual gas market liberalization (as opposed to immediate transition as required by European parliament directives on uniform conditions for domestic gas market) seeing as the Latvian gas mains are not connected to other European countries in any way (the same is also true for Lithuania and Estonia).

The demand for a speedy liberalization coincides with plans to establish the Baltic Energy Ring by 2005-2007, also set to include the Baltic states. Thus, Latvian, Lithuanian and Estonian governments are pursuing a double goal - giving western investors access to their respective local markets on the one hand and hacking away at the traditionally strong dependence on Russian energy sources on the other hand.

It should be reminded that Latvijas Gaze holds both exclusive and non- exclusive licenses to the transmission and distribution of natural gas in Latvia until February 2017, including the storage of natural gas at its underground facility at Incukalns near the Latvian capital Riga. Russia's giant Gazprom gas uses Incuklans to store gas that's used in winter not only by the Baltic states, but also by the Pskov region and partly the Leningrad region.

Who's to give Lithuania a gas link?

In recent years Lithuanian politicians have talked much about a foreign investor, who would link Lithuanian gas pipelines with Polish gas systems and thus also with the rest of Europe. Nevertheless, the recently approved Lietuvos Dujos gas utility privatization process does not require the strategic investor to arrange for network connections with Western systems. According to the privatization terms, an alternative gas route to Lithuania should be put in place provided that such an action is prompted by economic conditions. At present Lithuania gets its gas from various suppliers, using the gas mains owned by Russia's Gazprom.

Lithuanian parliament economic committee chairman, Viktoras Uspaskicas, claims that an alternative gas link will be profitable only if someone handed it to the Lithuanians on a plate. But there is no such thing as handouts in economics. The former gas magnate said that neither the government, nor a strategic investor in Lietuvos Dujos will build the pipeline to their own expense because it would cost nearly USD 400 million. Moreover, Norwegian gas prices are almost twice as high as Russian prices.

Raimundas Paliukas, president of the Lithuanian Gas Association believes that Lithuania should have built a gas metering station on the border with Latvia long ago in order to receive gas from the underground reservoir at Incukalns. Summer-time gas supplies are way cheaper than in winter, so one could buy it in summer, put it into the storage facility and use for needs in winter. A pipeline from Latvia would also help Lithuania avoid problems in case something went wrong with the pipe linking the country with Belarus.

Lietuvos Dujos receives gas from Russia's Gazprom (30%) and Stella Vitae, a  company run by the same Gazprom and the Western Lithuanian Industry and Finance Corporation. Achema gets its Russian gas under direct arrangements with Gazprom. Some Lithuanian gas consumers receive direct supplies from Russia's Itera at some 600 million cubic meters annually.

Lietuvos Dujos gets gas from Gazprom under a six-year agreement expiring late 2005. So far gas prices have been set at a semi-annual basis but starting next year they will be fixed for a year at a time. The current price is USD 76 per 1,000 cubic meters supplied by Gazprom and the price stated by Stella Vitae is 5 US dollars above the Gazprom rate.

Paliukas expects the Lithuanian gas demand to grow considerably in future as combined heat and power plants will extensively be built. The demand for gas is likely to rise sharply in 2004 upon closure of the first reactor at the Ignalina nuclear power plant. Paliukas estimates natural gas consumption in Lithuania to reach at least 3.5 billion cubic meters in 2006.

The Lithuanian government has made public the privatization model for Lietuvos Dujos, providing for sale of a 34% stake to a Western strategic investor and gas supplier.

Lithuania is also a transit country for the transportation of natural gas with some 470 million cubic meters being transported every year to Russia's Baltic enclave, Kaliningrad.

Estonian monopoly set to last

The Estonian national program for energy sector development says that a gas mains from Tallinn to Helsinki will be built by 2010. «For now we have only had some general talk with the Finns but no specific decisions have been made, and even the route of the pipeline has not been set yet», Eesti Gaas gas company sales director Mart Kraut told the BC.

«As far as I know, BalticGas is still discussing problems of the gas pipeline project - when construction may begin, how realistic is the project anyway,» said Kraut. He suggested that Finland needs the gas link more than others as it would give the Finns access to gas kept at the Incukalns underground storage facility in Latvia. «This facility has so much capacity that it would be unprofitable for us to build our own gas reservoir,» he said.

Estonia started using natural gas only in 1969. Today gas is being used to produce electricity and heat. The first combined heat and power plant was built in 1997 near Tartu by Grune Fee Eesti AS company. This plant produces 2 ÌW of electricity plus 5.4 ÌW of heat. In 1998 the second such plant was built in Polva (0.9 ÌW + 1.5 ÌW). Now there are six plants of the kind operating in Estonia.

The purchase, sale and transportation of natural gas from Russia is handled by a single company - Eesti Gaas. «Gazprom is one of our shareholders, and we have not had any problems with purchasing gas from Russia,» said Kraut. «We pay in German marks but are likely to switch to euros next year,» he added. Eesti Gaas has among its major customers Eesti Energija and the Iru Elektrijam power plant situated in Iru supplying heat and electricity to Tallinn as well as the Horizon pulp mill in Kehra.

«As of 2002, we will raise prices for household customers a little - by 10 percent," said Kraut. He pointed out that Estonian consumers won't be able to buy natural gas from Norway, as it is going to cost twice as much as Russian gas. Therefore it is unlikely that some other natural gas supplier will enter the Estonian market in the nearest future. Eesti Gaas will also keep its monopoly for many years to come

In 2001 the Estonian parliament started discussing amendments to the energy law. By now materials on three new laws - on electricity, on liquid fuel and on gas and heat - have been prepared and submitted to the parliament. The bills contain provisions required for joining the EU, stating that other companies may enter the Estonian gas market to create an alternative for Eesti Gaas services.



Norwegian gas from a Finnish perspective

By Inna Rogatchi, © Rogatchi Productions & Communications, (Helsinki)

The issue of Norwegian gas supplies is not all too current for Finnish energy dealers, although they recognize its importance as an alternative energy source, and as a significant card in the big negotiations game, particularly when playing in the Baltic region

Political components

Petri Barannik, President and CEO for the prominent Petrofinn Ltd. trading company emphasized the objective side of the process:

«No doubt, Norwegian gas is the main rival to gas of Russian origin, and thus it has quite a significant role on the formation of prices. As of the Summer 2001 we can see a certain activation of customers who may be more interested in Norwegian gas now than they were recently (such as Poland, for example), the process of price convergence can also be seen. And this is an interesting phenomenon of its own: for Russian gas to be able to compete it could rise its price a bit, just as Norwegian gas might slowly lower its prices. But in truly complex issues like this, one can not simply judge in such a definite form - what's cheaper and what's expensive. The weight of political components in the entire issue is so significant that you simply cannot measure it in such simplified «more expensive, less expensive» terms. Sometimes the «less expensive» turns out to be quite the opposite, and vise versa». 

Mr Barannik also mentioned that one can not analyze a gas issue without the context of current economical development, in a most serious turmoil from the aftermath of September 11th and the American response that followed. He emphasized that the situation is quite worrisome, especially in the energy sector: «If a year, even half a year ago, we had the most cheerful reflections on the industry and its trade development, today we are very tense and truly worried. The biggest danger, from my point of view, is lying in Russia's poor shape of economy, and its total dependability on stable and sufficiently high oil prices. Well, for once, we can forget the word stable here; and now all the worries are going for the level of prices. If OPEC is unable to keep the price level fixed, I am afraid that it will lead to a collapse of the entire Russian economy. And the dynamics of the energy market indicate that we, unfortunately, are due to be alert for the coming half year, and a tense situation will most likely continue one or two years ahead.»

It takes time and money

But Vladimir Hramov, board member of the well-known Gasum Ltd. company (Finnish, German and Russian capital) still sees the Norwegian gas factor as irrelevant, at least for Finnish consumers:

«Yes, we are well aware of the latest developments that started with the announcement last summer of a Polish-Danish Baltic Pipe project, set to build a new pipeline for gas drilled on the North Sea. There have already been a few analyses concerning this project that underline the wish of the Polish side, which is, first of all, to become not just a consumer but to also have a much more significant role as one of the key-players in the possible further distribution of North Sea gas. But it all remains to be seen. It takes a lot of time and money, even under normal circumstance, to carry out such technologically hard project.

But we are all far from doing business as usual. In times like these, stability of supply has become a factor of extra self-value. What's important is that you as a participant of the market are making a strategic decision for yourself: what's more important - the price, or reliability of the guaranteed supplies shared by both sides.

Meanwhile, we Finns, who are the last part in the long chain from Russia, pure consumers at the very end of the chain, with nothing related to further distribution whatsoever, have had no problem at all from the gas supplies coming from Russia in the last almost 30 years. There has been no interruption, pause, any time of uncertainty, nothing of that sort during all those years, and from my point of view as a trader, this is tremendously important.

If Norwegian gas becomes a permanent and solid trade factor here, surely, we have nothing against it, and we will consider all options with quite an open mind, but at the moment it is simply irrelevant for the Finnish energy traders».   

As for the technological and economical aspects of the issue, the leading Finnish gas dealer believes that Norwegian gas is still too expensive, and its supply is not too certain: «I would say, it is too expensive. To build the pipe from Norway to the Baltic states, this is a thousand kilometers. But the economy of all three Baltic republics is not yet strong enough to be able to carry on such a demanding and expensive project. Even for us (Finns), to build hundreds of kilometers of pipeline is too expensive, we would not go for that». 

Quality is an issue

Comparing the quality of Russian and Norwegian gas, Finnish experts do prefer the Russian one. They also pointed out a peculiar problem, which is due to emerge in the foreseeable future in Europe. Vladimir Hramov explains:

«Norway is a special country. They export all 100% of their own gas with fantastic revenues, without consuming their own energy source at all. They sell all their gas to EU countries. Now, the question remains with Russian gas that will reach Europe one day, in the foreseeable future. We do know that Russians are working hard to pursue their gas to this market. If, and when, this happens, lots of issues will be solved in the European gas transportation and distribution system. Due to the differences in physical qualities of Russian gas from one side, and Norwegian and other imported gas from another, decisions on technological alterations will have to be made in order to fix which gas shall be pumped through which pipelines. It is a serious challenge, and it might be a serious problem, and today we still get more questions Than answers on the issue.»

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