Baltic fission but no fusion of energy policy

By bne IntelliNews July 11, 2007

Nicholas Watson in Prague -

The decision by the Baltic states on Friday, July 6 to form a company tasked with building and operating a new nuclear power plant in Lithuania suggests solid progress in creating a coordinated policy on energy security. Yet continued squabbling over the size of stakes, as well divergent views on Russia's Nord Stream gas pipeline, show how the Baltic region is a microcosm of the EU in its inability to form a united front on energy when dealing with Russia.

The meeting of the prime ministers of Estonia, Latvia and Lithuania in Vilnius last week follows the Lithuanian parliament's approval on June 28 of the law to build the nuclear power plant, which was hailed by politicians as the final step toward getting the estimated €4bn project off the ground. Lithuania, Latvia and Estonia signed a preliminary deal last year to build the new nuclear power plant, which will replace the existing nuclear plant in Ignalina, due to be shut down in 2009 as part of Lithuania's deal to join the EU. Poland later joined the project.

The unprecedented cooperation is driven for the most part by fears over Russia's growing willingness to use its energy resources as a vital part of its foreign policy in Europe, exemplified by the shock decision to cut off gas supplies to Ukraine in the depths of the freezing winter of 2005-06 and oil supplies to Belarus the following year.

The Baltics' worries over this issue is even more acute given their almost total dependence on Russia for oil and gas, as well as ample experience of how Moscow is prepared to use energy supplies to gain leverage over these former Soviet satellite states.

Moscow's newfound assertiveness in the region can be dated back to 2003, when the Russian pipeline monopoly Transneft stopped oil supplies by pipeline to Latvia's Ventspils terminal following the completion of Russia's own Baltic port at Primorsk. Ventspils has languished since, receiving lesser amounts of oil via rail, and in November 2006 the Latvian government offloaded its 38.6% stake in the terminal operator to the Swiss-based oil trader Vitol Group for €103m. There are no signs the Russians intend to change their mind over the terminal; Russia's special representative for relations with the EU, Sergey Yastrzhembsky, was quoted by newswires as saying on July 2 that Russian oil transit through Ventspils will never recover to previous levels.

The Russians also suddenly halted pipeline supplies to the Lithuanian oil refinery Mazeikiu Nafta in 2006. The halt was ostensibly because of an as-yet-unverified leak on the spur from the Druzhba oil pipeline that feeds the refinery, though analysts point out the halt in supplies followed Polish oil firm PKN Orlen's success in a tender to take over the refinery, much to the chagrin of Moscow which had wanted one its oil companies, such as Rosneft or Lukoil, to win.

The future of the Druzhba pipeline itself, which for decades has carried 1.2m barrels a day (b/d) of crude from western Siberia to the heart of Europe, is in doubt. Polish President Lech Kaczynski recently warned that Russia intends to close down the Druzhba (meaning "friendship" in Russian) pipeline, and Russia's energy ministry said it indeed plans to reduce pipeline exports. On July 2, Russia announced that oil exports to non-CIS countries in June via Druzhba fell to 5.06m tonnes compared with 5.56m tonnes in May.

Rather than relying on oil and gas pipelines running through what it considers to be treacherous transit countries like Ukraine, Poland and the Baltic states, Russia is pursuing a policy of building undersea pipelines and expanding ports to handle more tanker traffic. It's here, say analysts, that the veneer of cooperation between the Baltic states peels off.


"If the Baltic states are the 'front line' in the European Union's 'war' to improve Europe's energy security by reducing reliance on Russian supplies, then the battle is nearly lost already. Not only are they already virtually encircled by Gazprom and Transneft, but the three countries are fighting among themselves," says Andrew Neff, an analyst with the consultancy Global Insight.

The latest divergence of views among the three concerns Gazprom's €5bn project to build a gas pipeline running from Russia under the Baltic Sea directly to Germany. The project, called Nord Stream, will pipe 55bn cubic metres a year (cm/y) of gas directly into Western Europe, bypassing transit states such as Poland and Latvia.

After initially standing together against the pipeline, the Baltic states are seeing their united opposition to the project erode, with recent reports suggesting that Latvia is viewing the project more favourably since Gazprom, employing the divide-and-rule strategy that has worked so well all over Europe, talked of building a potential spur pipeline from the Baltic Sea to Latvia.

Meanwhile Estonia, still smarting from its vicious tussle with Russia over a decision to move a Soviet-era statue in Tallinn in May, is making life difficult for the Nord Stream partners, which also include Wintershall and E.ON Ruhrgas.

In April, Nord Stream announced it would begin looking into alternative southerly routes in the Baltic Sea, one of which would run through the Estonian waters. This route is not only the shortest connecting Vyborg on Russia’s Baltic coast to the Greifswald on Germany’s Baltic coast, but would also minimise construction expenses. "The floor is more even and not so complicated to build on," says Jens Muller, a spokesman for Nord Stream.

Muller says Nord Stream has just finished compiling the 129 comments received from the nine countries that would possibly be affected by the various routes as part of the legal consultation process and the consortium would now begin public hearings in various countries, which should be completed by October.

Muller says international law governing the sea means that no country can unilaterally veto the pipeline route unless there are serious environmental concerns – something Estonia appears to be gearing up for.

At a regional energy conference in Riga in June, Estonian Prime Minister Andrus Ansip said his country would like to be involved in the discussions surrounding the project due to its environmental concerns. Ansip also suddenly postponed talks with former German chancellor Gerhard Schroeder, now chairman of Nord Stream, to talk about the pipe's route during the height of the spat with Russia over the statue and has yet to reschedule new ones. The daily Eesti Paevaleht reported in July that an analysis drawn up by Estonia's Defence Ministry will warn that any structure built on the bottom of the sea in Estonian waters could be potentially used for military purposes, such as observation of maritime traffic or electronic reconnaissance.

Nuclear splits

The law passed by Lithuania on June 28 to build the nuclear power plant is also not the triumph in cooperation trumpeted by the politicians. As the host country, the law stipulates that Lithuania will hold a 34% stake in the project. However, it is unclear how Latvia and Estonia will react to this new law, since they had been hoping for larger stakes in the project.

"Lithuania's decision to invite Poland to join the project without consulting the other two also clearly annoyed those governments [and] has undermined any sense of common purpose for the project," says Neff.

Another bone of contention tied to the nuclear project is how these states will fill the gap between when the old Ignalina plant closes and the new one, if it goes ahead as planned, opens in 2015 at the earliest.

At the energy conference in Riga, Latvian Prime Minister Aigars Kalvitis warned delegates that, "there will be a huge [power] deficit from 2009 to 2015, which will force the Baltic states to look to build additional interconnections and develop renewable energy sources in order to strengthen their energy security."

Although the recently launched Estonia-Finland high-voltage power cable and the planned Lithuania-Poland power line will boost electricity supplies, the region will still be short and perhaps have to rely on imports from Russia, which would do nothing to help Estonia, Latvia, and Lithuania diversify supply sources.

Russia is even involved in the building of power stations in the region, with reports on Wednesday, July 11 saying that Gazprom is considering building a 320-350 megawatt power plant at the facilities of the Kaunas heat and power plant in Lithuania. Gazprom won the privatization tender for Kaunas in 2003.

Antanas Pranculis, director of the Gazprom-owned Kaunas Thermofication Power Station told the Lietuvos Zinios newspaper that a final decision on the plant, which will cost more than $246m, will be made in August.

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