Ben Seeder in Riga -

Eesti Energia returned to the European capital markets on March 27 with a €300m 8-year Eurobond, its first issue since 2005. The deal could be no more than the tip of the iceberg, with the utility set to need more cash to power plans to upgrade its grid, invest in carbon-neutral power generation capacity, and boost oil production five-fold by 2020.

Deutsche Bank and Nordea were the joint bookrunners for the bond placement, which attracted €650m in bids from investors across the continent, with almost half the demand stemming from pension funds and asset managers. The bonds priced at 248 basis points over the interpolated mid swap rate, with a coupon rate of 4.25%, and maturity in October 2018.

Eesti Energia is 100% owned by the Estonian government. It has an existing €500m credit facility from local banks, and a €95m loan from the European Investment Bank, maturing in December 2012. According to the company, the funds raised from the issue will be put to use in its general investment plans, which include building a new 300 MW combined oil shale/biomass power plant, two new wind parks, and a €300m upgrade to the Estonian electricity grid.

Black gold

However, according to CEO Sandor Liive, the company is also considering spending €1bn - €3bn over the next decade developing its oil business. "These are uncommitted investments; it is at an early stage. If the commissioning of the Enefit 280 refinery goes well this year, we will make a decision about the other refineries in 2013," he told bne.

Eesti Energia plans to boost its domestic oil production to 22,000 barrels per day by 2016, as well as branching out into motor fuel production by building two new refineries to process shale oil. Meanwhile, greener fuels will be produced by a new hydrogen treatment facility. Altogether, the company will need to spend at least €1bn on boosting its domestic operations to hit those targets.

It is also planning to develop oil shale deposits in Jordan and in the US, where it acquired deposits in eastern Utah last year. The company plans to scale production from these reserves up to 50,000 barrels per day by 2020, whilst the Jordanian fields should contribute another 36,000. Combined, Eesti Energia plans to increase its world-wide oil production to over 100,000 barrels per day in the next decade.

If the plans develop as expected, Eesti Energia's oil business could soon dwarf its power generation and distribution business. According to oil analyst Thibault Normand, the capital required for the US project alone could total $2bn (€1.5bn). "To achieve its development plans domestically, in the US and Jordan, total investments could exceed €4bn, which is way too much for the company to finance off its own balance sheet," he said.

Liive declined to comment on how the company may finance these projects, should it decide to press ahead. "It is true that the investments needed for the industrial stage of these investments are very big and we can't do it on our current balance sheet," he said.

One alternative to raising further debt may be outside investors. Joint venture partners could be invited into the US project once the plan has been developed further, whilst Eesti Energia has already sold a 30% stake in its Jordanian operation to Malaysian company YTL Power International.

At the same time, in its more traditional power sector Eesti Energia is looking to veer away from oil and increase the amount of power it produces from carbon-neutral sources. EU regulations on carbon emissions have made it costly to operate older power stations fuelled from oil shale, and the planned 300 MW station will produce much less CO2 than the current oil shale-fired units built in the 1960s. At present, around 90% of electricity generated in Estonia is fueled from oil shale, which causes more CO2 emissions than coal.