In a recent report, The Lavtian based ThinkFoundation examined the opportunity that shale gas development provides for Baltic Energy Security. The following summarizes key elements of the report – Global Developments in Shale Gas:A Game Changer for the European and Baltic and Energy Security

Lithuania, Latvia and Estonia face exclusive dependence on Russian gas as well as near-exclusive dependence on electricity, and with lack of grids with other EU countries.  These factors results in high-energy prices, energy insecurity and increased vulnerability.

Background

The Baltic States energy sector bears scars of their Soviet legacy and are highly dependent on energy imports due to lack of infrastructure. The vulnerability is especially high in the gas sector: the three Baltic States have no gas reserves of their own and are 100 per cent dependant on imports from just one supplier: Russia’s Gazprom.

Despite facing a similar predicament, the three Baltic States cannot be thrown in the same pot. Each state has its unique energy mix with its weaknesses and strengths that are examined in detail, as examined below.

Lithuania

Lithuania is arguably the most vulnerable state in the Baltics. Until recently Lithuania was producing most of its electricity (70.7% as of 2009) at its nuclear power plant in Ignalina. This changed in 2010, when the plant had to be closed down in order to comply with the agreement made in tandem with joining the EU.

Even though the closure of the plant did not require the once energy exporting nation to resort to electricity imports by default, as elsewhere reported, it did nonetheless transform the country’s energy sector.

If needed, Lithuania is capable of covering the annual electricity consumption by producing all of it within its borders, namely at its power plant in Elektrenai. The problem lays in the fact that Elektrenai is mainly gas-powered plant, which means that the fuel for running it would have to be imported.

Leaving the security of gas supply issue for a later discussion, the significance for Lithuania of switchover from nuclear to gaseous fuel is two- fold:

Firstly, it is more expensive to produce electricity in a gas-powered power plant than it was in Ignalina. To compensate the difference, Lithuanian government decided to import half of its electricity from neighboring countries. Thus production costs were favored over electricity production autonomy.

Secondly, by deciding to  prioritize energy price and resorting to import of electricity, Lithuania has voluntarily increased its dependency on Russia as it currently offers the cheapest supplies.

To compensate the shortage of electricity supplies, the Lithuanian government is proposing to build a new nuclear power plant in the area nearby from the decommissioned Ignalina power plant.  The new power station, Visaginas, would be a joint project between the three Baltic States and Poland. Despite the recent nuclear accident in Japan , Lithuanian officials seem undeterred and insist that indeed, “now is the best time to build nuclear!”

However, even if the construction of Visaginas begins as planned in 2014, it will not be operational until 2020. The only participant in the Lithuania Energy Ministry last year’s tender in search for a strategic investor, Korea’s Electric Power Corporation (KEPCO), withdrew its offer.  It is interesting to note that Russian President Dmitry Medvedev visited to South Korea just two prior to KEPCO’s withdrawal.

It is clear that the Visaginas project is not as conclusive as the Lithuanian government would like to convey.

Latvia

Whereas Latvia produces no oil, it has large underground gas storage facilities. Equally, while Latvia is not an entirely self-sufficient electricity producer, electricity production mostly from hydroelectric plants, satisfies 88% of domestic consumption. However, the picture becomes less rosy when other energy resources are reviewed.

To satisfy overall energy consumption demand, as much as two thirds of Latvia’s energy is imported.  Even though there are plans to construct a new 400 mega watt power plant between 2015-2025, under status quo it would shift the problem of dependency from one area to another– the new power plant would be fuelled using liquefied natural gas (LNG).

Both gas and LNG would still need to be imported, although not necessarily from Russia. Moreover, the potential usage of LNG would require the construction of terminal and a  proposal to build a facility in Latvia is underway.  In theory it could increase energy security not only for Latvia and the other two Baltic States, but also Finland.

Latvia has a comparative advantage in building the terminal as the state owned underground gas station in Incukalns – one of the biggest in Europe with active volume of 2.3 billion cubic meters, – is seen as a vital link that could be utilized if the LNG terminal is built nearby.  Some Lithuanian energy experts have backed the idea for a joint LNG terminal in Riga.

However, a dispute over Incukalns ownership could potentially complicate the matters. Even though Incukalns is a state property, in 1997 its management was handed over to AS Latvijas Gaze for a period of 20 years.  As 2017 is approaching, AS Latvijas Gaze, whose 34% of shares are owned by Gazprom, has recently declared that if Latvia wants to retain its ownership, it would have to compensate for the investments it has made in Incukalns during the past 20 years amounting to about 600 million lats (860 million  euros).

Finland, which was endorsing the project, has quietly stepped away from backing the initiative recently.  If the ownership is not regained, Estonia and Lithuania could opt out of the potential construction of a Latvian LNG terminal, as the two states have said they would not cooperate on a project linked to Gazprom.

Estonia

Estonia is a fully autonomous electricity producer, the country stands out from the other two Baltic States because of its use of oil shale as a fuel for electricity and heat production. Eighty (80)  percent of world’s oil shale is mined in Estonia.  In 2009, this source accounted for 82 per cent of Estonia’s consumption of fuels in power, leading to 77 percent of Estonia’s electricity being generated by burning the shale.  This allowed the country not only to be self sufficient, but enabled it to export a share of its electricity to the neighbouring countries.

Nevertheless, the status quo is likely to change in the near future. The side effects of oil shale burning are high CO2 emissions. Despite the fact that future oil shale burning methods aim to cut down the emissions to that of coal and thus could, in theory, comply with the EC Large Combustion Plant Directive, they would remain very high.

Estonian policy makers also insist on the need to diversify its energy supplies. The aim is to cut down the dependence on oil shale so that its share in the next decade would be reduced to a third of the country’s total energy production. The energy production gap would be compensated by the expansion of gas, wind and nuclear energy. Unfortunately the diversification process may lead to less energy autonomy and more reliance on external suppliers, as there are no readily available substitutes at the moment.

One thing in common

Latvia, Lithuania and Estonia are all energy insecure states, even if the security of gas supplies issue is excluded from the problem. It is not hard to see why the current situation is alarming not only to the Baltic States, but to the wider Europe.

Having briefly sketched the differences between the three Baltic States’ energy sectors, it is important to assess the single most vulnerable link in the energy mix of the three countries which, unfortunately, is unifying.

When it comes to natural gas supply, Lithuania, Latvia and Estonia are all vulnerable and highly dependent: all three Baltic States are 100 per cent reliant on one natural gas supplier: Russia’s Gazprom.  However, the current developments are likely to increase dependency on Russian energy, including gas.

Estonia will have to reduce its reliance on oil shale in the near future in order to meet the EU 2020 targets. To compensate that, the government is planning, among other things, to shift some of the energy production to gas powered plants.

If that is not done, Estonia will have to begin importing some of its electricity. However, either way the dependency will be increased: even if the share of energy production of gas powered plants increases, the fuel itself–the natural gas–would still be coming from Russia.

As Estonia currently exports electricity to Lithuania and Latvia, the reduction of energy produced from oil shale would directly and indirectly be felt in these countries. The development would be especially uncomfortable to Lithuania, which lately, due to the closure of its Ignalina nuclear power plant, has resorted to electricity imports from the neighbouring countries, including Estonia.

Despite the fact that Lithuania would be capable of replacing energy imports with home produced electricity, the energy security problem would not be addressed. The production would be based in gas powered plants, fuel for them thus being imported from Russia. Given that most of the imported electricity already comes from Russia, increased dependency on the latter country and lack of an alternative supplier–Estonian electricity– would indeed be nerve wrecking for Lithuania.

The Lithuanian government is planning to address the energy security problem by building a new nuclear power station in Visagin as that would become operational by 2020. However, a lack of investor as well and the nuclear accident at Japan, will most likely delay the project’s development and thus would extend and increase Lithuania’s dependency on Russian gas in the following years.

Estonia’s upcoming shift from oil shale to other resources and lack of immediate replacement for Ignalina power plant translates into increased energy insecurity for Latvia. The country’s energy mix is already over shadowed by gas (30 percent as of 2008, well above the 25 percent EU’s average).  Since Latvia is not a self-sufficient electricity producer and thus imports some of its energy from Estonia, it would, directly or indirectly, become more dependent on Russian gas as well.

As can be seen above, there are some efforts to alternate the current state of affairs and minimize energy dependency. However, the above discussed solutions (or lack there of) to change the status quo will translate into the Baltic States’ increased dependency on Russian gas in the near future.

The move to shale gas

Alternative gas sources would not only mean increased energy security for the Baltics, but cheaper gas supplies as well. Even though the natural gas spot price is currently very low, it is not the case that Europe gets its gas cheaply. Indeed, Gazprom currently uses its near monopoly (or total monopoly as regards to the Baltic States) to charge premium for its gas.

While the situation has gotten better during the last years – incidentally because of worldwide natural gas abundance, largely due to shale gas production in the United States –, Gazprom still retains great bargaining power towards Europe and is often not hesitant to use it, as not too distant past has shown.

The benefits for reducing Gazprom’s current monopoly status in the Baltic States would be especially great not only for the insurance of energy security, but for the countries’ economy as well.  Baltic households spend disproportionately high sums of their monthly incomes in paying for utilities and food, the price of the latter being partly influenced by the energy prices. Therefore cheaper energy would mean increased consumer spending which in turn would result in sharper economic growth. For the depressed Baltic economies this scenario of events would be very welcomed.

Political Mood for shale gas production in the Baltic States

On the one hand the shale gas project in the Baltic States is in its infancy – no exploration has been started, let alone production. It is not controversial to claim that the Baltic States will probably be the last ones to begin production, if at all.

Yet, the political mood is very encouraging. When Latvian Minister of Foreign Affairs Girts Valdis Kristovskis was on his work visit to the United States in February 2011, he spoke favorably of a collaborative project between the two countries for shale gas extraction in Latvian territory, noting that shale is beneath the entire Latvian territory. Around the same time the Latvian president Valdis Zatlers, when visiting the United States, invited the energy company DTE Energy to begin shale gas exploration in Latvia.

The push for shale gas is even bigger in the neighboring Lithuania. Fuelled by the promising preliminary data on technically recoverable shale gas resources in the country, Lithuanian Energy Minister Arvydas Sekmokas urged the government “to take immediate steps to make shale gas extraction in Lithuania a reality” and noted that the country could extract $30 billion worth of gas in the near future.

During the recent visit to Lithuania, the US Secretary of State Hilary Clinton said that the United States strongly supports Lithuanian drive for energy independence and the two countries pledged in a joint statement to cooperate on shale gas development. Furthermore, Sekmokas has recently revealed that he has had talks with an undisclosed US energy company about prospective shale gas production in Lithuania.

Estonia is so far the only country in the Baltic States that is quiet about its plans in relation to shale gas. This has to do with the fact that Estonia is not consuming a lot of natural gas and can largely satisfy its energy needs by relying on oil shale.

Estonia aside, it can be glimpsed that the other two Baltic States – Latvia and Lithuania – are very eager to exploit their potential shale gas resource, thus increasing the energy independence and relying less on Gazprom.

Conclusion

Shale gas is a game changer for both Europe and the Baltic States. The shale gas revolution that began in the United States has contributed, together with the global economic downturn, to worldwide natural gas price drop and has made the gas suppliers self conscious about the future.

The fact that there is now gas abundance, coupled with the possibility of some European countries themselves becoming shale gas producers, is threatening the position of current European energy market dominating gas suppliers like Russia’s Gazprom.

Even if shale gas production does remain a US venture, it will still mean that market principles in Europe will be reinforced and that the continent will be able to choose between conventional pipeline gas, liquefied natural gas or possibly even unconventional US natural gas.

If shale gas production begin seven in one European country–and all signs lead us to think that there will beat least one (Poland)–, the European energy market will become even stronger and more secure.

For the Baltic States this would be a dream Come true given that they are 100 percent reliant not only on gas imports, but on one gas supplier. As European and world energy consumption will eventually rise and the use of nuclear power will fade, shale gas is the perfect candidate to fill the role as a bridge fuel between highly dangerous energy resources like nuclear and highly polluting ones like coal on the one hand and environmentally friendly renewable energy sources on the other.

Shale gas production in Europe will not only mean more energy security, but will result in cheaper energy prices for the continent thus helping to fuel the currently sluggish economic recovery.

For the Baltic countries that were hit hardest by the global economic down turn this will be specially welcome news. That said it is unclear whether shale gas production in Europe will commence anytime soon as there are still many hurdles to over come. The shale gas exploration is just beginning and judging by the US experience it does take years before production can begin.

Yet, Europe does not have to go through the gas drilling technique development stage as the US has already done that. Furthermore, if environmental risks are addressed in the EU directives and the gas industry is subject to strict regulation, shale gas production should not become a public issue either.

Ultimately, it does not matter whether shale gas production will commence in Europe or not as it has already changed the EU energy market and will continue to do so in a foreseeable future. Because even if the US shale gas production in the short term does not address some of the energy security concerns of Europe, especially those of the Baltic States, it will somewhat reinforce them market principles  and should contribute to low gas prices in the medium term. If the Baltic States are integrated into a common European energy market soon, there is no rush to commence shale gas production in the continent.

In short, the existence of shale gas has already revolutionized the European and Baltic energy markets and will continue contributing to the continent’s energy security in the future, with or with out shale gas production actually taking place in Europe.