Global Economics

Baltics Grapple with Energy Concerns


For reliable energy supplies outside Russia, the Baltic countries have many proposed solutions, but so far not much follow-through

Catchphrases generally are associated with comedians and advertising executives, not presidents and prime ministers. But any gag-merchant or copywriter would be happy to devise a couple of words that would catch on in the corridors of power as quickly as those introduced by the European Union's energy commissioner, Latvian Andris Piebalgs.

A paper on a European Strategy for Sustainable, Competitive and Secure Energy issued by Piebalgs in March 2006 referred to the Baltic states as an "energy island." It was the first time the phrase was used, and it has been doing the rounds ever since.

The substance behind the catchphrase is no light matter. Piebalgs's label for the Baltic states refers to their being cut off from supplies of oil, gas, and electricity. With few natural resources of their own, the Baltic states are increasingly reliant upon external suppliers. More troubling for states that only managed to break free of the Soviet Union 16 years ago, the word "suppliers" can be replaced, for all intents and purposes, with a singular "supplier": Russia.

Piebalgs revived his catchphrase while speaking in Riga in May, saying: "I would like to see the Baltic states at the heart of [the EU's energy] transformation. This would fit well with the acute need for greater security of energy supply in these states, which have for too long been an energy island dependent upon one major supplier of gas."

Worries about the reliability of Russian oil and gas supplies are at the heart of the energy island question. Russia's vast resources are controlled by the state in a manner that harks back to the days of the command economy, only now it's with a monopolist rather than communist flavor.

The Baltic states watched while Gazprom turned off the taps to Ukraine in 2005 and threatened to do the same with Belarus. Evidence already points to Moscow's willingness to treat the Baltics similarly. In July 2006, delivery of crude oil to Lithuania via the Druzhba (Friendship) pipeline -- the longest in the world -- abruptly ceased and has never resumed. The Lithuanian government has yet to receive an explanation from Russian oil transport monopoly Transneft about the sudden cut off other than a few vague comments about "damage" that's not worth fixing.

Not surprisingly, Lithuanian Prime Minister Gediminas Kirkilas was an early adopter of the energy island concept. He delivered the first major speech clearly expressing Baltic dismay at Russia's use of energy as a political tool when he addressed the Royal United Services Institute (RUSI), a British defense think tank, on 21 May 2007.

"We are concerned about the energy monopolization in Russia, ranging from extraction and production to transport, sale, and transit," he told RUSI delegates.

Kirkilas' fear is well-founded. Gazprom and Transneft not only have huge assets in Russia, but they also have used their soaring profits to buy big stakes in the Baltics' own energy infrastructure. For example, Gazprom owns big pieces of Latvijas Gaze, Eesti Gaas and Lietuvos Dujos, the national gas storage and distribution companies.

"How can we speak about the single energy market if, for example, the Baltic states are still energy islands?" Kirkilas asked. "We should ask ourselves why energy is being more and more associated with politics, and not with economy."

Since then, the Baltic states' efforts to ensure their future energy supply and energy security have started to look inadequate. Rather than addressing the problem, a series of attempted solutions have seen the Baltics drifting slowly away from each other.

DIVISIONS IN THE RANKS

At the forefront of the energy island issue is Ignalina. The only existing nuclear power station in the Baltic states, Ignalina is a Soviet-era reactor with a design similar to that of Chernobyl. It is scheduled to be decommissioned by 2009, and an agreement to that effect even was included as a condition of Lithuania's joining the EU in 2004.

Given the huge costs of building a replacement (approximately 6.25 billion euros), a new project was envisaged in which all three Baltic countries would participate. Then Lithuania invited Poland to the party, much to the surprise of Latvia and Estonia. Poland wasted no time in showing how the addition of one partner can make a project many times more complex.

Poland was a no-show at a signing ceremony designed to officially launch Ignalina II. It caused further embarrassment at another showcase event, the Vilnius Energy Conference earlier this month. Just before it began, Polish economy minister Piotr Wozniak announced that Poland would need at least one-third of Ignalina's output. Poland added further pressure by making it clear that failure to come up with the demanded wattage would result in a go-slow on construction of a "power bridge" to link Lithuania's electricity grid with Western Europe.

Ignalina II was supposed to be operational in 2012. With so little progress made, however, even a revised switch-on date of 2015 is looking optimistic and would leave Lithuania with a six-year energy supply gap that could cripple the economy.

Recently signs have emerged that Lithuania may be thinking about asking the EU for an extension of Ignalina's lifespan. Energy Commissioner Piebalgs has slapped down such suggestions as "vain discussions," but what Lithuania is clearly angling for is an increase in its EU compensation package.

The power bridge ultimatum must have been particularly galling for Lithuanian President Valdas Adamkus, who has been campaigning for links to both Poland and Sweden for years.

"I urge the European Union to show real and more active support for this and other regional energy projects aimed at solving the problem of the so-called energy islands," Adamkus said, employing Piebalgs's catchphrase at the launch of the Vilnius Energy Conference. "New bridges are needed to connect these islands in order to create an effective and viable European energy network."

At the Vilnius conference which Adamkus had worked so hard to establish, he promised that an agreement on the power bridge would be signed "within days." A month later, nothing had been signed.

Estonia has shown itself less fearful of Russian control of energy than have Latvia and Lithuania. One effect of the riots in Tallinn last May (which were given tacit Kremlin support) has been a spectacular worsening of Estonian-Russian relations. As a result, Estonia is developing a policy of energy self-sufficiency that may serve it better in the long run.

It has already completed the Baltics' first power bridge, the EstLink cable to Finland. In the words of European Commission President Jose Manuel Barroso, "Before EstLink, the Baltic states were an energy island."

Construction of a second EstLink cable has been confirmed, and Estonia is keen to be a full partner when Finland builds an expected sixth nuclear power station. Until then, Estonia theoretically could supply all its own electricity needs.

Estonian Prime Minister Andrus Ansip said recently: "Today, we are an energy island . Estonia's main energy source is oil shale. We produce enough energy from oil shale to meet our own needs. And we are even able to supply our neighbors with electricity. Thanks to oil shale, our overall energy dependency is one of the smallest in the European Union. Indeed, we are not highly dependent on Russian energy, as commonly believed."

But burning oil shale produces high-level carbon emissions far above than the quota allocated by the EU. So while Lithuania protests about having to shut down its ancient nuclear plant, Estonia is defending its use of dirty oil shale.

NORD STREAM

Another element of the energy debate is Nord Stream, a Russo-German project to construct a 1,200-kilometer gas pipeline along the Baltic seabed. It is much more expensive to build a pipeline underwater than it is on land. The Baltics were not consulted about its pending construction. The obvious conclusion is that Nord Stream is a Baltic bypass, enabling Russia to cut off supplies to the Baltics without affecting its bigger customers in the West.

Nord Stream also makes the EU's talk of a common energy policy look questionable. From a Baltic perspective, it enhances the energy supply of some EU states at the expense of others, placing national interest above collective interest.

When Finland expressed environmental concerns about the route of the pipeline, Nord Stream was forced to make a belated approach to Estonia for permission to survey the seabed in the small country's exclusive economic zone. Estonian politicians derived some satisfaction from giving Russia a taste of its own medicine and refused.

The real irony now is that the Baltics' haphazard attempts to avoid being split by Moscow's divide-and-rule strategy may end up having precisely that effect. Estonia is disillusioned with the dithering over Ignalina and is looking north. Lithuania and Poland have too much prestige -- and EU funds -- invested in their joint projects to let them collapse completely, so they will probably complete them, albeit behind schedule and over budget.

This all leaves Latvia in the middle, tempted to think primarily of money and to consolidate its current status as Russia's favorite Baltic state. In his address at the Vilnius Energy Conference, Latvian President Valdis Zatlers was much more conciliatory toward Russia than most speakers, saying: "I will speak about the case of the three Baltic states as an energy island in the EU Latvia is interested in closer co-operation with Russia, as well as dialogue between the EU and Russia on energy policy. In our view, the principles of the Energy Charter and G8 Energy Security should be incorporated in the new EU-Russia framework agreement."

EU proposals to develop an over-arching energy policy may offer some hope, but would require the EU to follow through on a threat to make Russia open up its own energy market or face expulsion from European markets. Such a course of action would require a degree of European unity that has never been seen before. But unless Baltic unity can show some signs of life soon, European unity could be the last means left to link the energy islands.


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