Transcript Slide 1

THE NORTH-EAST DIMENSION:
GAS-PIPELINE INTERCONNECTION
WITH THE BALTIC STATES
Dr. Joachim Hockertz
Deputy CEO, Director for Commerce, AB Lietuvos dujos
European Economic Congress
Katowice, 17 May 2011
Infrastructure & Quantities 2010
Finland
UGS 2.3 BCM working gas
capacity
4.5
4.5
New CS near Vilnius
Estonia
Latvia
0.7
0.7
 annual investment into new
gas infrastructure quadrupled
UGS
1.8
1.8
Lithuania 3.1
1.5
Transit 1.4
Lietuvos dujos after
privatisation:
 overall nearly 300 mln EUR
invested in infrastructure
 system grew by one third in
terms of km
C
C
 all major projects
implemented in time and
below budget
10.1 bcm = 5.6 bcm
(LT,LV,EST) + 4.5 bcm (FIN)
Single Supplier
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Regulation & Market: Infrastructure (1/2)

Free TPA to 100% of Lietuvos Dujos’ infrastructure


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guaranteed by strict laws and regulations
reality on high level (~60% of national consumption in last years),
since more than a decade - without regulatory complaint

Government entitled to decided on strategic projects,
company obliged to implement

Based on Government proposal 5% cap on pre tax return
on assets (RoA) included in Law
Regulation & Market: Infrastructure (2/2)
Instable regulatory
environment
Principles in methodology for
calculating the infrastructure tariffs caps
were changed:
 2007-07-31
 2008-08-08 (WACC introduced)
 2009-10-13 (5% cap on pre tax RoA)
 2010-10-06
 2011 autumn: changes expected
The changes are immediately applied to
calculate prices caps, despite the
regulatory period is five years => i.e. the
term “regulatory period” is stripped from
any meaning.
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vs.
Long term
investment

In natural gas infrastructure sector
investment payback period > 1520 years

According to the 3rd Energy
package, TSO must annually
prepare ten-year network
development plan.

Long-term planning is binding for
gas transmission and distribution
companies according Natural Gas
Law
Regulation & Market: Commodity (1/2)

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Market Structure Baltic States

Few household heating consumers, because district heating
dominates

In terms of consumption:

Heat & power 53%

Industry
39%

Households
5%

Others
3%

More than 1 mln consumers, but just a handful big ones

…must be involved by governments, regulators and companies
Regulation & Market: Commodity (2/2)
4000
LT Sales market 2002 - 2010
3563
3500
3000
2894
2880
3045
3014
2680
2198
1619
2000
1500
2066
1974
1653
1835
1523
TPA
1546
LD
1531
2099
837
1000
746
720
491
36
283
545
545
554
589
615
645
2002
2003
2004
2005
2006
2007
500
LD
3069
2680
2500
TPA
3197
1223
1149
2008
2009
0
Regulated market
2010
Free market
since mid 2007 all consumers are eligible, incl. households – however, at the same time
the whole gas market became state regulated
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Regulation & Market: Draft National Energy Strategy
“The Strategy foresees to implement a row of big
projects, and then to lower natural gas
consumption to zero. …”
From the recent joint comments of the Lithuanian Associations of Heat Suppliers, of Power
Producers, of Biomass Energy, and of the Lithuanian Energy Consultants Association on the natural
gas section of the ‘National Energy Independence Strategy’ drafted by the Energy Ministry,
27.09.2010
“By 2020 Lithuania will have the LNG terminal
and, depending on timing of project completion,
will have a gas interconnection with Poland.”
Draft NES prepared by Energy Ministry, approved by the Government on 06.10.2010, page 28.
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LT-PL gas link (1/4)
2005
LD created new interconnection capacity with Latvia
Interconnection currently strengthened by Latvijas Gaze
and LD using EU co-financing
Oct 2008 Jun 2009
Polish TSO Gaz-System S.A. performs Open Season
procedure / No demand in both directions
end 2009
LD and Gaz-System create a joint working group to
investigate possibilities to construct PL-LT gas link
Apr 2010
Gaz-Systems and LD send a joint application to EU COM
for TEN-E co-financing of a study
Dec 2010
EU decides on 50% co-financing, remaining part equally
covered by Gaz-System & LD
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LT-PL gas link (2/4)
Two phases of study
Business Case Analysis (BCA)
Feasibility Study (FS)
Market, regulation, demand & supply
and prices forecast
Technical and environmental aspects of
the pipeline connections
Jan 2011
tender for BCA announced
contract with winner “Earnst&Young” signed, start
of BCA
Summer 2011 presentation of BCA to the Boards of Gaz System
and LD
in case of positive Board decision: continue with
Apr 2011
2012
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2012
preparation of FS
in case of positive results: continue with
Open Season
in case of positive results: continue with
Engineering and Constructing
2016
in service
LT-PL gas link (3/4)
“… The companies are delaying the construction of the interconnection
by preparing a feasibility study. Allegedly, the EU has already
promised to allocate the support to this project, therefore there is
no sense to analyze whether the project will pay back. … I spoke on
the telephone with the EU Commissioner Günther Oettinger when the
Belarus gas crisis arose, and he assured the European Commission will
allocate financial support for the construction of this interconnection.
The companies should start concrete works …”
Energy Minister on 02.08.2010 on Lithuanian National Television
“... LD started to show demonstrative activity only after we clearly
announced our determination to implement the EU directive on the
separation of pipelines”
Prime Minister in Verslo žinios, 06.09.2010
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LT-PL gas link (4/4) Who will implement?
Article 48. Interconnection of natural gas transmission system with the
European Union natural gas transmission systems
1. The Government or the institution authorized thereby shall be entitled to
approve resolutions on the installation or extension of gas pipelines,
natural storage facilities and LNG facilities necessary for safeguarding the
security. Gas undertakings and the Regulatory Authority shall implement
such resolutions.
2. When investing in the development of the transmission system, the manager
(managers) of the transmission system together with the Government of the
Republic of Lithuania or the institution authorized thereby shall participate in
the project of interconnection of the natural gas transmission system of the
Republic of Lithuania and the European Union gas transmission systems. The
Republic of Lithuania shall implement its rights and duties in the project
through the undertaking controlled by the Government.
3. The methodology for the inclusion of costs of the project of interconnection of
the natural gas transmission system of the Republic of Lithuania and the
European Union natural gas transmission systems in the costs of rendering the
services of the transmission system shall be approved by the Regulatory
Authority.
From draft gas law, prepared by the Energy Ministry, approved by the Government on 02.02.2011(markings by LD)
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Baltic integration/de-isolation initiatives

FIN: 1xLNG +
Balticconnector

EE: 2xLNG +
Balticconnector


LT: 2xLNG + UGS +
LT-PL gas link

LT/LV
interconnection
enhancement (under
construction)

Regional solution
required

“LNG only” can not
be considered as
“interconnection”;
“Solid” interconnection necessary
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LV: 2xLNG
Implementation of 3rd Gas Directive in LT
PM declared goal: state control over gas transmission business (incl. transit) without
buying out shares from foreign investors

Due to condition state control (inter alia re management, profit distribution) and state
regulation (5% pre tax cap, instability) sale of transmission business hardly possible

E.ON
38.9%
GP
37.1%
State
17.7%
Others
6.3%

Option Ownership Unbundling (OU) was chosen without:
meaningful discussion with major shareholders and consumers
impact analysis or comparison of the options available under the Directive

LT is isolated market with single external supplier
OU would just create additional costs and higher transportation tariffs, but no
positive effect on the level of competition

Transportation of gas from any source from the border to consumers inside LT is
already fully safeguarded, today

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Liberalization or Nationalization?
How to proceed with LT-PL gas link project
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
Gas System and LD envisage in service date 2016, virtually in
line with EU policy (LT Government plans a considerably later
in service date)

Baltic LNG may realize earlier than 2016 (LT LNG Terminal in
service date fixed by Government as 2014), but possibly cannot
be considered as „interconnection“ of Baltic States

Involve big consumers and Lithuania‘s Northern neighbors

Determine gap to reach economic conditions; gap cannot be
covered via consumers tariffs, only
Q&A
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LT LNG Terminal
Government statement (website 21.07.2010):
"… We need a pipeline connection between Klaipeda and Jurbarkas to be able to supply
that liquefied gas to all consumers in Lithuania. The attempts to have the gas pipeline
interconnection between Klaipeda and Jurbarkas constructed have been unsuccessful
despite ten years of trying. Lietuvos Dujos is incapable of implementing this project. At this
point I have to remark, as we see, what a mistake it was to privatize Lietuvos Dujos.”
“… The construction of the terminal is directly related to the implementation of the so called
third package of the EU Energy Directive in Lithuania, about which the Government publicly
announced in May.
The third package requires unbundling the control of gas transmission and gas distribution.
The construction of the terminal would be senseless if gas transmission and gas distribution
were not unbundled, because Lithuania would not be able to distribute to customers the
liquefied gas delivered by sea to Klaipėda since, for the being time, the Government does
not control gas transmission pipelines. ”
LD Position:
We would be happy to connect an LNG terminal, in particular because this would end
speculations on the gas price. However, basic issues like the terminal’s location and
capacity are not decided, yet. By law, LD is obliged both to connect such facilities and to
safeguard free access to its system.
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EnMin’s Public Statement - Another Example
“The energy ministry told ICIS Heren that it has decided to push ahead with the
unbundling to diversify supplies and to assure free access to the grid,
something it says the incumbent has failed to do.”
“The energy ministry said it had made numerous attempts to convince Lietuvos
dujos to build new interconnectors, and a link to a proposed LNG terminal, but
had been unsuccessful.”
ICIS Heren European Spot Gas Prices, May 20, 2010
Lietuvos Dujos asked the Energy Ministry in writing whether it was correctly
cited and, if not, to inform what the Ministry actually said.
Energy Ministry’s “answer” (translation):
“We would like to inform you, that the Energy Ministry does not comment and
assess any opinions, conclusions or interpretations distributed in the mass
media. …”
Heren confirmed that the Ministry said exactly what Heren published.
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Key “Argument” for Nationalization
<…> lately delayed implementation of strategic energy
projects (e.g. the construction of Šakiai – Klaipėda gas
pipeline) acknowledges the existing problems <…>
Implementing the 3rd EU Energy Package by ownership
unbundling model, the Republic of Lithuania <...>
solves the currently existing problems …
Material distributed by the Energy Ministry
for the "public hearing" on 09.11.2010
regarding new gas law
All strategic projects LD implemented in time and
in budget – only Šakiai-Klaipėda delayed by State.
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