WE ARE INTERESTED IN CASPIAN ENERGY RESOURCES

 

Caspian Energy (CEI): Mr. Strods, what are the major macroeconomic indicators of Latvia? What is the GDP growth forecast for this year? What influence did the Latvia's accession to the common European space exert on the economic figures of the country?

Jurijs Strods, Minister of Economics, the Republic of Latvia: As you probably know, in the early 90s the economy of Latvia experienced fundamental changes: it was reformed and shifted into the market economy. The integration in the European Union (EU), both political and economic, was successfully completed in 2004. The entry to EU exerted positive influence on the Latvian economics. Through the last years our country has been showing one of the highest growth rates in EU. In 2004 Latvia's GDP grew by 8.6% and by 10.2% in 2005. The data available prove that in 2006 the trend of rapid growth went on: GDP increased by 11.9 %. High growth rates are provided due to the stable dynamics of in-country demand and the ability to expand the export market. Following our forecasts, in 2007 the GDP growth will make 9%.

To ensure development of science-oriented industries, the government maintains measures oriented at high technologies and innovations, and forms clusters of entities. The Latvia's strategic goal is to shift from labour intensive to science intensive economics.

The rapid development of economics has positively influenced the situation in the labour market. In 2005 the employment level in the country reached 63.4%, which is 1 percentage point higher compared to 2004 and only 0.4 percentage points less than the average level of EU 25. Following the assessment of the Ministry of Economics, in 2006 the employment level in Latvia reached 66.4%, which exceeds the average level across the EU. Investments in the Latvian economy has grown much mainly due to the sudden enhanced surge of foreign investments. In 2005 the amount of investments in the fixed assets increased by 18.6% and by 15.8% in the first half of 2006. In 2005 the scope of foreign investments in the country made 4.6% of GDP, whereas in 2006 (according to the preliminary data) the amount of direct foreign investments reached 8.5% of GDP and covered almost 15% of investing in the fixed assets. The Government of Latvia is following a liberal policy of foreign commerce, foreign investment and entrepreneurship environment, which is based on the requirements for the rights and commitments of the EU member-country. Upon the entry to the EU, the scope of foreign trade with the EU courtiers, especially with Estonia, Lithuania and other new EU member-states, has grown much. In comparison with the period preceding the entry to the EU, the scope of trade between Latvia and other Baltic states has increased over two times for two years. The volumes of export to the CIS states have been growing as well.

The Latvia's Government provides the stability of the national currency (lat) and small budget deficit (in 2006 it comprised 0.3%, whereas in 2007 it is expected to be at 1.4%) to create preconditions of stable economic growth. The special activity is carried out in Latvia so as to join the European zone, whereas to date Latvia meets almost all Maastricht criteria (exclusive of inflation).

The growth of the Latvian economy is accompanied with the consistent price boost. In 2004-2005 prices went up by 7.3% and 7.0% respectively, while in 2006 the increase was at 6.8%. The high home demand promoted by a rapid growth of wages in the previous years along with the high growth rates of crediting intensify the effect of the second surge of inflation last year. In 2007 it will hamper the significant inflation slowdown. The price boost will also promote the planned enhancement of administratively regulated prices and the increase in rates of the excise tax on tobacco goods and fuel. To date the government has already worked out the plan of actions that aims at binding the inflation.

 

CE: Has the Latvia's entry to the EU boosted the interest of foreign companies in Latvia? What branches of the Latvian economy are the most promising for foreign investors?

Jurijs Strods: The entry to the EU has noticeably boosted the interest of foreign investors in Latvia. Foreign investors regard the membership in this organization as a guarantee of stability of the business and political environments. The EU's structural funds serve as an addition incentive for attraction of foreign investments as investors can use the money of these funds through investing in the entity set up in Latvia.

Speaking about the branches of the Latvian economy that are perspective for foreign investments, first of all it is necessary to lay emphasis on the segments with high value added such as telecommunications, financial centers and business maintenance centers, IT-programming, software testing, etc. As a country with the favourable geographical location, Latvia might turn to one of the major transit countries for the commodity flow between Asia and Europe that will open up wide possibilities for development of logistics centers and transit business.

Foreign investors take high interest in the woodworking industry due to rich forest resources. There are 2,300 entities operating within the industry. 80% of all manufactured products are exported. The average growth rate of this industry makes 10%. The entities engaged in the branches, that manufacture products with high value added such as production of furniture, wooden floors, doors and panels along with erection of wooden houses, are facing a lot of opportunities.

The Latvian traditions of metal working and machine-building industries have ensured high development of this sector. The largest entities of the industry are located in the various regions of Latvia such as Daugavpils, Liepai, and Jelgava.

Latvia has many highly skilled specialists in this industry as well as lots of large successfully operating entities established in the country that offer mutually beneficial cooperation to foreign investor.

 

CE: How did the country near the EU-average level of per capita incomes? How many Latvian enterprises offer a flexible work schedule to their employees and what is the country's relevant ranking in the EU regarding this indicator? What is the productivity of Latvian enterprises? Did the Latvia's joining the EU influence its growth?

Jurijs Strods: Following the assessment of Eurostat, in 2006 the per capita GDP in Latvia calculated on the basis of the purchasing capacity amounted to 52.3% of the EU 25 average level. In comparison with the 2000 year, the lag in the EU average level was brought down by 17 percentage points.

The results of the Eurostat's investigation carried out to study labour conditions in the EU countries show that the Latvian entities rather rarely apply a flexible (free) work schedule. In 2005 66.4% of the total number of employed people worked in the fixed regime, which is 5.2 percentage points higher vs. on average across the EU.

The reforms implemented in the previous years along with the entry to the EU have promoted the growth of labour productivity. Over the last two years the labour productivity has been consistently growing. In 2004 it increased by 7.5% and by 8.6% in 2005 (through 2001 to 2003 its growth rate was in average 5% per annum). Following the Eurostat's assessment, in 2006 the labour productivity in Latvia was 50.5% of the EU average level.

 

CE: How much energy does Latvia consume and how does it satisfy its energy needs?

Jurijs Strods: In 2006 energy consumption in Latvia comprised 6.8 TWh, which is 7% higher compared to 2005. In 2006 natural gas consumption made approximately 1.72 billion m3.

The energy sector of Latvia is mainly characterized by: high dependence upon imported energy (Latvia imports 64% of primary resources and 30% of electrical energy); gas delivery from one supplier, the gas ratio within the balance of primary resources standing at 30%; the high ratio of renewable energy resources within primary resources (over 36%). However, the possibility to discover new generating capacities on the basis of renewable energy resources are limited; electrical energy is generated from natural gas and hydropower; the high ratio of renewable energy resources in power generation is over 46%; more than 35% of electrical energy is generated in the cogeneration mode of operation; the deficit of 300-800 MW power generating capacities; the sudden growth of energy demand as a result of rapid development of economy: 1-2% fall to the growth of demand for primary energy resources and 5-7% - for electrical energy.

The problems of the Latvia's energy industry were caused mainly by the high dependence upon imported resources, especially natural gas, the partial isolation of energy markets in the Baltic region from the European energy market and complete isolation of gas markets from the European markets, low energy efficiency of the heat supply system that provides consumers with heat energy along with the deficit of the domestic primary powers generating electrical energy.

In 2005 Latvia met 36.5% of domestic needs in primary resources. In 2003 this figure in the EU amounted to 48.2%. Though Latvia has a rich potential of local renewable resources, in conditions of growing economy this potential will not be able to completely provide economy with required energy.

The Latvian power grid, like the power grids of the rest EU countries, operates in the parallel operation mode with the Russian and Belarusian energy systems within the common electric circle. That is why the mobile reliability of the Latvian power grid in many respects depends upon the operation of this circle. In turn, the reliability of balanced electrical power is studied so as to develop generating sources both in Latvia and in neighboring countries as well and transmit this energy through power transmission lines. As a result of commissioning of the EASTLINK interstate power grid in late 2006 the energy system of the Baltic States for the first time enjoyed the technical connection with the energy systems of the Northern countries.

 

CE: How close is the power grid of Latvia integrated into the EU market?

Jurijs Strods: The integration of the power grid of the Baltic States into the EU market is not enough so far as at the moment the capacity of the EASTLINK power grid is low. At the same time it is necessary to add that there are no obstacles for interstate energy trade between Latvia, Estonia, Lithuania, Russia and Belarus now operating within the common system. The interstate connections are ensured by powerful transmission capacities. 40% of the total domestic consumption in Latvia is provided through interstate trade, whereas the average indicator of "old" EU members is equal to 8-10%.

The reason for a complete isolation of the Baltic gas supply systems from the gas supply systems of the EU countries is that main pipelines that deliver gas from Russia to Central Europe have been constructed via the bypass route. As a result, the Baltic States receive natural gas from only one supplier, Russia (Gazprom). However, there are no significant obstacles for interstate gas exchange in the territory of the Baltic States.

In order to provide real integration of the power market of the Baltic States into the EU market, it is necessary to enhance the capacity of the only existing connection and construct new connections such as Lithuania-Poland connection, which is regarded as priority. In addition, the possibility to construct a connection between the Baltic area and Sweden is under consideration now.

 

CE: How helpful is the document "On Main Directions of Development of the Power Industry in 2007-2016" drawn up by the government for finding solutions to the existing problems? Is it planned to achieve the self-sufficient supplies of energy by the scheduled period within the framework of the programme?

Jurijs Strods: The Latvia's Ministry of Economics has worked out a new document dedicated to the planning of the energy policy "Main Directions of Development of the Power Industry in 2007-2016" to find solutions to the above-mentioned problems.

Enhanced reliability of energy supply, providing people with available and sufficient energy through the improved energy supply infrastructure and wide implementation of measures aimed at energy efficiency in the consumer sector, preservation and enhanced renewable energy efficiency along with energy production by means of cogeneration are enlisted as primary ones in this programme.

They are aimed at creating conditions for self-sufficient power generation, promoting the growth of the self-provision with primary energy resources, ensuring diversification of primary energy resources supplies and removing isolation of the energy market in the Baltics.

The document also fixes the main directions of the energy policy of  Latvia, which are based on the following: the Latvia's energy complies with the EU new energy policy; diversification of energy supply sources and enhanced self-provision are regarded as the basis of reliable energy supply; the energy industry of the country is open for investments; the energy policy is aimed at further liberalization and ensuring competition in the energy market; the energy policy is coordinated with foreign and environment protection policies.

To achieve the above-mentioned goals, we are going to promote development of connections between the power grids of the Baltics and Europe through participation in the studies and the support of TEN-E projects (Transeuropean energy networks-energy) aimed at integration of the Baltic power systems into the European grids. The Latvian Government intends to facilitate development of the project on gas-condensate power station that will work on solid fuel (coal along with solid biomasses and other fuel types) to diversify supplies of primary energy resources and raise the self-provision with electrical energy. The initial stage of the project will be implemented by the state, which is going to carry out all required studies, to choose a location, draws up the project and coordinates all necessary aspects. Applying target subsidies on investments from the EU structural funds as a tool of support, we will contribute to development of cogeneration stations and production of power from renewable energy resources. The government also plans to support construction of a new nuclear power plant in the Baltic region and view the expedience of participation in the project in case the Baltic states will jointly make a decision on this issue. We will implement investment programmes to enhance energy efficiency for the systems of the heat supply entities, to raise energy efficiency of buildings and power generation from renewable energy resources through attracting the EU structural funds. The core aspects of the documents dedicated to the planning of the Latvia's energy policy meet major directions of the EU new energy policy.

Concerning the second part of your question - saying frankly, we can barely achieve electricity self-supply by established deadline as Latvia's situation differs from other countries. After the incorporation in Latvia the entire electricity network became uniform. And now, when we restored independence, we are still connected to Estonia, Lithuania, Russia and Belarus. We still do not have a direct access to Western countries. Unfortunately, we are still within FSU energy system and our internal energy satisfying the country's demand 4 weeks in a year (period of high water in Daugava River) makes a lot of trouble. In the remaining time we must purchase electricity from Estonia, Lithuania or Russia. According to the approved program, it is planned to erect new 400MW output base power plants to reduce the imbalance. Furthermore, together with other two Baltic countries, and last time with Poland, we are interested in construction of a nuclear plant on the basis of existing one in Lithuania. Naturally, we are thinking how to connect Latvia to Scandinavian countries and these regulations set out that we will be making studies on connecting Latvia to Sweden.

CE: Latvia is 100% dependent on gas supplies from abroad; how is the government working to diversify supply sources?

Jurijs Strods: In gas supply sphere we have only one supplier, Russia, that we fully rely on. We, like all other countries, are interested in supplies diversification and for this reason we are seeking various ways and possibilities on suppliers of both gas and electricity. We work more on introduction of renewable and less hazardous sources. We also consider using wind energy and construction of hydroelectric power plants. We are going to proceed with this work.

 

CE: What is government's program addressing creation of strategic reserve of petroleum products in pursuance of EU Directive? How many days is this reserve suggested for?

Jurijs Strods: The petroleum products reserve can supply the country for the period of three months. At the current stage we calculate number of days required to supply the state and private business. We are striving for the government assuming more obligations. In the end of the year we suggest 56 days from necessary 90 falls for the government. In three years we are going to achieve a three-month period for the government. The state's share increase if necessitated by increase of target commodity prices. Because a businessman takes money out of turnover, stores production long time and at last this all affects its price.

 

CE: Are there any preliminary results of hydrocarbons exploration in Liepaia area?

Jurijs Strods: We have explored western part of Liepaia, Kurlandia, according to some estimations oil should be both on and offshore in this area, but not all operations are completed to date. Two licenses, for offshore and onshore production, have been issued. By 2008 we will know the quantity of deposits, and on the basis of this quantity a decision will be made whether to develop these fields or not.

But, as it has been said, all is not so bad. We have a very interesting geological subsurface structure. One of such places is Inchkaln subsurface gasholder. Its capacity is twice as much as needed to supply the whole Latvia with gas. The gas pumped to this gasholder is used in winter not only for Latvia, but also Lithuania, Estonia and northern part of Russia. Furthermore, we work on an interesting and important project, Dobel subsurface gasholder. The studies commenced this year and will take three years. The project will be funded by Latvia and the EU (50/50). The FS and suggested amount of investment under the project are ready.

CE: Are you holding any talks with Gazprom on use of these gasholders?

Jurijs Strods: Latviasgas has been authorized to hold talks on this issue up till the year 2016. This is a private joint-stock company, whose main shareholders are Ruhrgas and Gazprom. According to the shareholding structure, their interests should not differ much from Gazprom's.

 

CE: And what about long-range gas purchase contracts with Gazprom?

Jurijs Strods: It is true that each year Gazprom revises the game rules despite that there was never a problem with payments. And the gas price for all EU countries is the same, and is subject to change all the time. Well, it could be lower for us than, for example, for Germany that is a thousand kilometers further. Earlier the price was calculated differently, it was considering gas storage in gasholders and their use for Russian regions. The situation changed when Gazprom tailored the gas price to black oil.

 

CE: In that case, why do EU countries restrain from common opinion on issues like this?

Jurijs Strods: Naturally, each of the EU members is observing its own interests. Therefore sometimes it comes that Latvia's voice is unheard across the Union. It makes no difference to Northern and Southern countries of Europe whether Belarus shut down the pipeline as they are supplied from Norway and Africa. Our countries are the first to feel it. The EU's Green Paper is addressing namely these problems that was the first to raise issues and task concerning risks diversification by suppliers and make all the countries equal in this respect. It suggests introducing the uniform pricing and renewable energy sources. As a result, the EU should have the entire Europe talking uniformly to other countries.

 

CE: After losing Russian oil transits via Ventspils does Latvia hope to compensate for loses using other suppliers? How seriously do you consider the Caspian region as an energy resource supplier to Latvia and further to Northern Europe?

Jurijs Strods: Latvia was always concerned in and ready for cooperation with new potential suppliers of energy resources from any region. Latvia has a good infrastructure of seaports, railways and pipeline systems that can provide significant transits through Latvia to other countries of the EU. However, one should either consider such issues together with transits via Russia or seek for new corridors.

We are not just considering ‘Caspian option', but think about it as one of the most important options for us in the event of our mutual interest. Being to Ukraine first time after assuming Minister's office, I saw this country interested in delivery of energy resources of Caspian origin. We might discuss here a petroleum product transit corridor Ukraine-Belarus-Latvia we are quite concerned about.

The Odessa-Brodi-ports of Poland route might be used to run oil from the Black Sea ports (and theoretically from Caspian region) to Europe. The studies are about to be completed, and the core idea is to examine extending the project coverage: to study and, if possible, revive Brodi-Mozyr-Polotsk-Ventspils transit corridor (Ukraine-Belarus-Latvia). The completion of this project requires installation of a 205km long pipeline (to avoid Russian pipelines in the new route). The project like this calls for investments in amount of not less than $230 million.

We still doubt any commercial investor would like to take part in the project. Therefore the primary objective is to prove Ukraine-Belarus-Latvia route's viability. Ukrainians suggest commencing the project with oil transportation by railroad from Brodi through Belarus to Ventspils. To make this proposal interesting to oil producers, three countries (actually their railroad companies) shall agree on a uniform transport fee through the entire oil route. Ukrainians believe railroad companies are unable to come to agreement by their own and such agreement shall firstly be reached at the governmental (ministerial) level. I am not sure about the opinion of Latvian Ministry of Transport Communication on this issue but one may conclude from Ukrainians' position they were not satisfied by this agency: the relevant protocol had been signed back in 2004 but no action followed up.

 

CE: How possible is it to connect Ventspils and Liepaia to NEG using individual branch, as stated Latvian governmental officials?

Jurijs Strods: We suggest installing from Dobele via Ventspils and further tie-up offshore. Actually, we do have a gas pipeline up to Liepaia. We have such a mercenary goal to provide northern port of Ventspils with gas.

CE: Is the government implementing any program to transform the structure of energy monopolist, state-owned Latvenergo, in compliance with EU's requirements?

Jurijs Strods: Meeting EU's directives suggests company's splitting in terms of economy and function. The process shall be completed by mid-2007. Since July 1 two legally independent structures were launched. They are responsible for transfer and distribution.

 

CE: What will be the progress of Rigas SiCE: When will the implementation of Rail Baltica project to connect Warsaw and Tallinn and further run across the sea to Helsinki be launched?

Jurijs Strods: Rail Baltica Project is one of the major infrastructure projects in the Baltic region. We have already concluded a political agreement to implement this project by establishing a state-of-the-art railroad communication with the Baltic and Western European countries. This project is among EU's priorities the European commission allotted funds for studies under provisional design. These studies are partially completed, consultants analyzed the source information and suggested various scenarios under the project. However, this would not be enough for a final decision, so the researches are on.

 

CE: How did the increase of cargo turnover in Latvian ports compensate for decreased railroad transportations?

Jurijs Strods: Even upon the stoppage of crude oil transfer via trunk pipelines to port of Ventspils in 2003, this port keeps running and diversifying processed cargoes. The lost amount is some 15 million tons per annum. Comparing to 2001, when it was loaded to full capacity, cargoes in port of Ventspils decreased by 8.8 million tons, while 6.2 million tons are of new cargoes. Thus, more than 40% of lost amounts have been compensated for.

I would like to emphasize that most part of new cargoes are containers and ro-ro type goods that have greater added value and bring higher revenues to the port. The figures show free port of Ventspils progresses other kinds of services, erects new terminals and implements new projects, thus bringing additional profit to the port.

 

Thank you for the interview.