"LITHUANIA ACTIVELY SEEKING DIVERSIFICATION OF NATURAL GAS IMPORT SOURCES" -

Vitas Navickas, Minister of Economy, the Republic of Lithuania

 

Caspian Energy (CE): Mr. Navickas, how successful are economic reforms in Lithuania?

Vitas Navickas, Minister of Economy, the Republic of Lithuania: Following the EU's putting forward in 2000 its ambitious goals to become the world's most competitive region, the economic reforms plan called Lisbon Strategy has been launched. In this respect it was planned to achieve until 2010 the social and economic changes and significant alterations in environmental protection. Over a decade the EU shall turn into the ‘most competitive, dynamic and knowledge-based economy in the world to combine harmonic economic development, a higher and quality level of employment and stronger social unity». The Ministry of Economy has drawn and is implementing the National Lisbon Strategy Implementation Program 2005-2008 with actions enabling the rapid growth of economy, increase of economy competitiveness and encouragement of employment and investments in human capital.

The economy growth in Lithuania remained fast through the last 4 years (GDP was growing more than by 7% per annum) also owing to good results of structural reforms. To the greatest extent this growth was provided by structural reforms in energy, pension reforms, and development of countryside and agriculture and, certainly, EU funds that helped fuel most of said reforms. This has helped to grow the demand.

The influence of economic cycle on Lithuanian economy growth is obvious. One of the most important factors of this cycle creating a precondition for internal demand is a low percentage rate and banking credits.

Lithuanian economy is developing as a part of common EU market. It is actively trading with third countries and participates in various interconnection systems within global economy.

Significant structural changes took place in construction and industry: production clusters successfully competing in international markets are forming in many sectors, we have qualified specialists, workforce price is competitive, physical infrastructure is sufficient, we possess scientific potential to be used to develop and strengthen the competitiveness of industry and construction sector. Our managers have a unique experience of work in the CIS and Western markets.

 

CE: How would you assess Lithuania's economic development? What are the prospects of the country's further macroeconomic policy?

Vitas Navickas: During 2006, actual GDP grew by 7.5% and in during the first 6 months of 2007 by 8.1%. The core factor of the country's development is internal demand stimulated by booming nominal revenues. Gross average monthly salary and end consumption of home economies in 2006 rose 17.6 and 12.4 % over year, respectively.

In 2007 the highest growth displayed the sectors representing internal services: construction, internal trade, financial brokerage, realty and other entrepreneurial activities. During 1Q2007, amount of construction operations was 43% more compared to the previous year. Added value in construction sector grew by 26.2%. It has displayed the fastest growth for the sixth consecutive quarter.

The direct foreign investments in Lithuania as of January 1, 2007 amounted to 28.7738 bn Lt (€8,300mio), displaying a growth of 20.4% over year. Direct investments from EU27 and the CIS countries amounted to 24.3 (84.4%) and 1.9bn Lt (6.5%), respectively. Over a third of all accumulated direct foreign investments are in processing industry.

In 2006 export rose by 18.7% over year. Lithuania is mainly exporting mineral resources, machines and electric equipment, transportation vehicles and equipment, textile and items, as well as chemicals and related products. This signifies a good external competitiveness of Lithuanian producers. Most goods Lithuania exported to Russia (12.7% of total export), Latvia (11.1%), Germany (8.6%). Trade between Lithuania and Azerbaijan is relatively small: in 2006 Lithuanian export and import amounted to Lt 24.1 and 11.2 million, respectively.

Lithuania's labor market is integrating with the common EU labor market. Number of unemployed and their percentage in the population of working age is gradually decreasing. In the end of 2006 registered unemployed totaled 3.7%, compared to 4.1% a year before.

Lithuania is forecasted to remain one of rapidly growing economies within the EU. EU-supported fiscal stimulation of economy and reduction of tax burden shall keep the population's trust in such rapid growth of economy. GDP is expected to grow by 8.0% in 2007, nearly 5-6% in 2008, compared to 2.9 and 2.7 in the EU27 countries.

In 2007-2009 internal demand, just like in pervious periods, will further strongly influence the growth of economy. The internal demand in 2007 and 2008 is expected to grow by 8.7 and 4.8%, respectively. Such additional momentum to demand in 2007-2008 will give rise to salary (in average 15% per annum through 2007-2008), boost reduction of unemployment and taxation of labor revenues and an access to opening RC labor markets. An important factor will be consumers' exclusively optimistic expectations about economy development. End consumption cost shall rise in average by 11%  in 2007-2008.

The change of net export shall remain quite favorable. Its growth shall be stimulated by reviving EU market. Export is expected to grow in 2007 and 2008 by 6.8 and 7.8%, respectively.

If preserving investors' trust in economic stability, investments fraction in GDP shall be growing up. In 2010 the fraction of total basic capital shall make up to 29.4% of GDP.

CE: How favourable are the conditions in the country for business activities? What steps are being taken for strengthening entrepreneurship initiatives carried forward by the businessmen? Has Lithuania's joining the EU common European economic zone influenced economic development and growth of investments into the economy of the country?

Vitas Navickas: Lithuania is open to all investors as defined in the Investments Act dated July 7, 1999 of the Republic of Lithuania. The Act sets forth the terms of investments in the Republic of Lithuania, rights of investors and protection of all kinds of investments. It is stated by the Act that Lithuanian and foreign investors are guaranteed equal rights for their activities. Rights and legal interests of investors are protected by the regulatory of the Republic of Lithuania.

According to investors, Lithuania is an attractive country for several reasons. One of them is its membership in NATO and EU, advantageous situation between Western and Eastern markets, favorable business climate (it is very easy to launch business compared to other Baltic countries), rapid and sustainable economic growth, low inflation, reducing unemployment, diversified and market oriented economy and in particular industry, as well as EU's financial support, transparent and stable governmental and economic policy. For example, national laws have been adapted to the EU. Alongside, there are relatively low taxes, advantageous situation and logistics infrastructure in Lithuania alongside good qualified workforce number/cost ratio, tax stimulation in two free economic zones; 7 industrial parks are rapidly developing.

It is planned to improve investment climate through the draft of Investment Attraction Program.

 

CE: Does Lithuania intend to develop the onshore infrastructure, including the port infrastructure?

Vitas Navickas: Lithuania is situated near the Baltic Sea and part of its economy is linked to it. Onshore infrastructure is developing with an account for needs and further development of Klaipeda seaport, nearly $0.5 billion have been invested since 1999: its gates have been reconstructed, its entry fairway dug to the depth of 15 meters, piers for berth of various large carriers and cruise liners reconstructed and upgraded. A seaport of Šventoji near Klaipeda is being designed.More than 100 countries of the world have their investments in Lithuania with direct investments as of January 1, 2007 amounting to nearly €8.3 billion, of which 39.9% are invested in production, 16% in financial brokerage, 10.9% in transportation and communications and 22.5% in other economic activities. Most investors are from Poland and Nordic countries like Denmark, Sweden, Finland; Russia invested nearly $700 million.

The trans-European roads network is developed (see Fig.1)

Good qualified workforce number/cost ratio:

Low Taxes

Zones (industrial parks) for Greenfield investments are developing. There are 7 such zones in Lithuania, apart from two free economic zones (FEZ): in Klaipeda - 205 ha and in Kaunas - 534 ha.

Companies operating within FEZ are profit tax exempted for a period of 6 years, and later they shall pay just a half of this tax. No VAT, excise or customs duties (see Table 1).

Table 1. Industrial parks

  Total Area   Distance from Vilnius Airport   Distance from Port of Klaipeda  
Siaulai   138 ha   214 km   161 km  
  135 hà   139 km   208 km  
Visaginas   33 hà   158 km   453 km  
Panevezys   49 hà   135 km   240 km  
Marijampole   67 hà   139 km   231 km  
Alytus   60 hà   105 km   294 km  
Àêìÿíå   32 hà   290 km   166 km  

 

CE: What programs are implemented in the country within the framework of the Lithuania's membership in the EU? How is the problem with the Lithuanian economy's shifting to the common European currency (€) being solved?

Vitas Navickas: In 2006 our progress in implementing Lisbon Strategy was highly appraised by the European Commission. Lithuania was praised for its pension and tax reform, active policy in labor market, upgrade of transportation infrastructure, approval of updated energy strategy, and modernization of elementary education and teaching.

The Government is engaged in implementation of the Convergence Programme of Lithuania for 2006, which was worked out on the basis of the Stability and Growth Pact, as well as the EU United Landmarks of Economic Growth and Opening of New Jobs. The program was targeted on carrying out economic policy that would ensure price stability and authorities' funds in order to keep up high credibility toward the continuity of the Currency Governing Principles in Lithuania and successful participation in the second mechanism of exchange rates. Being implemented in accordance with tough regulations of the Stability and Growth Pact, the fiscal policy will enable us to sequentially reduce authorities' debts, while governmental money become capable to ensure stable putting into effect the Maastricht Agreement commitments without leaving firm social guarantees. The Convergence Programme will be prepared every year until Lithuania joins the EU zone.

Lithuania adheres strictly fixed course of the national currency of lit to euro and seeks joining the EU zone as soon as the country meets economic criteria of the convergence. In 2007 the Government approved the National Plan for Introduction of Euro that provided for key measures to be taken to introduce euro that ensure protection of consumers' interests, gradual exchanging lit to euro and informing the publicity. According to the data available, the most timely period for Lithuania to join the EU zone will begin not later that 2010. At the end of 2007 and in 2007 the inflation rate in the country is envisaged not to exceed 4%. After the period of acceleration of inflation, oil and gas prices stabilization and completion of concordance of excises in accordance with the EU standards, as well as increasing interest rates and reducing credit increments, the Lithuanian inflation will approach to EU zone rates again.

 

CE: What are the principles on which Lithuania, as an EU member, builds principles of its energy security?

Vitas Navitskas: To increase the energy stability of Lithuania, we are to unite the Lithuania high-voltage power transmission network with those ones of Poland (Lithuania-Poland, junction - 1,000 MW) and Sweden (Lithuania -Sweden, junction - up to 1,000 MW) until 2012; launch operation of a new nuclear power plant and prepare for joining UCTE (Union for the Coordination of Transmission of Electricity) not later than 2015; arrange underground gas storages, which total payload volume intended for Lithuanian consumers must be not less than 1 billion m3; prepare for studying about possibilities of construction of regional liquid gas import terminals in the Baltic jointly with Latvia, Estonia and Poland in 2007; develop geological exploration of domestic oil fields on the territory and shelf of Lithuania; work out a new programme for speeding up use of local and renewable power sources; work out and implement a programme targeted on production of biological fuel in order to increase its share in the total transport fuel balance by 20% until 2025; develop distributed electric power generation; work out a programme intended for the development of atomic energy; apply up-to-date analytical techniques in order to optimize future strategic solutions in the field of reliability of power supply to estimate the degree of risk of various possible factors, as well as their economic, social and political outcomes.

 

CE: Is Lithuania ready to become an independent from monopolistic power raw stock deliveries? How should they settle the issue of oil supplies via Druzhba pipelin?

Vitas Navitskas: In the National Energy Strategy we have envisaged an aspiration that a share of gas supplied from one country to generate electric power must make up not more than 30% in Lithuania's annual fuel balance.

We resumed oil importation by tankers via the terminal of Butinge when Russia's oil transportation giant Transneft suspended oil supplies to the oil refinery plant and terminal in Butinge via the pipeline.

We managed to increase the production and use of biological fuel in order to partially replace oil by materials of biological origin. In 2006 such kind of materials made only 1.7% out of the total fuel. We have approved requirements that stipulated 5%-content of renewable materials of biological origin (bioethanol, fatty acid methylether) in the content of gasoline and diesel fuel. Hence the share of biological origin material used in fuel will increase.

We also seek a way, which allows us to increase the share of renewable power sources in the country's total balance of primary energy in 2025 by 25%.

 

CE: How efficient is the operation of Mazheyku Nafta Concern after its sale? Have sources of oil supplies to the Lithuanian oil refinery plant been determined yet?

Vitas Navitskas: Poland's oil concern PKN Orlen bought most part of shares of Mazheyku Nafta JSC in December, 2006, and we should admit that the last six months were not so easy for the new holder of Mazheyku Nafta. The lack of oil in Druzhba pipeline and a fire broke out in the deep black oil refining complex caused reduction in the enterprise's capacity that resulted inconsiderable losses for the first six months of 2007. However, need in oil products was met both in 2006 and 2007. The second quarter of 2007 will turn out to be profitable for the company. The share of the Mazheyku Nafta JSC production in the Lithuanian consumer market was about 87%. The company imported 13% of oil products.

 

CE: What is the structure of consuming gas, oil and oil products in Lithuania? What do you think about the structure of power consumption increasing until 2025?

Vitas Navitskas: Growth of need in gas in the total balance of primary energy in 2025 will depend on implementation of the project on construction of a new nuclear power plant. After the nuclear power plant is closed down in 2009, gas in initial power expenditures will make 45%, with 35% falling at oil products.

Gas in initial power expenditures presently makes 29%, with 31% falling at oil products.

Use of light oil products is expected to raise most of all in the transport sector and will reach about 2.2 million tons per year until 2025, that means it will grow approximately by 50%. The need of households in liquid gas will inconsiderably increase in the future, while the use of this fuel in transport (about 200,000 tons annually) will only grow.

The total domestic power expenditures will increase approximately up to 18.2 TW/h until 2025.

 

CE: How seriously do you view the Caspian region as a energy resources supplier to Europe?

Vitas Navitskas: The pipeline of Odessa-Brody, which was put into commission in 2002, was laid to the Ukrainian town of Brody, which is situated not far from the Polish borders. The extension of the existing pipe to the town of Plotsk would enable us to be supplied with oil produced from the Caspian and Black Sea fields and create an alterative to oil supplies from Russia. For laying the pipeline, Poland and Ukraine established Sarmatia JV. Lithuania's company specialized in oil shipment Klaipedos Nafta, as well as enterprises representing Georgia and Azerbaijan will join Sarmatia this year.

Due to the implementation of the mentioned project, the Odessa-Brody-Plotsk-Gdansk pipeline is planned to be the first one that links the Caspian and Black Sea region with Baltic states and become a new transit alternative.

 

CE: How would you say about the perspectives of cooperation between Azerbaijan and Lithuania in non-oil sector? Which directions are of prime attention? How would you evaluate the present-day situation with Azerbaijani-Lithuanian economic relations in general?

Vitas Navitskas: Regarding trade and economic cooperation between Lithuania and Azerbaijan , I would note that according to the Statistics Department of Lithuania, the commodity turnover between the two countries in 2006 reached € 10.2 million (that makes up 0.04% out of Lithuania's total foreign trade turnover). The export made up €7.0 miion (0.06%), with the import being at the rate of €3.2 million (0.02%) correspondingly. If in 2005 we observed the growth of foreign trade indicators between Lithuania and Azerbaijan, in 2006 and the beginning of this year we can state a considerable decrease in the commodity circulation (through the first four months of 2007 this indicator fell by 34%, with the export decreased by 28%, and import - by 57.2%). The reduction in the export of chemical industry products (40.4%), textile (23.9%), machinery and equipment (14.0%), as well as fall in the import of products of vegetable origin (51.2%), textile (99.9%) and chemical production (100.0%) were principal factors affecting the commodity turnover. Through the first four months of 2007 Azerbaijan was just on the 76th place among 167 trade partners of Lithuania, 64th place according to export and 74th according to import. The Lithuanian Statistics Department reported that the direct Azerbaijani investments put into the country's economy were €86,000. No Lithuanian investments were fixed in Azerbaijan.

I think that these figures can make glad none of the parties. To brisk and develop bilateral trade and economic cooperation, first of all it is expedient to promote development of cooperation between associated commercial organization of both countries, expand contract and legal base (for example: agreement on mutual promotion and protection of investments can have a positive effect on expansion of mutual investments and economic development of both countries).

CE: What actual possibilities of business with Azerbaijan does Lithuania, as an EU member, consider?

Vitas Navitskas: It is quite difficult for us to discuss concrete actual possibilities to expand trade operations with Azerbaijan without keeping necessary information about business interest of Azerbaijani companies. Anyway, Lithuanian Republic is interested in alternative oil and gas supply sources and probably some other materials, as well as promotion of export of Lithuanian goods like any other country.

 

CE: Does Lithuania consider issues concerned with possible gas import from Azerbaijan in the future?

Vitas Navitskas: Lithuania seeks possible alternatives on diversification of gas import sources. We consider Nabucco Project as one of such alternatives. The Lithuanian National Energy Strategy provides for preparation for studying possibilities of linking up gas pipelines of Poland and Lithuania and the gas transportation network of Baltic states to diversified gas supply routes of Central Europe coming from the basins of the Caspian Sea, Central Asia and North Africa, particularly from Nabucco, as well as other alternative gas supply sources until 2011 in order to ensure safe, efficient and reliable gas supply. Taking part in the process of building the EU energy policy, Lithuania will strive for EU's active support in cooperation and dialogue with Azerbaijan and other countries in the field of energy.

 

CE: What will be the perspectives of gas consumption growth in Lithuania in a short-term outlook? Which possibilities are being viewed to diversify gas supplies?

Vitas Navitskas: The gas consumption in Lithuania has recently been stable and does not change considerably in general. In 2006 the country consumed 3031.0 million m3, with 3061.7 million m3 of gas in 2005.

We expect that through 2007-2008 the gas consumption to satisfy the population's needs and generated electricity will remain stable. The increase in import will be stipulated by growing needs of some Lithuanian enterprises (for example: Akhema JV - the largest fertilizer producer). When the Ignalin Nuclear Power Plant is shut down in 2010, we expect that the country will consume about 4,900 million m3 per year. As to diversification possibilities, the National Energy Strategy provides for the new liquid gas terminal in the Baltic to considerably lower dependence on the only available Russian gas source. Moreover, we have envisaged that Lithuania will get a possible alternative way to be supplied with gas as soon as the country's and Poland's gas transportation networks are linked up.

 

CE: Does the installation of the North European Pipeline concern Lithuanian interests? What is the EU stand on this issue?

Vitas Navitskas: The laying of a new gas pipeline to Europe via the bottom of the Baltic Sea (as they plan the North European Pipeline) bypassing the territory of Baltic States is one of the key factors that impact the stable energy activity in Lithuania. After getting acquainted with the programme on assessment of possible negative influence on environment within the project on laying the North European Pipeline via the bottom of the Baltic Sea, Lithuania laid its criticism down and insisted on consideration of other alternatives of the mentioned pipeline. Lithuania stated their position on this issue during meeting with representatives of different EU offices and agencies: during the Council of Ministers of Transport, Telecommunications and Energy of EU that took place on February 15, 2007 in Brussels, the Economy Minister of the country expressed our concern about the North European Pipeline project, which, in the view of Lithuania, does not increase the security of Baltic states.

The position of EU countries toward the project is quite complex; anyway, Lithuania strives for observation of EU common policy in the field of energy and similar position on key energy issues.

 

CE: Does the country have possibilities to create strategic reserves to fulfill the EU directive?

Vitas Navitskas: The National Energy Strategy provides for ensuring reliability of gas supplies through piling up gas reserves in special storages. It is necessary to carry out test and evaluation works, prepare for research on storage equipment in the possible place intended for the construction of a gas storage in Sinderay. We can technically equip the underground gas storage only after the feasibility study of the project is concluded.

EU directives requires a member to possess state reserve of oil and oil products for not less than 90 days in accordance with the annual daily consumption registered last year. Lithuania is obliged to carry out this commitment until July 31, 2009.

 

CE: To what extent the Green Book  adopted by EU has became a guideline for Lithuania?

Vitas Navitskas: On June 22, 2005 the Commission of European Communities approved the Green Book on the efficiency of use of energy or how one should save more energy for less expenditure. The document is intended for the stimulation and promotion to increase the efficiency of energy utilization. On March 8, 2006 the organization acknowledged the Green Book as the Strategy for the Stable, Competitive and Safe Energy of EU, in which requirements, standards and regulations of stable, competitive and safe energy of EU were laid down. The provisions of such books were very important for Lithuania during determination of national strategic aims for energy sector.

On the basis of the regulations of the mentioned Green Books, we have determined strategic aims for Lithuania's energy that are common to all EU member-states. These are the energy security, stable development of energy sector, competitiveness and efficient use of energy.

Lithuania links its energy security with the integration of energy systems of the country with those ones of EU and carrying out efficient national policy in the field of energy, as well as EU policy in this field that will ensure energy security to the country, which must be equivalent to that one of other EU member-states.

In order to put into effect targets stipulated by the National Energy Strategy, it is necessary to increase a share of renewable power sources in the country's energy mix by not less that 20% until 2025; raise a share of electricity generated by heat-setting stations during heating season in the electricity generation total balance until 2025; increase a share of biological fuel considered for transport in the market by 15% until 2020 and up to 20% until 2025; save 9%-content final energy versus the level of final utilization of energy power registered in 2005 within 9 years starting from January 8, 2007.

The regulations of the Green Books were estimated in the National Programme for the Enhancement of Efficient Use of Energy considered for 2006-2010, in which organizational, legal, economic measures to be taken were stipulated along with that ones intended for the improvement and introduction of technologies, applied scientific researches, education and public awareness.

We have also approved the Energy Efficiency Action Plan. This action plan was worked out in accordance with the requirements of Directive of the European Parliament and Council 2006/32/ÅÂ on efficiency of final energy consumption in energy conditions, which was adopted on April 5, 2006. Due to the implementation of the action plan, starting from 2008 and within nine years on we shall save 9% of final energy against the level of utilization of this energy registered in 2005. The plan has already been submitted to the European Commission for further consideration.

In addition, in order to increase the efficiency in use of energy and informing consumers, we introduce Directive of the European Parliament and Council to Lithuanian legal enactments. The regulations of the directive determine the system of setting requirements on ecological projecting for power consuming products.

 

Thank you for the interview.