Estonia: Only Versatility in Energy Market can Secure Brighter Future

Ahead of Estonia’s joining by the end of the year the International Energy Agency (IEA), its director Maria van der Hoeven has visited the Estonian capital, Tallinn, and introduced the findings of an IEA analysis of the Estonian energy sector. 

Although the report praises the smallest Baltic country’s achievements in pursuing energy security and liberalization, it also has pointed out to Estonia’s three major energy sector weaknesses: dependency on Russian Gazprom gas, electric power market’s poor integration with Western Europe and reliance on oil shale.

While the IEA findings have seemingly already had a sobering effect on Estonian lawmakers, some of whom tend to believe in the endless abundance of the country’s natural gas, another “wake-up” call has come from the least anticipated source, Estonia’s state energy company Eesti Energia’s CEO Sandor Liive, whose comments in Estonian media, following the IEA report, that if the EU continues to stiffen its climate policy, the value of the Estonian oil shale may plummet to zero in 30 to 40 years has caused quite a stir.

But the card to beat the grim forecasts, the IEA says, is in Estonia’s hands, as only versatility in the country’s energy market - now Estonia is set apart from other OECD countries by its overwhelming prevalence on a single dominant energy source, oil shale- can secure the country a brighter energy future.

 Kieran McNamara of the IEA’s Country Studies Division told Natural Gas Europe “the findings are the outcome of a thirteen-month, evidence-based assessment of Estonia’s performance.”

“The in-depth review of Estonia was a peer review, carried out by a visiting team of energy-policy experts composed of senior officials from IEA member countries, supported by experts from the IEA’s Secretariat and European Commission. The cornerstone of the process was a very detailed set of information and data provided by the reviewed country in advance of the review visit,” McNamara said.

Speaking of Estonia’s “energy sector weaknesses”, Marian van der Hoeven, the IEA director general, has especially stressed dependency on Russian energy sources and little integration with the EU energy market.

“Joining Nord Pool is one thing. I think, however, that for Estonians, it would be important to more closely integrate with the EU energy market. And here, I think, you will have to find a regional solution, as Estonia alone would be too little to accomplish that,” Hoeven told Estonian daily Postimees. 

And the third shortcoming, according to her, is Estonia’s huge exceptional reliance on oil shale.

“Estonia is an oil shale country. Global oil shale resources are vast. At the same time, oil shale use has quite a negative effect on the environment…What is problematic with oil shale is the emissions. We think this situation needs to be changed… Estonia has done a lot and is engaging new technologies, and I consider Eesti Energia’s oil production device Enefit-280 to be a world leading technology,” the IEA executive director noted.

She said finding other ways to use oil shale, turning it into liquids used in internal combustion engines and doing that in a more environmental-friendly manner is of utmost importance in advancing the technologies.

“Oil shale is to be found in very many locations over the world. I was surprised, however, to discover that Estonians are in Jordan, in Utah... And that could be to the country’s benefit, nationally…But what is absolutely most important is that the technology should advance, and Estonia here is the leader…” Hoeven stressed.

Estonia began accession talks with the organization in 2011. The IEA is an independent organization founded by the OECD, an international organization whose 34 member states are mostly high-income economies. Only members of the OECD can join the IEA.

Commending Estonia for commitment to implement a new energy strategy by mid-2014 which includes reforming energy markets, expanding renewable energy sources, reducing greenhouse-gas emissions, focusing on long-term energy sustainability and researching new energy sources, the International Energy Agency encouraged the country to pursue the goals as they “will bring tangible economic benefits and diversify energy supply.”

Rasmus Ruuda, advisor for the Estonian Economy minister, agrees that currently the Estonian gas systems are “too much” connected to Russian gas networks which leave Estonia isolated from EU gas systems.

“But the three States of Estonia, Latvia and Lithuania are working hard to tackle the current situation and open its gas markets to other suppliers. As Estonia has decided to implement the Third Energy Package in a full scale, it means that Estonia has decided to go ahead with a full –scale unbundling of gas TSO in Estonia, where currently majority shareholding belongs to Gazprom. Estonia foresees that the unbundling should be completed by the beginning of 2015,” Ruuda told Natural Gas Europe.

According to him, the Baltic countries along with Finland and the European Commission are working on “a number of regional gas infrastructure projects” which will ultimately connect the East-Baltic region gas networks with central European gas networks and end the isolation with the rest of Europe. 

“The infrastructure package includes gas pipeline projects between Poland and Lithuania, grid enforcements inside Baltic countries, expansion of Latvian underground storage, pipeline connection between Estonia and Finland and regional LNG receiving terminal in Finnish Gulf region to be built either on Estonian or Finnish shore. The package has been proposed to the European wide list of Project of Common Interest (PCI) to apply for investment support from Connecting European Facilities (CEF) budget,” the Economy ministry official asserted.

If implemented, he says, the projects will effectively end Estonia and the whole East-Baltic region’s isolation from the single supplier, Gazprom. 

Meanwhile, speaking of oil shale, Eesti Energia CEO Sandor Liive has warned that if the EU continues to toughen its climate policy, the value of the Estonian oil shale may plunge to zero in just 30 to 40 years.

"To the best of our knowledge today, the faster the state, the owner of our oil shale, uses it, the more value it will get out of it," Liive said at a press conference.  "While at today’s rates, the Estonian oil shale may be worth some USD 24 billion, it could fall to zero in thirty to forty years. The state is running out of time…" he added.

Eesti Energia estimates that the Baltic States pay around USD 540 million more for natural gas a year than the West European average, according to LETA, the Latvian news agency.

The reason for the higher price is closed gas market and indexation of the price of gas with the price of oil although in Western Europe generally free market price is used.

Ruuda, from the Economy Ministry, asked by Natural Gas Europe whether it is in Estonia’s interest to speed up the process of oil shale extraction in the country said that Estonia is currently “reviewing its national development plan for the utilization of oil, where various scenarios for utilization of oil shale will be analyzed.”

Meanwhile, Eliis Vennik, the Eesti Energia spokeswoman, downplayed her boss’s warnings on the rapidly dropping value of national oil shale reserves.

“Sandor Liive has expressed only its personal opinion that in case the current climate policy will continue, the oil shale could lose its value during a time…” she told Natural Gas Europe.

“On the other hand, Eesti Energia economist Andres Arrak, who also participated in the conference, said he did not believe in such a pessimistic scenario and believes that even in 2050 oil shale will be an accepted source of energy,” the spokeswoman added.

There’s been a lot of talk about the importance of a LNG terminal in the Baltic region, and while the experts share the views on its significance some of them disagree on its location, though.

“A regional LNG terminal, irrespective of location, will have a significant impact on the energy supply in the Baltic region and bring the market closer to the European natural gas market,” maintained McNamara of the IEA.

“None of the countries in the region have enough natural gas demand to sustain an LNG terminal therefore a regional terminal is the optimal solution. An LNG terminal will diversify supply, decrease the dependence on one country for natural gas and will facilitate the emergence of a regional natural gas market. The IEA supports the concept of a Baltic LNG terminal but we don’t have a preference regarding its location,” she told Natural Gas Europe.

Andres Mäe, a prominent Estonian energy expert, says the supporters of the LNG terminal are relying on the recent price negotiations between the European consumers and Gazprom where the latter agreed to make a discount for partners having contracts with several gas suppliers.

“It is hoped that a LNG terminal will be used as leverage in price negotiations with Gazprom and Estonian gas consumers as well. A LNG terminal as an additional supply channel will decrease political risks concerning the current single supplier,” Mäe told Natural Gas Europe.

He says a single LNG re-gasification terminal for the whole Eastern Baltic region “might be economically more viable” than similar units in all three Baltic States. However, the capacity to use floating re-gasification terminals in every Baltic State could be even cheaper, according to him.

“If the regional LNG terminal is in the common interest of Estonia, Latvia, Lithuania and Finland, then it has to be expressed by a political agreement, which obliges the participants to share the costs of building the regional LNG re-gasification terminal,” he emphasized.

The Estonian expert says the Lithuanian LNG terminal to be built off the Baltic coast is suitable to become a regional re-gasification terminal due to its being an ice-free port and available connections with Latvian UGS. 

“But in conclusion, all the three Baltic States have to increase their natural gas consumption as a premise to make the LNG terminal economically viable, which is advised by researchers supporting the building of a regional LNG terminal. If the current pattern of low gas consumption continues then the purpose of the regional LNG terminal will be only as leverage in price negotiations with Gazprom,” Mäe emphasized.