Identifier
Created
Classification
Origin
07RIGA430
2007-06-05 15:23:00
CONFIDENTIAL
Embassy Riga
Cable title:  

LATVIA: SCENESETTER FOR USG PARTICIPANTS AT THE

Tags:  ENRG ECON LG 
pdf how-to read a cable
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ZNY CCCCC ZZH
P 051523Z JUN 07
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC PRIORITY 4091
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBS/USEU BRUSSELS
RHEBAAA/DOE WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 RIGA 000430 

SIPDIS

SIPDIS

STATE FOR MATT BRYZA
USEU FOR AMBASSADOR GRAY
DOE FOR JOHN MIZROCH

E.O. 12958: DECL: 06/05/2017
TAGS: ENRG ECON LG
SUBJECT: LATVIA: SCENESETTER FOR USG PARTICIPANTS AT THE
BALTIC REGIONAL ENERGY FORUM

Classified By: Ambassador Catherine Todd Bailey for Reason 1.4(d)

C O N F I D E N T I A L SECTION 01 OF 03 RIGA 000430

SIPDIS

SIPDIS

STATE FOR MATT BRYZA
USEU FOR AMBASSADOR GRAY
DOE FOR JOHN MIZROCH

E.O. 12958: DECL: 06/05/2017
TAGS: ENRG ECON LG
SUBJECT: LATVIA: SCENESETTER FOR USG PARTICIPANTS AT THE
BALTIC REGIONAL ENERGY FORUM

Classified By: Ambassador Catherine Todd Bailey for Reason 1.4(d)


1. (U) Summary: Your visit to the June 11-13 Baltic Regional
Energy Forum provides an excellent opportunity to view first
hand both the challenges and opportunities that Latvia (and
the other Baltic States) faces as it strives to craft an
energy policy that: enhances security, ensures a stable
energy supply, adapts to new EU regulations concerning
conservation, and creates viable opportunities for the
private sector to address the energy challenges of the
future. This cable provides background on the energy market
in Latvia, with an aim to enhance USG participants'
understanding of the context and limitations within which
panel discussions will take place. Helping Latvia think
strategically about the geopolitical realities of the region
(particularly its heavy dependence on Russia for basic energy
supplies) and creating opportunities for American
businesses--these are the two key goals of this year's Baltic
Regional Energy Forum. End Summary.

--------------
A Heavy Reliance on Russia
--------------


2. (U) One of the stark realities shaping Latvia's energy
policy is the country's heavy reliance on imports. One
hundred percent of its natural gas and most of its oil and
oil products are imported from Russia. Electricity imports
vary from negligible in a wet year - when Latvia's
hydroelectric power stations can meet domestic demand - to
approximately 60 percent imported in dry year. This heavy
dependence on imported energy (especially from Russia) colors
virtually every aspect of energy policy in Latvia; it will
loom in the background of most (if not all) of the panel
discussions that take place at the forum.

--------------
Natural Gas
--------------


3. (U) The Latvian natural gas company, Latvijas Gaze (LG),
has sole authority to import, store and distribute natural
gas in Latvia. Privatization of LG began in 1995 with sales
of equal minority stakes to German and Russian companies.
The privatization was completed in early 2002. Currently, it

has two groups of strategic investors: E.ON Ruhrgas
International AG with 47.23 percent interest; and Russian
interests represented by Gazprom (34 percent) and Itera
Latvia (16 percent). This overall privatization strategy,
while often criticized for giving Russian companies a
controlling share, has ensured good relations with Gazprom.
There have been no problems with supply interruptions of gas
from Russia, and LG has adequate funds to operate reliably.
Gazprom has been moving Latvia to market pricing for gas.
The wholesale price per 1000 cubic meters (tcm) of gas
increased by 50 percent starting January 1, 2007, to USD 215
per tcm. LG expects another price increase in 2008 (by about
30 percent) which will bring the costs of natural gas for
Latvia close to Western European levels. Retail prices to
consumers across all categories have increased by an average
of 30 percent compared to last year.

4. (U) Latvia maintains an underground natural gas facility -
the third largest in Europe - at Inculkans, about an hour
from Riga. Gas from Russia is injected into the underground
storage formation in the summer, and then withdrawn during
the winter season to be delivered to consumers in Latvia and
Russian regions near the Latvian border. Latvijas Gaze is
hoping to expand the Inculkans facility and ultimately to
develop other large underground storage sites in Latvia--a
development that depends on Latvia's future intergovernmental
relations with Russia.

--------------
Oil
--------------


5. (U) Ventspils Nafta (VN),a large holding company known
mainly for its oil terminal and extremely convoluted
shareholding structure, is the largest player on the Latvian
oil transit market. Besides the oil transit business, VN
owns a number of real estate businesses, several printing and
publishing businesses, and a 49.94 percent share in another
large company, Latvian Shipping. In the past, VN
trans-shipped between 12 and 14 percent of Russia's crude and
oil products exports each year. However, since Russia started
developing its own oil terminals and stopped crude oil

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shipments through the pipeline to Ventspils in late 2002, VN
has confronted a much more competitive and uncertain
environment. The existence of competitive export routes has
heightened VN's perceived vulnerability to the vagaries of
Latvian-Russian political relations.


6. (C) The domination of VN and related oil business in
Ventspils by long time mayor Aivars Lembergs and his
associates has further distorted the picture. Lembergs,
currently in jail on charges of large scale corruption and
bribery, was a personal impediment to relations with Russian
oil suppliers (depending on who you ask, either because he
stood up for Latvian interests or because he swindled the
Russians out of money, or some combination of the two).
Until his legal situation is resolved and until there is some
evidence that he no longer holds sway over VN operations, it
is hard to imagine a decision by Russia to resume shipments
to Ventspils.

7. (SBU) The VN privatization saga began in 1997 and was
completed only in October of 2006, when the government
auctioned off its entire remaining 38.62 percent stake to a
number of bidders. Vitol Group, an international oil trader
based in the Netherlands with turnover exceeding USD 80
billion in 2005, emerged as the largest buyer. The company
bought 34 percent of VN shares through its daughter-company
Euromin. Vitol Group has since increased its interest in VN
to 47.9 percent. Latvijas Naftas Transits (LNT),a consortium
of several local oil transit companies, owns 38 percent of
shares, while the rest is owned by various small
shareholders. The fact that a large block of shares is now
owned by a Western buyer without any known ties to Latvia's
oligarchs is in itself a modest success of the last round of
VN privatization.

--------------
Electricity
--------------


8. (U) Latvia relies heavily on electricity imports. In 2006,
Latvia imported 2.809 billion kWh of electricity from Russia,
Estonia, and Lithuania. Latvenergo, Latvia's energy
utility, operates three hydropower stations, two large
thermal power plants that provide heat and electricity to the
Riga region, and a network of small-scale district heating
plants that account for some 70 percent of Latvia's
electricity generation. It also controls the transmission
and distribution systems. Latvenergo has estimated that
investments of up to USD 2 billion are needed over the next
decade to upgrade the various components of the electrical
system.


9. (U) Privatization of Latvenergo has been the most
sensitive issue compared to all other Latvian energy
companies, and successive Latvian governments have been
unable to achieve consensus on how to proceed. At present,
Latvenergo is fully state-owned, and we do not foresee any
GOL attempts to privatize it in near future.

--------------
Ignalina Nuclear Power Plant
--------------


10. (U) Lithuania's Ignalina Nuclear Power plant plays a
vital part in meeting Latvia's overall energy needs.
Lithuania pledged to decommission the plant in 2009 as part
of its commitments to join the EU. All three Baltic States
(plus Poland) are negotiating the construction of a
replacement plant--slated to be completed in 2015 (though
probably later). An initial agreement involving only the
three Baltic states envisioned each country holding a 1/3
share of the project. However, Lithuania and Poland
announced in January that Poland would be brought into the
project as a partner, amidst complaints by Estonia and Latvia
that they had not been consulted.


11. (C) This issue of Polish participation and the allocation
of shares of energy production has created considerable
tension between the participating countries. Latvia felt
very poorly done by the Lithuanian efforts to bring the Poles
into the new Ignalina nuclear plant, without consultations
among the original partners. Lithuania has proposed that it
hold a 34 percent stake in the project, with the other three
partners each receiving 22 percent. This scenario would give
Lithuania plus Poland a majority share in the new plant.
Estonia and Latvia have counter-proposed that Poland only
receive 15 percent. It should be emphasized that in the

RIGA 00000430 003 OF 003


period between the closure of Ignalina in 2009 and the
completion of any successor nuclear plant, the Baltic states
will face an even greater reliance on Russian natural
resources to meet energy needs. For its part, Latvia has
proposed construction of a 400 MW, USD 650 million electrical
generation plant to meet its demand during this gap. A
feasibility study on the plant is due in July, with
construction envisioned for 2009-2011.

--------------
Nordstream Pipeline
--------------


12. (U) The Nordstream gas pipeline project, which would
build a direct link from Russia to Germany under the Baltic
Sea, has been controversial in Latvia and the broader Baltic
Sea region. The Baltic States felt boxed out when Germany
and Russia proposed the project, as such a direct link could
allow Russia to supply gas to Western Europe directly while
potentially playing political games with former Soviet
states. Scandinavian governments, particularly Sweden, are
concerned about the environmental risks associated with
building a pipeline under the Baltic Sea; these concerns are
magnified by the fact that a considerable amount of
unexploded ordinance from the two world wars lies unaccounted
for along the sea bottom.


13. (C) Like Ignalina, the Nordstream project has also
created tensions among the Baltic States and with Poland.
In May an advisor to the Polish PM met with the Latvian PM's
foreign policy advisor, Peteris Ustubs. According to Ustubs,
the Polish advisor began the meeting by assaulting Latvian
policy, especially on energy. She charged that Latvia was "a
traitor" to the Baltics and Poland on energy issues, cutting
side deals with Moscow on gas storage and the Nordstream
pipeline. She then alleged that there was a "secret deal"
negotiated as part of the Latvian-Russian border treaty that
dealt with energy and economic issues. The degree of
suspicion on all sides regarding these issues even
significantly complicated the process of whom the Government
of Latvia was willing to invite to the Baltic Regional Energy
Forum.


14. (C) Whether due to a simple lack of policy on the issue,
or due to a desire by the Latvian government to "hold its
cards close to its vest," no clear Latvian policy has emerged
regarding Nordstream. Ugis Sarma, Director of the Energy
Department at the Latvian Ministry of Economics, told post
that the GOL views Nordstream neutrally--simply as a
commercial matter, with some environmental dimensions.
According to Sarma, the GOL's main interest would be in
building an "interconnector" to link the Nordstream pipeline
to a proposed underground gas storage facility in Latvia at
Dobele. Sarma noted that such a connection would only be
built if such storage were necessary for Gazprom--to ensure a
stable supply of gas for customers in Germany. He added that,
regardless of whether the Nordstream pipeline is built or
not, Latvia will remain heavily dependent on Russia for gas.


15. (C) Comment: There is no shortage of interest or passion
when it comes to energy in Latvia and how it affects Latvian
relations with the other Baltic States. The confluence of
security, economic, and environmental interests make the
matter one of the key strategic challenges for Latvia in the
short, medium, and long terms. While a resurgent Russia will
undoubtedly continue to use its natural resources and control
of energy infrastructure assets as political weapons, Latvia
has no other viable options to meet its energy needs for now.
The Baltic Regional Energy forum should help policymakers
think strategically and long-term as they develop policies in
an environment where there are no easy answers, only
difficult tradeoffs. In addition, the forum will encourage
Latvia to look west, not just east, as it considers policy
options--and thereby foster increased trade ties between the
US and Latvia. End Comment.
BAILEY