ALBANIA: CHALLENGES AND OPPORTUNITIES FROM THE RUSSIAN GAS

UNCLAS TIRANA 000016 SIPDIS SENSITIVE DEPT FOR EUR/SCE JISMAIL E.O. 12958:N/A TAGS: EPET ENRG ECON PGOV AL SUBJECT: ALBANIA: CHALLENGES AND OPPORTUNITIES FROM THE RUSSIAN GAS CUTOFF Ref: 08 TIRANA 811 ¶1. (SBU) SUMMARY: Albania is somewhat insulated from the immediate effects of the Russian-Ukrainian gas spat since Albania imports no natural gas. However, rising fuel and energy costs in the region, primarily for electricity, could create problems for an economy largely untouched by the global financial crisis, but partially dependent upon imported electricity. A possible benefit for Albania of the gas crisis could come from a determination by EU countries, primarily Italy, that LNG (liquefied natural gas) terminals in Albania could provide a buffer from future gas crises. END SUMMARY. ¶2. (SBU) Albania imports no natural gas, so the energy crisis befalling many European and Balkan countries will not produce additional Albanian energy shortages. However, Albania's chronic electricity problems could be exacerbated since the cost of imported electricity will probably increase due to additional demand on the grid as well as reduction of supply if gas-fired thermal power plants have to be taken off line. Since the GOA is unlikely to increase electricity prices to consumers before the summer 2009 elections, it will have to 1) release more water from its reservoirs to offset higher import prices; 2) allow the budget deficit to increase due to higher costs of imported electricity; or 3) increase electricity blackouts. Although Albanians are to a certain extent used to blackouts, the GOA will probably do everything in its power to keep them at a minimum, since blackouts are a constant and painful reminder of the GOA's inability to deal with a long-term problem. If the GOA uses more of its stored hydro power to offset higher import costs, it is gambling that the reservoirs will not run dry by this summer. The budget deficit seems to be the most vulnerable target, but an increase in the deficit could have the most serious consequences due to the global financial crisis (reftel). ¶3. (U) The gas crisis, though, could have two possible long-term benefits for Albania. Prior to 1990, Albania produced a moderate amount of natural gas from over 250 wells in fields in the south of the country. A network of 500 km of gas pipelines was built to connect the wells to primarily industrial consumers. However, as some of the wells became depleted, output dropped radically, and the GOA decided to abandon the wells and pipelines instead of investing the capital necessary to make the gas fields productive. Recently, a Western investor presented an unsolicited proposal to the GOA for building a gas-fired thermal power plant (TPP) using locally produced gas. ¶4. (U) Secondly, Italy is facing a growing energy crisis in part due to the resistance of green opposition groups to the construction of TPPs, nuclear power plants and LNG (liquefied natural gas) terminals. The GOA has received a number of proposals to build LNG terminals in Albania, use some of the gas to power a TPP and pipe the rest of it to Italy in an underwater pipeline. Some of the electricity generated would also be sent to Italy via underwater cables. In addition, some companies have proposed extending various planned gas pipelines from Greece through Albania with Italy as the final destination. ¶5. (U) COMMENT: These Albanian gas projects, as well as much larger projects liee the NABUCCO pipeline, have languished due to lack of financing and political will to get them done. Perhaps the current gas crisis will provide incentive to EU governments, particularly Italy, to kick-start some of these projects, benefiting both countries. Investment in infrastructure projects like these would also help bring these countries out of their economic doldrums while ensuring future energy supplies. Unfortunately, history has shown that when the crisis is over, governments tend to go back to their old ways as if the crisis never happened.