Executive summary

Germany’s energy transition changes the demand for energy on regional and international energy markets. A major share of the country’s energy imports comes from, or passes through the Baltic Sea region, making Germany the area’s main energy importer. Public discourse does, however, not reflect this situation accurately. Imports of natural gas block the view on the importance of other energy carriers. The latter, especially oil and coal, are, however, equally important both as elements of the regional energy system and with regard to Germany’s energy future. This article therefore aims at going beyond the narrow focus on natural gas, and provides a more encompassing assessment of the impact Germany’s Energiewende is likely to have on energy flows in the Baltic Sea region.

Introduction

In 2011 Germany started enthusiastically into its Energiewende adventure. Since then it became clear that the goal of a nuclear free and carbon-neutral energy system is not to be achieved easily or cheaply. The international implications of the project have not received much attention in the beginning; yet in the energy sector things are per definition interrelated and not confined to the national level. Soon after the phase-out of the first eight nuclear power stations, the country hence saw itself confronted with the international dimension of the latest of its energy policy u-turns. But to the major surprise of the general German public, the idea of a quick nuclear phase-out and large-scale increase of renewables did not turn out to be an Exportschlager (export success).

On the contrary, the focus of countries, such as Poland, Sweden and Great Britain, remained on coal, gas and nuclear power. Others such as Spain even reduced their subsidies for renewables. But even though Germany’s energy transition causes only little enthusiasm in neighbouring countries, the Energiewende still has repercussions in the international energy system: being Europe’s largest importer of energy, the transformation of Germany’s energy system changes demand on international and regional energy markets. Moreover, electricity flows go through the interconnectors between national power systems, and thus have an impact on the emerging EU electricity market. It is thus very likely that the Baltic Sea region will not remain unaffected by the Energiewende.

The aim of this article is a twofold assessment of 1) the role of the Baltic Sea region for Germany’s Energiewende project and 2) the likely impact of this project on energy flows in the region. A short-term and a long-term scenario could serve as the basis for this analysis: according to Germany’s national energy strategy the nuclear phase-out is to be completed by 2022. At this point renewables should contribute with at least 18 per cent to meet national net energy demand, and with at least 35 per cent to electricity demand. The renewables are supposed to increase to 60 per cent of national net energy demand and 80 per cent of electricity demand by 2050 (BMWi 2014a). As the

Energiewende’s history suggests, sudden turns in Germany’s energy policy are possible. As a consequence, the article elaborates on the basis of a 2020/2022 short-term scenario.

What role does the Baltic Sea region play in Germany’s plans to transform its national energy sector?The following section provides an analysis of public discourse in Germany. Aiming at an assessment of those issues that will affect the region’s energy system in the following years, this analysis looks at the Baltic Sea region through the eyes of the country’s energy-interested public. Based on this assessment, the energy system of the region and the likely impact of Germany’s energy system itself is analysed. The focus of this step lies on import/export flows of different energy carriers.

Germany’s energy transition and energy flows in the Baltic Sea region: public opinion in Germany

The significance of a particular region for a country’s energy policy should be reflected in the national media coverage: the more important a particular region appears to journalists and experts to be as a source, supply route, and/or location for energy production of a given country, the more prominent its place in the energy-related media coverage should be. Similar patterns should be noticeable in the German case. On the basis of this assumption, the following analysis aims at assessing the relative importance of the Baltic Sea region for Germany’s Energiewende. It is based on a sample of 717 articles from five of Germany’s leading daily and weekly newspapers, covering the spectrum from centre-right to centre left and a time period from April 2005¹ to October 2014: Die Zeit (76 articles), Der Spiegel (63), Süddeutsche Zeitung (206), Die Tageszeitung (90), and Die Welt (282).²

How much attention does the Baltic Sea region receive in German debates around the Energiewende? From the sample of articles, 134 mention the term ‘Ostsee’ (the Baltic Sea), that is almost 19 per cent. However, this number shrinks drastically if the search term is amended with ‘erneuerbare Energie’ (renewable energy) or ‘Energiewende; only 33 (4.6 per cent), respectively 26 articles (3.6 per cent) discuss the role of the Baltic Sea for the country’s energy transition towards more renewables. In order to put these numbers – and hence the relative importance German press attributes to the Baltic Sea – into perspective, it has to be related to the prominence of other areas. Since Germany is not only a littoral state of the Baltic Sea, it seems logical to ask also about the prominence of the North Sea and other neighbouring regions in German energy-related press (Figure 1).

Based on the findings of this analysis, aforementioned search results appear in a different light. Even though other countries and regions rank higher on the echelons of energy-interested public awareness in Germany, a nevertheless considerable percentage of energy-related press articles seems to discuss the threats or benefits of the Baltic Sea for the country’s energy policy. It can hence be assumed that the Baltic Sea is considered an area of significant importance for Germany’s Energiewende project by German press (and thus the country’s energy-interested public). Moreover, this general interest in the Baltic Sea seems to increase (Figure 2). Yet the results of this analysis are indifferent with regard to the specific role the Baltic Sea plays in energy-related public debates in Germany; the relatively low number of articles in the year 2013, for example, cannot be explained on this basis. In order to provide a better view, a closer look on the specific targets of the Energiewende is necessary.

According to BMWi (2014a, 11), the Energiewende aims at distinctively changing central elements of Germany’s energy system: on the one hand, the share of renewables in Germany’s gross energy consumption is to be increased to 18 per cent until 2020 (60 per cent by 2050); on the other hand, the use of primary (fossil and nuclear) energy is to be decreased by 20 per cent (50 per cent by 2050). In sum, these and other measures are supposed to decrease green house gas emissions by 40 per cent in the same time period (80 to 95 per cent by 2050). The electricity sector has to play a fundamental role in this programme, with targets even more far reaching: power consumption is to be decreased by 10 per cent until 2020 (25 per cent by 2050), and full nuclear phase-out is to be achieved until 2022. By then (2020) renewables are to increase to a share of 35 per cent in gross final power consumption (80 per cent by 2050).

How does German press reflect these targets with regard to the Baltic Sea? While the percentage of newspaper articles from the sample generally reflect the significance of individual Energiewende targets, the Baltic Sea appears to be a blind spot in this regard: only a small fraction of those articles, which are dealing with Energiewende targets also mentions the Baltic Sea. A look at the different forms of energy explains why: German press mostly reflects on the Baltic Sea region with regard to conventional energies; most important in this context is gas and oil, but nuclear energy and coal also play a significant role. Renewable energy, such as solar, biomass and hydropower, on the other hand hardly appear at all (Figure 3). The exception that proves the rule in this context is wind power, as more than a third of those articles that mention the Baltic Sea deal with this form of power generation.

In a first approximation this analysis has examined the prominence of the Baltic Sea in German energy-related press; yet the search term ‘Ostsee’ (the Baltic Sea) is too narrow to include the entire region, that is those countries around the Baltic Sea. A deeper assessment therefore has to include the individual littoral states in German Energiewende-related press. There are slight differences between the numbers of articles that mention the search terms ‘Energiewende’, ‘erneuerbare Energie’ and individual countries around the Baltic Sea; yet all in all Poland, Russia, and Sweden appear to be at the centre of attention, whereas Denmark, Finland and Norway attain less attention and rank second in German press.³ Estonia, Latvia and Lithuania attract the smallest share of attention.Thus, a few preliminary conclusions can be drawn: if the prominence of the Baltic Sea in German press is taken as an indicator, it appears that the energy-interested public in Germany attributes only limited attention to this region in terms of the Energiewende targets. The interest is, however, growing. Moreover, by broadening the scope to include the littoral states of the Baltic Sea, the picture changes significantly, with individual countries, such as Poland, Russia, and Sweden attaining considerable attention by German press. Seen through the eyes of the German press, the Baltic Sea region is, however, of limited importance with regard to the primary targets of Germany’s energy transition, that is the reduction of (fossil) energy consumption and the increase of renewables. On the contrary, the German press perceives the Baltic Sea region mostly as a supplier for fossil energy, especially gas and oil, or as the location of conventional/nuclear energy based electricity generation capacity.

A closer analysis reinforces this impression: screening the sample of articles mentioning the Baltic

Sea for different search terms to appear in the same section as ‘Ostsee’ (the Baltic Sea), almost two thirds of the results account for the term ‘gas’, while only 18 per cent account for ‘wind’. Hence, not only do most articles in the sample largely cover fossil fuels; the particular sections within the articles that contain the search term ‘Ostsee’ also mostly cover the issue of natural gas which is mentioned. The conclusion of this analysis must hence be that gas largely predominates where public discussions in Germany mention the Baltic Sea region and the Energiewende. Given the Energiewende targets to decrease the use of carbon based energy carriers⁴, the following sections can hence be based on the hypothesis that – with the exception of wind power – the Baltic Sea region will lose some of its importance for Germany’s energy system.

Germany’s energy transition and energy flows in the Baltic Sea region: statistical facts and trends

Where the Baltic Sea region is mentioned, it is largely portrayed as a supplier or supply route for fossil fuels – namely gas – by the German press. In comparison, other forms of energy, such as nuclear energy or biomass, hold an inferior position. The construction of the Nord Stream pipeline might, however, have resulted in a place of gas imports in German public discourse disproportionate to its actual role. Beyond, renewables pose a serious challenge for gas-fired power plants in Germany. The role of natural gas might therefore decrease in the years ahead. The Energiewende targets to generally decrease the use of fossil fuels until 2020 and beyond. In order to provide a clearer idea of the interactions between Germany’s Energiewende and energy flows in the Baltic Sea, this section will therefore analyse the energy system of the Baltic Sea region in more detail. Basis of this analysis is Eurostat data on energy consumption and imports from 2010-2012 (see Annex at the end of this article).

If the territory of the littoral states is included in the analysis, the Baltic Sea region⁵ is an area rich in energy resources, with a three years (2010-2012) average surplus of primary energy production of 500.2 mtoe (million tonnes of oil equivalent). Unsurprisingly, the distribution of available energy resources is, however, highly unequal, with only three countries, namely Denmark (2010-2012 average surplus of 1.7 mtoe), Norway (2010-2012 average surplus of 169.6 mtoe) and Russia (2010-2012 average surplus of 602.5 mtoe), showing a positive balance between energy consumption and production. If one compares this (positive or negative) balance with gross energy consumption of individual countries, the seriousness of this situation becomes clearer: with the exception of the three net exporters, the countries of this region do not produce indigenous energy in numbers sufficient to supply the national economies (Figure 4). The energy supply gap of those countries⁶ with insufficient access to indigenous energy sources amounts to a (2010-2012) average of -273.7 mtoe.

With an index of -0.613 Germany is to be found amongst those countries that in the region with the smallest basis of indigenous energy. As a result of its internal energy situation and the size of the German economy, the country thus is confronted with a massive (2010-2012 average) energy gap of (-)198.1 mtoe, that is 72.38 per cent of the region’s combined energy supply gaps. 95.3 mtoe, or 48 per cent, of the necessary imports to Germany come from the littoral states of the Baltic Sea region.⁷ The Baltic Sea region can thus be described as the backbone of Germany’s energy supply, and should be of strategic interest for the country. Given that Germany also accounts for some 24 per cent of gross energy consumption in the Baltic Sea region (including entire Russia), any changes in the German system of energy production, imports and consumption can be expected to affect energy flows in the entire region (Figure 5).

Energy imports from the Russian Federation and Norway play a particular role in this regard, as they account for nearly the totality of imports from the Baltic Sea region to Germany, and hence fill almost half of the country’s energy gap. Including Norway and Russia in the analysis is, however, based on a very broad understanding of the Baltic Sea in terms of geography, as both countries stretch far beyond the geographical limits of that area. This analysis therefore requires a closer definition of the ‘Baltic Sea region’. In this regard, it is important to understand that Germany’s national energy system is located at the crossing point of several major Euro-Eurasian energy regions (Högselis, Aberg & Kaijser 2013, 56). German gas and oil imports from Norway, for example, come from fields in the North Sea, and cross that sea through different pipelines (via Europipe I, Europipe II, and Norpipe); from its entry points to the national German system – located at the shores of the North Sea – Norwegian gas then predominantly supplies areas in North-Western Germany (such as the Ruhr), which, in a more narrow sense, cannot be described as being part of the Baltic Sea region.

In the strict geographical sense, Norwegian gas (2010-2012 average of 25,003 mtoe) and oil (8.5 mtoe) supply to Germany can hence mainly be attributed to the North Sea Europe region (Högselis, Aberg & Kaijser 2013, 56); they are thus to be excluded from the following analysis. With energy from Russia, things are more complicated, as parts of the transit system are part of the Baltic energy system (Nord Stream, Yamal/Europol), whereas others (e.g. Brotherhood) pass through different regions. However, yearly transport capacities of individual pipelines⁹, and actual gas flows in these pipelines¹⁰ allow to infer an estimated 50 per cent of Russia’s gas and oil supply towards Germany passing through countries in the Baltic Sea region. The following analysis thus includes only those 50 per cent of German oil and gas imports from Russia that can be assumed to pass through the Baltic Sea region.

As a result of this, the overall picture of energy flows in the Baltic Sea region changes considerably, and leaves a clearer perspective on the interplay of Germany’s Energiewende with the flux of various forms of energy in the area (Figure 6). Accounting for approximately 79 per cent of energy exports, the predominance of Russia amongst the energy exporting countries remains largely unchallenged in this closer definition of the Baltic Sea region, whereas Norway’s role as energy exporter becomes far less important. Germany’s energy imports from the region reduces largely, to approximately 57.6 mtoe, that is a comparably small 36 per cent share. In other words, the importance of the Baltic Sea region for Germany’s energy sector diminishes if the analysis is based on a strictly geographical understanding of the geographic area.

Moreover, the perspective on different energy carriers as a commodity in the Baltic Sea region changes with an exclusion of Norwegian and Russian sources: while gas is most prominent in the German (Energiewende-related) press on the Baltic Sea region, its actual share amongst those energy carriers which are traded and shipped in the region, is small compared to other energy carriers, such as oil and the different forms of coal (see Figure 6). Compared to the flows of oil, gas is only the second most important energy in the energy system of the region, and depending on the share of coal among solid fuels¹³ it is likely that gas even ranks third. An analysis of the impact ofGermany’s Energiewende on energy flows in the region has to take this limited role of gas into account. Moreover, the place of electricity imports and exports in the region amongst other forms of energy flows has to be noted, as its relatively small share indicates that electricity generation still has a very strong national basis.

The impact of Germany’s energy transition on energy flows in the Baltic Sea region

Its scarcity of indigenous energy resources makes Germany irrelevant as an energy exporter.¹⁵

Regardless of major modifications of Germany’s energy system, such as the Energiewende, this is unlikely to change. As an importer Germany plays, however, an important role in different energy markets. With a yearly average of 57.6 mtoe (2010-2012) of energy imports, 25 per cent of Germany’s total imports of 176.4 mtoe (2010-2012 average) come from or pass through the Baltic Sea region.¹⁶ To put it differently, 36 per cent of the Baltic Sea region’s total energy flows enter Germany’s energy system. The Energiewende will affect this pattern (until 2020 and beyond), yet the question is, how and to what extent. Since Germany’s exports is unlikely to change significantly¹⁷, the reminder of this section focuses on energy imports.

Based on an energy scenario from 2010 (Prognos, EWI, GWS 2010)¹⁸ , it can be assumed that Germany’s energy imports from the Baltic Sea region will decrease by 27 per cent to 41.8 mtoe until the year 2020 (Figure 7). In today’s numbers, this implies that Germany remains the largest destination for energy flows within the region, but the country’s share of imports would reduce from 36 to 26 per cent. As a consequence, the region’s combined energy deficit of (-)273.7 mtoe (see Annex, Table 2) would be reduced by about 15 per cent. In other words, energy demand would decrease. Yet in order to infer from Germany’s national energy policy on future energy flows in the entire region, several factors need to be taken into account, namely economic growth, national policies of neighbouring countries, and energy prices.

Sound and continuing economic growth of Germany’s eastern neighbours, makes it, for example, possible that by 2020 Poland will be the region’s main importer of energy from the Baltic Sea region.¹⁹ In view of relatively large share of oil, development of road traffic and transport could be a decisive factor in this regard, both in Germany and other countries. National policies are very different in terms of their approach to road traffic: while Germany implemented programmes to promote the use of electric cars and increase their number from only 12,156 at the beginning of 2014 (Car Sales Statistics, 2014) to one million by 2020 (Bundesregierung), other countries did not. Depending on the success of Germany’s policy to convince consumers of the benefits of electric cars, oil demand will develop accordingly.

Other national policies, such as supply diversification programmes in Poland and the Baltic States – that is increased use of LNG from overseas and of indigenous shale gas, as well as the continued use of nuclear power (in Sweden and Finland) and/or the successful construction of new nuclear plants and the necessary grid infrastructure (in Poland and the Baltic States) – might generally reduce demand for gas in the region (largely gas from Russia). Whether Germany will actually retain its roleas the region’s main importer thus depends on the development of German demand for natural gas, bituminous coal, and solid fuels. Their place in Germany’s energy system is, however, very much unclear. The reason behind this uncertainty is to be found at the very core of Germany’s

Energiewende project – namely the phase-out of plants suitable for meeting base load requirements and increasing number of intermittent renewables.

Both technically and economically this combination of decreasing numbers of base-load generators and increasing numbers of peaking units such as solar and wind power is a complex issue, and – despite many scenarios and plans – there is no blueprint for a system where decentralised and intermittent renewables largely replace centralised base load plants. Flexible gas and biomass power plants are seen as the ideal technological link between the two elements; yet as the case of Europe’s most recent gas power plant in Irsching (FAZ, 2015)²⁰, illustrates, investments in state-of-the-art equipment and turbines becomes unprofitable under the economic conditions of the Energiewende: as renewables have priority access to the grid, they are growing in numbers and come with low prices at peak hours, therefore, market for gas and other fossil fuels is shrinking. Moreover, gas faces a double challenge, as coal still outcompetes gas due to lower prices.

The development of Germany’s gas imports hence largely depends on the question whether policy makers agree on a capacity market that provides an economic framework suitable to keep gas plants in the system. Such a step is currently under discussion (BMWi, 2014b). Outcomes of this discussion and their implementation will certainly affect Germany’s demand for coal and gas imports. Notwithstanding the results of this political process, the demand for biomass is likely to increase in Germany over the following years, because this form of energy – either used in decentralised plants or in form of co-combustion in existing fossil fuel plants.²¹ The share of biomass amongst energy imports is thus to until 2020. Depending on the availability of biomass and the outcomes of Germany debates on capacity markets, this energy source is hence – to a larger or smaller extent – to replace either coal or gas in Germany’s energy imports from the Baltic Sea region.

Conclusions

Against the backdrop of energy imports and exports patterns in Northeast Europe, this article analyses the place of the Baltic Sea region in Germany’s public discussions about the country’s energy future; natural gas imports from Norway and Russia largely dominate this public discourse. The construction of the Nord Stream pipeline is likely to be one of the reason for this highly topical nature of gas in German public discourse; it can hence be assumed that the perception of the Baltic Sea region by the German public is largely distorted. This article therefore attempts to broaden the discussion by expanding the focus of the analysis to include other forms of energy such as coal and electricity. On the other hand, this article attempts to focus on the energy system of the Baltic Sea region in the narrower sense. As Norwegian oil and gas exports to Germany come from and through the North Sea, they are hence excluded from this analysis. And as about half of Russia’s oil and gas exports to Germany pass through Central Europe, they are equally excluded.

The result of this analysis is, that the importance of the Baltic Sea region for the future of Germany’s energy supply is not fully grasped by German public. Individual countries, such as Poland and Russia

obtain varying degrees of attention, and so do the various forms of energy. But all in all the narrow focus on gas largely hides the role of other forms of energy coming to Germany from or through the Baltic Sea region, and thus the true role of the area for Germany’s future energy system. Taking the bigger picture of energy flows in the Baltic Sea region into account, the role of gas imports from Russia appears overestimated in German discussions concerning the role of the Baltic Sea region for Germany’s energy supply: even though Russia is the region’s main supplier of energy, natural gas is not the most important energy carrier. The focus of German media on this topic hence seems to obstruct the view on other important energy carriers, such as coal and – most importantly – oil, which are at least equally important.

As a response to the growing role of renewables, Germany currently discusses a new market design for fossil fuel power stations. Capacity markets for coal and gas-fired plants will be the likely result of these debates, as backup for the notoriously volatile renewables is needed. As Germany is the region’s largest importer of gas and coal, the design of these markets will largely determine the impact of Germany’s Energiewende on regional flows. The way Germany’s Energiewende will affect patterns of energy exports and imports in the region depends, however, on more factors. The future of the German transport sector will at least be equally important, as oil represents the largest share in energy flows in the region. Widespread use of electric cars could serve as a storage battery for intermittent wind and solar power; in 2014 the German government therefore renewed its support with a broad range of incentives for the use of electric cars.

It remains, however, to be seen whether the customers of the German car industry see electric cars as an attractive option. If they do, Germany’s role as an importer of energy from the Baltic Sea region could diminish largely. In this case, Germany’s place in the energy system of the Baltic Sea region will be determined by the results of current discussions about a capacity market for flexible fossil power stations. Depending on the exact outcomes of these debates, German energy imports could decrease according to official scenarios. In such a case, Germany might lose its role as the region’s main importer of energy. For those countries in the region which have only limited access to indigenous energy resources and hence can only play a minor role in supplying Germany’s energy system, such a development is not necessarily a bad one, as their bargaining position on the regional energy market would improve, especially if they successfully implement programmes to further diversify their energy supply.

References

Auer J. and Anatolitis V. (2014) The changing energy mix in Germany. The drivers are the Energiewende and international trends. Deutsche Bank Research. Current Issues, June 26, 2014.

BMWi (2014a) Zweiter Monitoring-Bericht „Energie der Zukunft“. Berlin: Bundesministerium für Wirtschaft und Energie BMWi.

BMWi (2014b) An Electricity Market for Germany’s Energy Transition. Discussion Paper oft he Federal Ministry for Economic Affairs and Energy (Green Paper). Berlin: Bundesministerium für Wirtschaft und Energie BMWi. Bundesregierung (n.d.) Leitmarkt und Leitanbieter für Elektromobilität. Retrieved from http://www.bundesregierung.de/Webs/Breg/DE/Themen/Energiewende/Mobilitaet/podcast/_node.html, date accessed: April 9, 2014.

Car Sales Statistics (2014) 2014 Germany: Total Number of Electric Cars, March 29, 2014. Retrieved from http://www.best-selling-cars.com/germany/2014-germany-total-number-electric-cars/, date accessed: April 9, 2014.

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FAZ (2015) Energiewende. Irrsinn in Herrsching. Frankfurter Allgemeine Zeitung, March 17, 2015.

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The Making of Europe’s Critical Infrastructure. Common Connections and Shared Vulnerabilities, edited by Per Högselius, Anique Hommels, Arne Kaijser, Erik van der Vleuten, 2761-101. Basingstoke: Palgrave Macmillan.

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Prognos, EWI and GWS (2010) Energieszenarien für ein Energiekonzept der Bundesregierung. Studie für das Bundesministerium für Wirtschaft und Technologie. Basel, Köln, Osnabrück: Prognos AG, Energiewirtschaftliches Institut an der Universität zu Köln, Gesellschaft für Wirtschaftliche Strukturforschung mbH.

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Annex

Table 1. Yearly energy production and consumption in the Baltic Sea region (2010-2012 average, in ktoe)

Table 2. Yearly energy deficit/surplus in the Baltic Sea region (2010-2012 average, in ktoe)

The project of Kaliningrad nuclear power plant, if of much greater capacity than conceivable needs of the oblast, will necessarily influence plans and feasibility of the nuclear power plants intended and/or planned in the Baltic Sea region. Complexity

of the nuclear situation in the region is greatly enhanced by diverging concepts and imaginations about the nuclear-for-electricity as energy generation technology. In the region, there are countries that do not intend to have nuclear electricity capacity (Denmark), or that want to get rid of it (Germany). But there are also those that firmly rely on nuclear electricity generation (Finland), or those that seem to agree to

it because of its climate action preferences (Sweden). At the same time, there are those that signal their intention of building one or two nuclear power plants (Poland), or those that want to return to their nuclear generation past (Lithuania).

The situation is complex also because the former Soviet electricity system that used

to embrace all the former Soviet Union count­ries (including now firmly again independent Baltic states of Lithuania, Latvia and Estonia), as well as Poland as a part of former com­munist bloc, still operate in the Baltic states. That makes for a awkward situation when an important part of the European Union (the Baltic states), potentially an indispensible connection north-south from Scandinavia to the European mainland in Poland, cannot contribute to making of the common electri­city system of the EU. Conversely, if they fi­nally switch over to the European electricity standard, they will make the Kaliningrad ob­last an electricity island within the EU, much as it stands in all other areas. A possibility of the Kaliningrad region switching to the EU’s electricity standard together with other three Baltic states would naturally reverse the logic and would separate – in electricity terms – the Kaliningrad oblast from the Russia mainland.

Fig 1. Planned Kaliningrad NPP capacity versus total electricity consumption of

the Kaliningrad oblast and the Baltic states (TWh/year)

Source: Own calculations, data on total electricity consumption from the World Factbook, 2013-14.

Here is where the local nuclear power plant plays a huge role. Its capacity greater than the needs of the local Kaliningrad market means that the Russian authorities play on the logical assumption of either the Baltic states remaining firmly in the post-Soviet electricity system, or the Kaliningrad oblast joining the EU standard. If the capacity is to be greater than the needs of Kaliningrad and Lithuania combined, as intended in the first project, than its feasibility may rely on export oppor­tunities to the EU standard neighbours, mainly Poland, perhaps Sweden, or even Germany.

This seems possible only if Kaliningrad oblast switches to EU electricity standard.

The Kaliningrad nuclear power plant project

The Russian Federation is planning a significant strengthening of their nuclear sector as a way to increase its share in electricity production. According to the adopted plans, by 2030 the nuclear share will grow to about 25-30% of the global electricity production and then to 45-50% after the next two decades1. The aim is to achieve three objectives that seem crucial for the Russian economy. The first is to make available a significant amount of gas for exports. Approximately 70% of Russian annual gas production is consumed by the domestic market2. The second reason, most obvious, is to secure increasing energy needs in next two or three decades. Last but not least is to make Russian nuclear technology more competitive on the international market. In order to meet the above tasks, the process of lifetime exten­sion of existing reactors is in progress. More than 35 new reactors are under construction, or planned3. With exception of the most advanced investments, the future of the suggested, new nuclear power plants is uncertain.

In the context of ambitious Moscow plans, the Baltic Nuclear Power Plant (NPP) (Kaliningrad) has got a very special status. The first proposal to erect a new nuclear power plant in the Kaliningrad province has been announced by InterRAO UES in 2008. The construction agreement with the Kaliningrad authority was signed in April 2008 and the future installation located in the town of Neman near the Lithua­nian border4. The initial plans assumed building a twin AES-92 plant with two VVER-1000 reactors5. It was supposed to be the first nuclear installation in Russian Federation with its output destined for export. Energy needs of Kaliningrad were of secondary importance. The energy security of the town is currently guaranteed by its thermal power plant (Kalinin­gradskaya Thermal Power Plant 2 – 875MWe)6.

The nuclear power plant is expected to be the first case in the history of nuclear industry of Russian Federation to have the anticipated foreign equity share (albeit no more than 49%)7. Part of the main plant modules is to be developed in cooperation with foreign industry. The contract signed in February 2012 by the Alstom-Atomenergomash (AAEM) company provides, among the other things, that Alstom would deliver steam turbines ARABELLE and moisture separator re-heaters, power generators and other auxiliary equipment. The contract is estimated at 875 million euro8.

According to a more recent project, the new nuclear power plant would be based on the larger and more modern AES-2006 design with two pressurized water reactors (PWR) VVER- 12009. Each VVER-1200(V491) reactor has the thermal capacity of 3200MWth and electrical capacity of 1170MWe gross. The design is the common project of OKB ”Gidropress” and “Atomenergoproekt” with the scientific supervision of Kurchatov Institute from Moscow10.

The Russian VVER-1000/1200 family are equi­valent of the Western PWR reactors (genera­tion III and III+). VVER-1200(V-491) based on AES-2006 design, are classified as generation III+ with an expected service life of 60 years. It would probably be the most modern project of the Russian nuclear industry until the beginning of the next decade. As many as 17 of similar VVER-1200 reactors are expected to be commissioned in other locations in the Russian Federation by 202011. It’s also an export success. The identical project is planned in Turkey (Akkuyu nuclear power plant). The Turkey-Russia agreement of May 2010 provides for the construction of four VVER-1200 reactors around 2020-23. The total electrical capacity of the Akkuyu will be about 4800MWe12. The contract value is about 20 billion dollars.

The doubts about nuclear safety raised in con­nection with the Kaliningrad nuclear power plant investment, can be referred to all the latest-generation reactors. There might be problems, as in case of all III/III+ generation projects, with the reliability of the most important modules in assumed long-standing service life13. The VVER-1200 reactors are based on many-year-experience with operating of earlier generations of VVER family. There are about 50 VVER-440 and VVER-1000 operating units in Russian Federation and abroad. They are more reliable in comparison to other Soviet designs (RBMK reactors in particular). According to the official information, the VVER-1200 reactors that are currently under construction contain extensive passive and active safety systems with the increased share of the passive one. It comprises, inter alia, a passive heat removal system and a passive reactor scram system, as well as a passive hydrogen removal system and a secondary system of passive heat removal via steam generators14. In the opinion of the Russian specialists, the concept of the safety system is comparable to the western designs of PWR reactors of the III and III+ generation.

The preparatory work of the project in Kaliningrad has begun in February 201015. The first elements of concrete were poured two years later. According to the plan, the first reactor should be in commercial service by 2017. The cost of the project is estimated at 6-8 billion euro.

Due to the electricity exports objectives of the project, there are several conditions to be fulfilled, before it gets operational. The first one was to attract foreign investors and loans to finance the project. The second one was to attract the real interest for future foreign customers. Only a small part of planned output (2300MWe) may be consumed by energy needs of Kaliningrad. The long-term contracts from foreign partners are necessary to ensure the economic side of the investment. Last but not least, there are grid connection requirements. The Russian enclave has got a limited capacity transmission line with Lithuania and no connec­tion to Poland. This situation makes a future export of electricity impossible, unless funda­mentally changed. Project of such a big nuclear power plant in the Kaliningrad Province, if not fully connected of to the EU grid system, is not really arguable in economic terms.

In the course of last five years none of the conditions mentioned above was fulfilled.

There is no long-term contract for future supplies of electricity, although the proposal

has aroused some interest. The project seems to be in direct contradiction with energy strategies of neighbouring countries, all of which are very much interested in raising their energy independence ratio.

The latest news from Kaliningrad indicate a possible change in the schedule of the project’s implementation. This could mean, at least, a significant delay of the works, if not abandoning of the project altogether. A possible scenarios assumes that the VVER- 1200 reactors could be replaced by a smaller design, thus better corresponding to the real energy needs of the region itself, and less relying on the external markets.16

Poland still uncertain

In Poland, until now with no nuclear generated electricity, in November 2008 the government took decision to explore possibilities for building two nuclear power plants that should be operational by 2023-24. It therefore created a special purpose company, that is a consortium of mostly state owned electricity utility companies PGE, Tauron and Enea, together with the KGHM, a copper mining conglomerate. So far, the three possible locations were all considered at the Baltic  Sea shore in either Gąski,  Choczewo, and/or Żarnowiec, as seen from the West to the East.

However, the Polish public opinion remains divided on the issue. On one side, the nuclear generated electricity could enhance the country energy security, so far – for electricity generation – largely (by 90%) based on coal and lignite. It would also significantly contribute to lowering the country’s CO2 emissions, thus contributing to the EU’s driven climate change action. Yet, when things got to local, things turned bad. In a local referendum in Gąski (February 2012), an overwhelming majority of 95% of 50% turnout voted against any new nuclear power plant built in vicinity. Although, there was no public awareness campaign before, and the local population was not familiarized with the benefits of such an option, still the results were considered straightforward in saying ‘no’.

In politics, two parliamentary left wing parties, Ruch Palikota and SLD, with one fringe right wing party Solidarity Poland, are all against, while all major mainstream parties of both the government and the opposition are favourable for building a nuclear electricity generating capacity in Poland. In short, over three quarters

of the current parliament is in favour of the nuclear power plants in the country.

Fig 2. Polish parliament split on nuclear electricity generation, 2013

Source: own analysis of party platforms. Those bolded are against, or rather against nuclear power plants;

L = left; R = right; C = centre; (-) and (–) = against nuclear; (+) and (++) = for nuclear; (-/+) = split.

It plays a role, that Poland is in fact currently surrounded by the nuclear producing countries: Germany, Czech Republic, Ukraine, Belarus, and Sweden with Finland across the Baltics. There are several well known exceptions to that picture that do and will play a role. Germany has announced its Energiewende, the energy transition that presupposes also closing their nuclear power plants by 2022. Lithuania used to be a strong player on the local market thanks to its Ignalina nuclear power plant, but this was closed at the end of 2009 as a part of their accession deal with the EU, the installations there considered not secure enough. The Kaliningrad oblast, although Russian territory, does not produce nuclear based electricity for now. And Denmark, again across the Baltics, has decided already in 1985 not to produce nuclear energy at all. Even if it imports electricity from Sweden and Germany, thus partially imports the nuclear derived elec-tricity, it was able to successfully exert pressure on the Swedish public opinion. Consequently, the Swedes closed two Barsebäck units, what ultimately happened in 1999 and 2005 respec­tively.17 Finns apparently managed to solve the nuclear waste problem, and seem to pro­ceed to the final stage with their European Pressurized Reactor (EPR) at Olkiluoto 3. The EPR there, although much delayed now (from 2008), is expected to go operational in 2016, with almost tripled costs of now estimated 8.5 bn EUR18. This, along with the French Flamanville project and the British one, could contribute to the possible implementation of the European nuclear energy design EPR.

Lithuania going for and hesitating

An interesting project, from the point of view of the Baltic Sea nuclear situation is the

Lithuanian concept of Visaginas, the new nuclear power plant. It has been construed as one not only to replace the closed Ignalina, but also to provide a backbone to the long needed and awaited north-south connection from the Scandinavian Finland and Sweden, via the three Baltic States of Estonia, Latvia and Lithuania, to Poland in the south. The region suffered long from incompatible inheritance of the Soviet times when it was largely connected east-west, to the USSR as a pole and source of energy and dependence. The Visaginas project started in 2007 with participation of companies from Lithuania, Estonia, Latvia and Poland, which subsequently withdrew in 2011. The main technology provider, and strategic investor would be Hitachi GE, which should start to build a single 1350 MWe Advanced Boiling Water Reactor in 2015, intended to be opera­tional as of 2021. It is estimated to cost almost 5 bn EUR. Still, the project has been over-shadowed by the national referendum in Lithuania, which in October 2012 proved negative sentiment by a large margin of almost 65%.

Although non-binding, the referendum might indicate problems with the project at a later stage.19

The Visaginas has been planned to be the cornerstone of the new Baltic Energy Market Interconnector Plan (BEMIP), which is intended to link Poland with Finland and Sweden, via the three Baltic States. It gets support of the European Union which funds seve­ral of its parts: LitPolLink (Lithuania-Poland), Estlink-1 and Estlink-2 (Estonia-Finland), NordBalt (Lithuania-Sweden). The links as the interconnectors should effectively reverse the situation when, now, Lithuania, Latvia and Estonia are still parts of the Russian controlled IPS/UPS electricity system. With the three Baltics states connected to the European Network of Transmission System Operators (ENTSO), the Kaliningrad oblast would get isolated from the mainland Russia. Apparently, the Russians recognize this situation and Rosatom proposed to build a link between Poland and Kaliningrad that would effectively forge the Kaliningrad electricity system with that of the EU. This prospect would eventually facilitate greatly any Kaliningrad nuclear generated electricity exports to the EU, either Poland, or Lithuania, or even all the eastern and southern Baltic states.20

Eventually, Poland would add one or two of its own nuclear power plants, if the government’s plans are going to materialize. The decision on the technology, the reactors and design, has not been taken, however. With the Swedish 10 nuclear reactors, and their public opinion strongly backing them as a viable strategy for climate action, the Baltic Sea nuclear prospects seem a bit diversified. But there are interesting patterns emerging where the Kaliningrad nuclear power stations or the Polish nuclear power plants may play important roles. Particularly, if we take into account the Germans going the Danish road to abandoning the nuclear electricity generation, with their Energiewende. This way, the west of the Baltics would be free from nuclear energy capacity, while there would be strong production sites in the north, south and east of it.

The situation in the north and east of the Baltic Sea seems clear: both the Swedes and

especially the Finns are seemed prone to rely heavily on nuclear for their electricity

generation. Their capacities are construed. Specifically, the Finnish seem to generate

electricity from nuclear fission – based their cooperative concept of ownership of the nuclear capacities – for domestic purposes, and not really intended for serious exportation.

Sweden nuclear, but…

The current status of Sweden’s nuclear industry is a result of the decades of develop­ment, beginning with the top secret nuclear weapon program for advanced nuclear

industry. As far as today more than 40 percent of Swedish electric power comes from ten nuclear reactors at three nuclear power plants. Four of them entered commercial

service in the 1970s (Oskarshamn 1,2 and Ringhals 1,2) and six began to operate in 1980’s. As mentioned, the Barsebäck nuclear power plants were ultimately closed in 2005.

Interestingly, for more than 30 recent years, the Swedish nuclear power plants have under­gone consistent process of expanding nuclear capacity as well as their operational lifetimes. In case of the Ringhals nuclear power plant it has meant an increase of about 337 MWe21 to 450 MWe by 2012.22  This action, despite the closure of the Barsebäck has allowed to maintain the st­rong position of nuclear energy in the Swedish electricity mix and to add about 1050MWe to the ten working reactors by the end of 2008.23 Further investments of this kind are planned.

Sweden has one of the most advanced pro­grams of nuclear waste management. The Swedish Nuclear Waste Fund is administrated by the Swedish Radiation Safety Authority and will cover costs associated with the decommis­sioning of nuclear reactors and waste storage. The fund is financed from the fees of nuclear power operators.

According to the plans of the Swedish Nuclear Fuel and Waste Management Company, SKB, the ultimate repository for used fuel from Swedish NPP will be located in Söderviken, close to the Forsmark Nuclear Power Plant. The repository will be placed at the depth of approximately 500 m in geologically stable granite bedrock. The beginning of the construction is planned for 2019 and the investment will be completed about 2025. The repository will be in use until about 2070 and at that time it will have 60 km of tunnels and about 4 square kilometers of underground storage surface. Its total capacity is expected at 12000 tons and it will be able to store as many as 6000 iron, copper-cast canisters containing used fuel.24 The canisters will be stored in the holes bored in the tunnel floor. Each canister will be surrounded by bentonite clay to isolate it form the bedrock and to absorb water. That is to help to stop a corrosion process of the copper canister. In case of leakage or other damage of a canister the clay insulators of the granite bedrock would delay radioactive materials from reaching the surface.25

This kind of storage is known as the KBS method. The technology should isolate radio­active material from people and living nature for at least 100 thousand years. Given the time-span of the storage project, the speed of corrosion of the copper containers seems to be a crucial safety problem. The bentonite clay as well as the repository environment are both intended to help to stop the corrosion process of copper, but there are still controversies over the safety issues of the technology. The newest report of the Swedish Radiation Safety Authority indicated that the corrosion had occurred on the surface of the copper elements during the last tests. The issue would require further research to solve the contro­versy.26 In the last three decades Sweden went through ambivalent nuclear ”phase out” policy. The US Three Mile Island catastrophe of 1979 was the reason for the Swedes to organize a referendum about future of the Swedish nuclear energy. In 1980 a majority of Swedes voted for not developing the next generation of nuclear power plants after having ended lives of those plants already operational or under-construction. Conse-quently, the Swedish parliament took a decision to close all twelve nuclear power plant by 2010. For economical reasons and under a strong pressure from industry and labor unions, the Swedish political elite has not made a serious attempt to implement this decision and the 2010 target was subse-quently abandoned.27 In 2010, in spite of resistance from the political opposition and ecological movements, the Swedish govern­ment adopted a new plan of replacement of all ten nuclear reactors by new ones, and passed it through the parliament. The plan is strictly limited and assumes replacements only. The number of reactors is not allowed to exceed ten, and all of them must be built at the same site of as currently existing nuclear plants.28

According to the plan, the first new nuclear reactor would be required after 2025.

Today, it is difficult to foresee future of nuclear energy in Sweden. Still, taking into account the public opinion shift in favor of continuing of the nuclear power program and ambitious government’s plans, atom seems to be an important part of the Swedish climate policy. Together with renewable energy sources, nuclear plants will contribute towards environ-mental goals and will help to impose further limits on the fossils fuel share in the Swedish energy mix.

Finland firmly nuclear

The nuclear industry in Finland is providing nearly 30% of the electricity. The first genera­tions of nuclear power plants, like in Sweden, were completed from 1977 to 1980. All four nuclear power reactors built at the time, are currently in use. Unlike Sweden, Finland has not developed its own nuclear technology capacity. Olkiluoto 1 and 2 are based on the Swedish technology, and Loviisa 1 and 2 on the Russian one. In spite of this, an average lifetime capacity factor is one of the highest in the world – over 85%. Moreover, as in the case of the Swedish nuclear power plants, the nominal capacity of the Finnish reactors have been uprated ever since they were built. In case of the Olkiluoto, the nominal capacity of each reactor has increased from 658 MWe to 880 MWe.29

The decision about the future of the nuclear industry in Finland has been taken in 2002. For economical reasons, in May 2002 the Finnish parliament approved a proposition to build fifth nuclear reactor.30 According to the ini­tial investment plan, developed together with French Areva (EPR reactor EPR reactor, 1600 MWe), it should have been in commercial service in 2013. Unfortunately, due to the sophistication of the project, serious technical problems and delays have been encountered. The budget exceeded more than twice by now, and today its commercial operation is planned for 2016.31

All these problems have not stopped the Finnish intentions to further expand its nuclear power industry. Of two new projects, the first one – Olkiluoto 4 – is intended to be one of the modern western designs, whi­le the other one – Hanhikivi 1 NPP, led by the new consortium in the nuclear power industry: Fennovoima Oy – would most likely get partnered with the Rusatom Overseas to develop the AES-2006 design based on the VVER-1200 reactor.32 In July 2010 the Finnish parliament approved construction of the new reactors.

Finland’s nuclear waste management program was initiated in 1983, and is in general similar to the Swedish one. The key player is Posiva Oi, company responsible for the final disposal of spent nuclear fuel. The company is owned by two Finnish nuclear power plants operators: TVO – 60% and Fortum – 40%.33 The final repository and waste encapsulation plant will be placed at Olkiluoto up to 450 meters underground in the stable bedrock. Disposal will be based on the Swedish SKB-3 concept with the copper canister and bentonite clay as the second barrier.34 The planned capacity of the deposit is 9000 tons and will allow to dispose of all spent fuel from the four existing reactors as well as the new Olkiluoto 3 and 4 units. The future of the spent fuel from Hanhikivi 1 nuclear power plant is still unclear.35

The cost connected with the final disposal and decommissioning of nuclear power plants will be covered by the state owned Nuclear Waste Management Fund. The fund is financed from the charges on the generated electricity which amounts to about 10% of the total electricity production cost. According the Ministry of Employment and Economy, at the end of 2012 the Fund has amassed about 2.16 billion Euro.36 This amount of money seems sufficient to cover all the costs of management of current nuclear waste stockpile as well as decommissi­oning of the existing power plants.

In Finland the nuclear energy is perceived as a reliable and safe source of electric power. The Finnish public is among the strongest supporters of the nuclear energy in Europe. Successful finishing of Olkiluoto3 and the two planned projects will extend a nuclear horizon far beyond 2050 and will root nuclear power deeply in the Finnish climate and energy stra­tegy. The future of nuclear energy in Finland seems to be stable and certain.

Conclusion

To sum up, the nuclear electricity generation on the south and east side of the Baltic Sea remains mixed. There are several reasons for that, with perhaps the most important one being social and political uncertainty about the projects and their public perceptions among nations and locally. External developments, with Fukushima disaster, German Energiewende, and pressures from the non governmental organizations, which in many cases do not recognize nuclear electricity generation as beneficial for climate action and they still press for the development of renewable resources.

The other very important reason is an apparent competition between three major concepts: Kaliningrad power station, Visaginas project in Lithuania and Poland’s plan for two major power plants, all of them intended to be nuclear and located in the north of the country. It seems either – or. With serious inroads of the renewable resources into the electricity mixes and consumption needs, there seem not to be place for more than one project regionally.

Moreover, their business chances are interlinked – any increased possibility of advancing and implementing of one of them does and will indeed influence chances of financing and building the others. Clearly, capacity of the projects to raise money and loans are inter-linked as all investors and banks would naturally look into the externalities of each project.

Finally, neither of them have yet crossed their respective points of no return. While the Kaliningrad project seemed most advanced, it got stilled. The Visaginas has been clouded by the Lithuanian public opinion referendum. And the Polish plans are still far from being stable.

Interestingly, the European Union does not play any important role in these cases. As only natural with energy projects, especially of this magnitude of investment needs, the na­tional authorities are the key players. Even if the case of local cooperation across and along the Baltics would normally call for somewhat closer cooperation on the issue, this is not the case. The European Commission might get in­terested in the issues, especially with its inter­est for the single energy market, but it has not been noted as an important player among the parties here. Its role is marked in pressing for making of the north-south energy and tran­sportation connectivity, but not on the choice of ways of electricity production. While this being national prerogative, Brussels would still seem only a natural point of meeting and coor­dinating of regional plans, a helping hand to be.

List of References:

1. Nuclear Power in Russia, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-O-S/Russia–Nuclear-Power/#.

UkseEb7wFRA (accessed: 27.09.2013).

2. Statistical Review of World Energy 2013, BP June 2013,

http://www.bp.com/content/dam/bp/pdf/ statistical- review/statistical_review_of_world_ energy_2013.pdf (accessed: 22.09.2013).

3. Nuclear Power in Russia, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-O-S/Russia–Nuclear-Power/#. UkseEb7wFRA (accessed: 27.09.2013).

4. Kaliningrad plan for Baltic States market, “World Nuclear News”, 17 April 2008, http://www.world-nuclear-news.org/NNKaliningrad_plan_for_Baltic_States_market_ 1704086.html (accessed: 30.09.2013).
5. Ibidem.
6. Kaliningradskaya Thermal Power Plant 2, JSC INTER RAO — Electric Power Plants website, http://irao-generation.com/en/stations/kalinigradg/ (accessed: 30.09.2013).
7. Baltic NPP Project, Rosatom website, http://www.rosatom.ru/en/investmentstrategy/ projects/ (accessed: 27.09.2013).
8. Russian joint venture of State Corporation Rosatom and Alstom will supply the turbine island to the Baltic nuclear power plant, Alstom, 2 February 2012,

http://www.alstom.com/Global/Group/Resources/Documents/Investors%20document/Regulated%20 Information/Russian%20joint%20venture%20of%20 State%20Corporation%20Rosatom%20and%20 Alstom%20will%20supply%20the%20turbine%20island%20to%20the%20Baltic%20nuclear%20power%20 plant.pdf (accessed: 27.09.2013).

9. Baltic nuclear plant brought forward, “World Nuclear News”, 27 August 2008

http://www.world-nuclear-news.org/NN_Baltic_ nuclear_plant_brought_forward_2708083.html (accessed: 27.09.2013).

10. IAEA Status report 108 – VVER-1200 (V-491) (VVER- 1200 (V-491)), International Atomic Energy Agency (IAEA), 2011,

http://www.iaea.org/NuclearPower/Downloadable/ aris/2013/36.VVER-1200(V-491).pdf (accessed: 30.09.2013).

11. Mark J. Harper, Advanced Reactor Technology Development for Near Term Deployment, Nuclear Energy Management School Tokai Mura, Japan June 2012,

http://www.iaea.org/nuclearenergy/ nuclearknowledge/schools/NEM-school/2012/Japan/ PDFs/week1/5-1_HARPER_Current_LWR_Technology_ NEMSchool.pdf (accessed: 29.09.2013).

12. Akkuyu NPP JSC website

http://www.akkunpp.com/index.php?lang=en (accessed: 29.09.2013).

13. Jozef Mišák, Evolution of safety assessment appro-aches for Gen III systems and implications for future systems, INPRO Dialogue Forum on Nuclear Energy Innovations 1-4 February 2010, IAEA, Vienna http://www.iaea.org/INPRO/1st_Dialogue_Forum/ 22-Misak.pdf (accessed: 29.09.2013).

14. Status and perspectives of VVER nuclear power plants, Meeting of the TWG-LWR IAEA, Vienna, Austria, 26 -28 July 2011, http://www.iaea.org/NuclearPower/Downloads/ Technology/meetings/2011-Jul-26-28-TWG-LWR-HWR/Session-I/21.TWG-LWR-Russia.pdf (accessed: 29.09.2013).

15. Baltic site works, “World Nuclear News”, 27 August 2010,

http://www.world-nuclear-news.org/NN_Baltic_ site_works_2708101.html (accessed: 19.09.2013).

16. Grid concerns for Baltic project, “World Nuclear News”, 11 June 2013,

http://www.world-nuclear-news.org/NN_Grid_ concerns_for_Baltic_project_1106131.html (accessed: 19.09.2013).

17. Barsebäck nuclear power plant own website:

http://www.barsebackkraft.se/index.sp?ItemID=1291 (accessed: 25.08.2013).

18. Sonja van Renssen, New nuclear power in Europe – will Finland show the way?, “European Energy Review”, EER Monthly, February 2013.

19. Results of the referendum from the Central Electoral Commission of Lithuania,

http://www.vrk.lt/2012_seimo_rinkimai/output_ en/referendumas/referendumas.html

(accessed: 13.09.2013).

20. Nuclear Power in Lithuania, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-G-N/Lithuania/#.UkiVbdK-1vI (accessed: 1.09.2013).

21. Own calculations, data on the Ringhals NPP reactors from PRISM – Power Reactor Information System, IAEA, 30 September 2013, http://www.iaea.org/PRIS/CountryStatistics/CountryDetails.aspx?current=SE

(accessed: 01.10.2013).

22. Nuclear Power in Sweden, World Nuclear Association

http://www.world-nuclear.org/info/Country- Profiles/Countries-O-S/Sweden/#.Ukqqwr7wFRA (accessed: 15.09.2013).

23. Ibidem.

24. A repository for nuclear fuel in 1.9 billion year old bedrock, SKB – The Swedish Nuclear Fuel and Waste Management Company, 4 April, 2010,

http://www.skb.se/Templates/Standard____28848. aspx (accessed: 30.09.2013).

25. Harold Feiveson, Zia Mian, M.V. Ramana and Frank von Hippel, Managing Spent Fuel from Nuclear Power Reactors, Experience and Lessons from Around the World, International Panel on Fissile Materials (IPFM), p. 78 92, September 2011,

http://fissilematerials.org/library/rr10.pdf (accessed: 30.09.2013).

26. Barbro Plogander, Sweden’s Planned Nuclear Waste Storage Faces Problems, The Epoch Times, 12 February 2013,

http://www.theepochtimes.com/n2/world/ swedens-planned-nuclear-waste-storage-faces-problems-346787.html (accessed: 25.09.2013).

See also: Nuclear Waste State-of-the-Art Report 2013 – Final repository application under review: supplementary information and alternative futures, Swedish National Council for Nuclear Waste, Stock-holm 2013,

http://www.karnavfallsradet.se/sites/default/files/ sou_2013_11_eng_vers.pdf (accessed: 01.10.2013).

27. Johan Bergenas, Nuclear power in Sweden, The Stimson Center, 15 April 2011,

http://www.stimson.org/spotlight/nuclear-power-in-sweden/ (accessed: 15.09.2013).

28. Sweden to replace existing nuclear plants with new ones, “BBC News”, 18 June 2010, http://www.bbc.co.uk/news/10347187 (accessed: 05.09.2013).

29. Nuclear power plant units Olkiluoto 1 and Olkiluoto 2, Teollisuuden Voima Oy (TVO), January 2008,

http://www.tvo.fi/uploads/File/nuclear-power-plant-units.pdf (accessed: 30.09.2013). See also: OLKILUOTO-1, PRISM – Power Reactor Information System, IAEA, 30 September 2013,

http://www.iaea.org/PRIS/CountryStatistics/ ReactorDetails.aspx?current=159 (accessed: 01.10.2013).

30. Finland opts for new nuclear reactor, “BBC News”, 24 May 2002

http://news.bbc.co.uk/2/hi/europe/2006191.stm (accessed: 01.10.2013).

31. Dome in place at Flamanville EPR, “World Nuclear News”, 16 July 2013,

http://www.world-nuclear-news.org/NN-Dome_in_ place_at_Flamanville_EPR-1607134.html (accessed: 26.09.2013).

32. Hanhikivi contract by year end, “World Nuclear News”, 3 September 2013

http://www.world-nuclear-news.org/NN-Hanhikivi_ contract_by_year_end-0309137.html (accessed: 26.09.2013).

33. Posiva Oy, Posiva Oy website, http://www.posiva.fi/en/posiva (accessed: 28.09.2013) .

34. The Principles for Final Disposal, Posiva Oy website, http://www.posiva.fi/en/final_disposal/the_ principles_for_final_disposal/ (accessed: 28.09.2013).

35. No room at the repository, “World Nuclear News”, 9 march 2012,

http://www.world-nuclear-news.org/WR-No_ room_at_the_repository-0903127.html (accessed: 28.09.2013).

36. Finnish waste fund continues to grow, “World Nuclear News”, 26 March 2013,

http://www.world-nuclear-news.org/wr-finnish_ waste_fund_continues_to_grow-2603134.html (accessed: 22.09.2013).

Source: BSR Policy Briefing 4/2013, Centrum Balticum, www.centrumbalticum.org

Can the Russian economy weather the combined effect of falling oil prices and massive capital out­flows while preserving some growth or is the economy heading for a sudden stop scenario with falling GDP?

 Recent forecasts of Russian growth

Forecasts for Russian GDP growth have been revised down several times over the last couple of years, starting well before the conflict with Ukraine and the sanctions that followed. This is well illustrated by how different vintages of the IMF’s World Economic Outlook forecasts change in Figure 1.

Figure 1. IMF forecasts of Russian real GDP growth

The forecasts from 2012 projected a real GDP growth of around 4 percent per year for 2014 and 2015, and then just slightly below 4 percent over the next two years. In 2013 the April forecast was lowered to around 3.5 percent over the forecast horizon, while the October forecast the same year was revised down significantly for 2013 as the poor growth performance that year became hard to ignore. However, it nevertheless showed a strong rebound in growth in 2014 and in 2015, and going forward the forecast was back at 3.5 percent growth. Then in April 2014, there was a sharp downward revision of growth for 2014, from 3 to less than 1.5 percent, followed by a long-run growth forecast of 2.5 percent. The slippery slope of growth revision has not stopped there and the latest forecast in October 2014 projects a barely positive growth rate for 2014 and a mod­est pick-up in 2015 before a gradual climb back to 2 percent growth in 2018 and 2019.1

Implications for income levels

It may not sound very dramatic that growth falls a percent or two in the revised forecasts, but summing up all the growth revisions – both in the short-run and adding the significant drops in projected long-run growth — amounts to enor­mous losses of income for the Russian economy should the forecasts be realized. Figure 2 com­pares how income levels evolve until 2019 using the April 2012 and October 2014 forecasts.2

Figure 2. Income levels based on different forecast of real GDP growth

Source: Authors calculations based on IMF WEO forecast April 2012 and October 2014

In the April 2012 growth scenario, Russian GDP would be 12 percent higher in 2014 than in 2011 and by 2019, growth would have lifted GDP by more than 35 percent. However, the October 2014 forecast has GDP in 2014 only 5 percent high­er than in 2011 after the end of 2014 and merely 13 percent up in 2019. Comparing the two scenarios, the income level at the end of the forecast period is 20 percent lower based on the current forecast compared with the April 2012 projection.

However, also the 2014 forecast shows increas­ing income levels which given the latest devel­opment of oil prices and capital flows seems unrealistic. The following sections of this brief will detail why Russian GDP growth is in grave danger of not only continue a slow slide down but could instead enter a “sudden stop” scenario with fall­ing GDP.

Oil and growth

The price of oil is the single most important de­terminant Russia GDP growth. Figure 3 shows how real oil prices and income per capita in USD have developed over the last two decades. The rising incomes from 1999 to late 2008 were strongly correlated with a real oil price index that went from around 25 to over 180. Similarly the decline in income in 2009 was concurrent with the oil price index sliding to 116. With oil prices rebounding in 2010 and 2011 before leveling off in 2012, Russian income levels followed suit. Of course many other factors changed in the eco­nomic environment, not least in 2008/9, but in many ways this just reinforces how strong the link between oil prices and Russian incomes is.

The question is if the strong relationship evident in Figure 3 between oil prices and income levels also holds for growth rates, which would be a bit less susceptible to criticism of spurious correla­tions between non-stationary time series. Figure 4 shows that the impression from time series of price and income levels follows through also when both series are in growth rates and presented in a scatter plot. Note that the charts in­clude oil prices and not oil revenue, so it abstracts from changes in oil production. In this sense, it does not capture what would be included in the calculation of real GDP (which would include changes in production rather than prices) but simply the correlation between an exogenous variable — international oil prices — and Russian growth.

Figure 3. Oil prices and income growing together

Source: IMF oil price index, World Bank for GDP per capita in 2005 USD

Figure 4. Scatter plot of oil prices and income

Source: Author’s calculation based on data from IMF and the World Bank

A simple OLS regression presented in Table 1 quantifies the relationship in Figure 4. It is quite striking how a regression with one explanato­ry variable manages to pick-up 60 percent of the variation in growth of Russian GDP per capita. The estimated “model” basically says that without any changes in oil prices, Russian GDP growth would be just above 2 percent. This hap­pens to coincide rather closely with the IMF’s Oc­tober 2014 longer-run forecast. In addition, a 10 percent increase (decline) in oil prices adds (sub­tracts) 1.5 percent GDP per capita growth. The coefficient on oil price changes is not only high­ly significant from an economic perspective but also from a statistical. The equation is estimated with only 16 observations and no other control variables are included, so there are reasons to take the result with plenty of caution. Neverthe­less, it is not often a one-variable regression ac­counts for this amount of variation in a country’s growth rate. Again, it should be stressed that it is the price of oil – which is an exogenous variable – that is included in the regression and not the value of Russian oil export revenues.

Table 1. Regressing income growth on oil price changes

Dependent variable is GDP/capita in 2005 USD (% change)

Coeff.   Std.err.   t-stat

Real oil price (% change)      0.15       0.03       4.8

Constant                                 2.42       0.89       2.7

1.           16

Adj. R-square                          0.60

Imports, growth and capital flows

The reason oil prices are so important for Russian growth is that it determines how much the country can import, which in turn contributes signifi­cantly to domestic consumption and investment. It may be puzzling at first that imports contribute to growth since it enters the national income ac­counting identity with a negative sign.3 However, whatever is imported is either used for consump­tion or investment, and since this consumption or investment is usually accompanied by domestically produced inputs, it means that the overall effect on growth from imports is positive. Russia GDP growth also shows a strong positive correla­tion (90%) with import growth as can be seen in Figure 5.

Figure 5. Scatter plot of quarterly GDP growth and changes in import

Source: Author’s calculation based on Goskomstat data

However, imports are not included in the regres­sion above since it is part of GDP and thus an en­dogenous variable with respect to growth. The scatter plot in Figure 5 can obviously not be given a causal interpretation for the same reasons, but it is still informative that imports have shown a higher positive correlation with growth than ex­ports have. In fact, net exports, the difference between exports and imports that enter the ac­counting relationship with GDP with a positive sign, showed massive “contributions” to GDP growth in all of the quarters of 2009 when GDP growth fell significantly. Again, this was linked to large declines in imports coupled with sharp con­tractions of investments. In other words, what at a first glance can look as an improved trade balance may instead be a sign of lost confidence and reduced external financing for domestic in­vestments and consumption.

Figure 6. Net capital flows, private sector

Source: Central Bank of Russia

In many emerging market countries, capital in­flows are highly correlated with imports as well, since they are needed to finance imports when export revenues are not sufficient to do so. For Russia, strong growth in oil revenues due to in­creasing prices has made the country less dependent on capital flows to finance imports in the past. However, with lower oil prices, this will change and capital flows will be a more import­ant factor also for Russia in this respect.

Capital flows are basically determined by expected re­turns on financial and real investment in a country relative to alternative investments abroad. These expectations are in turn dependent on many different factors, including real growth prospects linked to macro economic policies, economic and legal institutions and the elusive concept of market “sentiment”. Attracting the necessary capital will be a challenge for Russia if policies do not change.

Net private capital flows have been negative in all but three quarters since mid-2008 with peak out­flows of $132 billion in the final quarter of 2008 in the midst of the global financial crisis (Figure 6). With the crisis in Ukraine, capital outflows accelerated in the beginning of 2014, reaching almost $50 billion in the first quarter alone. Over the first three quarters of 2014, outflows amounted to $85 billion, which is more than the total value of imports in the second quarter.

The net outflow of capital and lower oil prices are also leaving a mark on Russia’s external bal­ance sheet. Often when Russia’s external posi­tion is discussed, the focus is on the Central Bank of Russia’s (CBR)4 large international reserves. However, they are also not immune to chang­es in oil prices or capital flows since the CBR intervenes in the foreign exchange market to stabilize the ruble as is evident in Figure 7. Nevertheless, even after significant interventions, reserves were around $450 billion at the end of September 2014, which is a non-trivial amount for a $2,000 billion economy and the third largest in the world after China and Japan. The CBR can probably continue to intervene at a similar rate as it has done in 2014 for several years, but the question is if Russia do not have better ways to spend $50-100 billion a year. Another question is how confidence in the foreign exchange market is affected by these interventions. It may be good to keep the ruble from a complete free fall, but at the same time, the CBR does not want to find itself in a situation that looks too much like a cen­tral bank that loses much if its reserves in a reg­ular speculative attack on a fixed exchange rate.

What has been less in focus, but came into the spotlight already in the global financial crisis, is the external debt of the private and public sec­tor beyond regular sovereign borrowing. Banks and non-financial firms in the private and public sectors had together borrowed over $700 billion at the end of the first quarter of 2014, which is the latest available number. If borrowing has remained unchanged in the following two quar­ters, it would mean that external borrowing is now over $250 billion more than the internation­al reserves held by the CBR. External debt at 35 percent of GDP is in itself not alarming but if ma­jor companies are unable to access international markets it can soon become a problem.

Figure 7. External debt and international reserves

Source: CBR and author’s calculations

Despite significant interventions by the CBR, ear­ly October the ruble had lost 20 percent of its value against the dollar since the beginning of 2014, as had the stock market (Figure 8). In some ways the global financial crisis was a good les­son for the CBR on the cost of trying to defend an overvalued currency. Then the CBR lost more than $200 billion while trying to keep the ruble exchange rate fixed. The currency defense did not prevent the ruble from falling by around 30 percent at the end of 2008 and beginning 2009. Since then, the exchange rate has been allowed more flexibility, although the CBR tries to avoid more abrupt changes. Russia also intends to focus its policy on inflation rather than the ex­change rate going forward, but the question is if this is credible given what has happened in the second half of 2014.

The stock market is also affected by capital out­flows, falling oil prices, and a deterioration of confidence in the Russian economy that has come with the sanctions related to the conflict in Ukraine. At around 1,000, the RTSI is back to its 2005 level, after having peaked at almost 2,500 before the global financial crisis and then reach­ing a post-crisis peak of 2,000 in 2011.

Although the sanctions have played a role in the developments in 2014, it is clear that the decline in both the stock market and exchange rate goes back to 2011 when oil prices leveled off and growth started to slow. In other words, the struc­tural dependence on increasing oil prices to gen­erate growth again shows its importance also for capital flows, the exchange rate and stock mar­ket returns. The reform program launched by then-president Medvedev in 2009 in response to the crisis, under the “Russia forward” heading, made little difference since the most important parts were never implemented.

Figure 8. Exchange rate and stock market

Source: MICEX

Sudden stops dynamics and a more realistic growth forecast

In a paper studying the correlates of output drops, Becker and Mauro (2006) look at a long list of shocks that include both macro-financial shocks as well as real shocks. One of the find­ings is that sudden stops in capital flows cause the most damage in emerging market countries. In a typical sudden stop triggered crisis, the average emerging market country loses an aggre­gate of 64 percent of initial GDP, which is related to a large initial drop in income and several years of recovering to bring income back to the pre-cri­sis level. The sudden stop episodes in the paper are defined as a reversal of capital inflows that suddenly turn around and become outflows. In countries with insufficient export revenues, this leads to a sharp contraction in imports, which (as discussed above) leads to a significant drop in output.

Reducing imports may sometimes be interpreted as a sign of a country being able to pro­duce more at home and therefore a sign of strength. But when imports contract very quickly in response to a drop in available financing, it sig­nals something different; the lack of confidence in an economy, with large economic costs in terms of falling incomes as a consequence. This type of scenario is a very real possibility in Rus­sia given recent developments. All the indicators above — oil prices, capital flows and imports — point to a much more negative growth outlook than the IMFs World Economic Outlook forecast published in October 2014. Since July of 2014, the WTI price has fallen from around $100/barrel to just north of $80/barrel in mid-October. The IMF World Economic Outlook in October 2014 fore­casted a continued decline in oil prices for 2015 and 2016, but this was based on mid-year prices rather than mid-October prices. Futures contract over the next five years price oil around $80/bar­rel for the entire period. Although this is mostly a function of historical oil prices following a ran­dom walk so it makes it hard to predict changes up or down, it still means that there is currently no information that would suggest that oil prices will move up any time soon.

Taking $80/barrel as the relevant forecast for 2015 it would be a drop in oil prices of over 20 percent compared to mid-2014. If we use the sim­ple growth-oil price equation estimated above — which despite its simplicity generated an adjusted R-square of 60 percent — it implies that the oil effect on growth is around minus three percentage points. The intercept in that regres­sion is 2.4 so the forecast from this regression is negative growth of around half a percent for Russia in 2015. Of course this empirical estimate is not really a proper macro model and excludes a long list of other important variables that will affect growth, including policy changes.

However, one crucial factor that will contribute to the downside risk of the already negative fore­cast based on falling oil prices is capital outflows — linked to investor confidence — which sug­gests that there will be less money for imports and further negative pressure on growth rates in 2015 and forward. Capital usually flows to countries with good growth prospects and rewarding investment opportunities. Capital rarely flows to places where the growth outlook is negative and uncertain. It is not easy to predict capital flows with any precision. In the event capital outflows continue at the pace they have in the first three quarters of 2014, it will push imports down by a significant amount and perhaps shave off another 1 to 2 percent of an already negative projected growth rate for 2015.

Import growth has already turned negative in the first two quarters of 2014, and if the trend con­tinues, there is a strong likelihood that imports decline so much that quarterly GDP growth turns negative in the last part of this year. It may still be that the growth for the full year stays positive, but probably not by much. The real problems with growth will then be for 2015 if nothing positive happens with oil prices and capital flows. In sum, the no-change scenario for Russian growth in 2015 points to a real danger of a sudden stop type of output decline of 2-3 percent rather than IMF’s October 2014 forecast of 1.5 percent posi­tive growth. Needless to say, if the sudden stop scenario rather than the IMF forecast materializes it will have serious effects on Russian in­come levels in the years to come as was illustrat­ed in Figure 2 earlier.

Policy options to avoid a growth collapse

The question is then how Russia can avoid a full-blown sudden stop scenario with accelerating capital outflows, shrinking imports and a col­lapse in growth. What policies can be implement to generate growth in the economy in 2015? The first option is to do nothing and hope for higher oil prices. A significant increase in oil prices will in all likelihood provide conditions to resume import growth that can feed domestic con­sumption and investment. However, this is not in the cards at the moment as discussed above.

The economic policy areas under control of Russian policy makers include monetary and exchange rate policy, fiscal policy and the “catch-all” area of structural reforms. The lat­ter a crucial area that affect investor and con­sumer sentiment which determine capital flows and domestic demand. A closer look at these areas below suggests that the policy space is mainly in the area of structural reforms.

First out is monetary and exchange rate policy. As students of basic macro knows, in a world of capital mobility, policy makers have to either focus on targeting inflation or the exchange rate. Attempts at steering both will regularly have only short-lived effects or be associated with significant economic costs coming from trying to regulate capital flows more vigorously. Russia has over the last couple of years stated that inflation rather than the exchange rate should be the primary policy target for the CBR from 2015. The inflation target is initially set at 5 percent and supposed to move to 4 percent over the medium-term. Governor Nabiullina of the CBR states that the inflation targeting framework and associated goals will not be implemented if the cost of doing so is too high (CBR, 2014). However, with inflation now running at around 8 percent, capital flowing out of the country and the exchange rate falling, trying to stimulate growth with looser monetary policy does not seem to be a viable option regardless of the CBR pursuing an explicit inflation target or not.

Fiscal policy can possibly help stimulate demand. The low oil prices put pressure on fiscal policy as well, but the falling exchange rate means that the ruble value of oil revenues is kept up. The result is a relatively modest fiscal deficit of around 1 percent of GDP at the General government level.

Behind this is a nonoil deficit of around 12 percent of GDP. In other words, government oil revenues account for around 11 percent of GDP, which is a strong indication of the importance of oil in all sectors of the economy. The reserve and wealth funds that have been accumulated from past oil revenues provide some additional fiscal room to maneuver.5 In September 2014 the reserve fund stood at $90 billion and the wealth fund at $83 billion. These are of course significant amounts, but relative to net capital outflows of $85 billion in the first three quarters of 2014, they are perhaps a bit less impressive. It is also noteworthy how quickly the reserve fund was run down in response to the global financial crisis. From the start of 2009 to 2011 the reserve fund went from almost $140 billion to $25 billion, or a drop of $115 billion, more than what is currently in the reserve fund. The message for fiscal policy is that there is some room for providing stimulus but the funds are not sufficient to keep doing this for several years. It may be enough to add a few percent to GDP in 2015, but if nothing else then happens, 2016 will not have the same fiscal space available. At best, fiscal policy can buy a year or so of time, but it really just delays much needed reforms aimed at underlying structural weaknesses that puts a drag on confidence and economic performance.

The most obvious “reform” is for Russia to con- tribute to a peaceful resolution of the conflict in eastern Ukraine. This would alleviate the serious confidence effect the sanctions have had on investment and capital flows. More importantly, the main effects of the sanctions are still to come when important Russian companies need to refinance large loans in 2015 and 2016. If they are shut off from international financial markets it will contribute to net capital outflows as the expiring international loans are replaced by domestic ones. The impact on capital flows does not stop with the direct sanctions targeting specific firms since the confidence effect of sanctions hit all possible investments in Russia. Even if some international loans will be available to Russian firms, the conditions for such loans will be worse as long as the sanctions are around, which is a real cost for the Russian economy. It is hard to quantify the exact gain of restoring confidence and removing sanctions for the Russian economy, but in the current circumstances, confidence is a crucial element to avoid a full-blown sudden stop scenario.

In addition to the hugely important aspect of resolving the conflict in Ukraine, Russia has a long structural reform agenda ahead if its leaders want to move Russia’s citizens up the global income ranking where they currently are in 51st place just behind Argentina and a few places behind Latvia in 47th place.6 Again, this is not news to the leaders of Russia and several key elements were part of Medvedev’s “Russia forward” plan of 2009. Institutional reforms aimed at fighting corruption at all levels, creating a rule of law and modernizing government are still high on the list of priorities. However, it is hard to see how real changes in these areas are going to be made, in particular if the leader(s) that push reforms want to stay in power once the reforms are implemented.

Any internal reform efforts that directly contribute to a positive development for the Russian economy is likely to also have important indirect effects through its trading partners. Although the Russian economy is not large enough to alone make a significant impact on world growth directly — it accounts for less than 3 percent of global GDP — its importance for trade and finance should not be ignored. Besides being one of the key energy providers to the global economy, it is also capable of affecting confidence and market sentiment in the rest of the world. The exact effect is hard to quantify but in times of ample volatility in financial markets, removing one piece of uncertainty would possibly be of great importance. From a Russian perspective this is also important since improved sentiment in the global economy is likely to lead to increased energy demand and upward pressure on oil prices.

Without serious reforms aimed at rebuilding international financial confidence and trade ties, the Russian economy will likely face a sudden stop scenario in 2015 or at best find itself on a slippery slope towards stagnation. This is not in the interest of the current leaders and citizens of Russia, nor of its neighbors and trading partners. There are clear win-win propositions in terms of policies that Russia can undertake today to avoid an economic crash landing. The question is if Russia is ready to move towards the modern approach of looking for win-win solutions or if it will remain stuck playing strategic games where your gain is always my loss.

Notes

1 Note that this brief was written in mid-October 2014 and therefore based on the data and forecasts available at that point in time.

2 The original April 2012 forecast ends in 2017 and the forecast to 2019 here is based on extending the 2016 and 2017 forecast of 3.8 percent growth over 2018 and 2019.

3 The basic accounting identity says that national income is equal to private and public consumption and investment, plus exports minus imports.

4 The Central Bank of the Russian Federation, also called Bank of Russia, will be abbreviated as the commonly used acronym CBR which is also its web address www.cbr.ru.

5 The initial oil fund was called the Stabilization fund but was divided up in a National wealth fund and a Reserve fund in 2008, where the former should support future pensions while the latter has the stated purpose of financing the federal budget when oil and gas revenues decline.

6 Income ranking based on market exchange rates and IMF data from 2013.

References

Becker, Torbjorn and Paolo Mauro, 2006, “Out- put drops and the shocks that matter”, IMF Working paper, WP/06/172.

CBR, 2014, The Central Bank of the Russian Fed- eration (Bank of Russia) Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017, Draft as of 26.09.2014. Available at http:// cbr.ru/Eng/today/publications_reports/on_15- eng_draft.pdf

IMF, 2014, “Russian Federation, 2014 Article IV consultation — Staff report”, IMF country report No. 14/175, International Monetary Fund, Wash- ington D.C.

IMF, 2012-2014, World Economic Outlook fore- casts available at www.imf.org.

Source: BSR Policy Briefing 4/2014, Centrum Balticum, www.centrumbalticum.org

Shale gas revolution has joined pop culture of late. Even when you switch on an iron you hear something new about shale gas revolution. The words “shale rock” are well known to Russian experts. MGIMO has been recently visited by Estonian lawmakers who asked not to confuse available shale rock in Estonia with shale gas revolution. You have been dealing with the issue for long. What is it all about?

Shale gas has been developed in the world for decades but in small volumes as it is, firstly, expensive and, secondly, technologically difficult. The government of the United States traditionally subsidizes the production of shale and other non-traditional gas. I do not want to burden the reader with numerous figures but will anyway cite one table which explains a lot about the shale gas revolution which was artificially and intentionally inflated. The table was produced on the basis of calculations by well-known Wood Mackenzie consultancy and published in March 2010 by Petroleum Economist.

The table shows the share of non-traditional types of gas grew before 2009 not due to real physical volumes but as a result of depleted production of traditional gas. In reality the difference in total volumes of US gas between 2000 and 2009 comprised 3.2 bln cubic feet a day. Although the share of shale gas considerably increased it was still 2.5 times lower than tight gas (most deposits were developed by old vertical drilling technology) and nearly three times less than conventional gas. Such a modest result hardly merits “shale gas revolution” title. Even if Wood Machenzie forecast for 2020 comes true the total growth of domestic gas production in the United States can hardly be viewed as radical. The surplus will comprise only 7.5 bln cubic feet a day.

To comprehend the developments it is necessary to remember that 92% of natural resources in the United States are mined by small and medium independent companies which account for 82% of gas production. The second major aspect is that everything under your own land is yours. The technological condition for the shale gas revolution was the unification of two well-known technologies – horizontal drilling and fracking (high-pressure hydraulic formation fracturing). Shale is different from stone and sand as after fracking that discharges gas the cracks fold back and “heal”. To prevent it they add chemicals to the injected water. That is the reason while local population and authorities oppose the technology in most states. However there are territories where residents are indifferent to the environmental consequences and mostly want jobs.

In Texas, in a place called Barnett someone decided to combine horizontal drilling with fracking. It seems the Barnett field continues to provide a lion share of US shale gas. The situation was favorable as from 2005 prices of energy carriers grew and became record-high in 2008 when a barrel of oil cost 147 dollars. (I always warned at the time the price was unbalanced and a result of gambling at NYMEX – New York Commodity Exchange). However it was like hypnosis for many people. Even Vladimir Putin said when oil price began to rise after the crisis that so far we have failed to reach 147 dollars per barrel. But it was an absolutely artificial and abnormally high price. A fever similar to gold and oil rush in the XIX century began. Companies and individual businessmen bought out land plots and drilled for shale gas. A number of major fields were discovered – Eagle Ford, Haynesville, Utica, Woodford, Marcellus, and others. The last one includes the States of Pennsylvania, New York, and New Jersey, which are densely populated and well-developed regions. When TV showed a land plot whose owner allowed to produce gas on it people were horrified by seeing dark brown water around. Another TV broadcast hit the whole world: a burning match ignited water in a tap. There is still one more important aspect for the comprehension of the general situation. In all the years when the shale issue was in the focus of public attention there were only two-three serious publications about it, as far as I remember.

In mid-March 2010 the Oil and Gas Journal published an article of Houston-based expert and President of Merlin Associates consultancy Chuck Yost whose biography offers a successful synthesis of theory and practice. He agreed there are prospects for shale gas in the United States but expressed skepticism regarding excessively optimistic present-day forecasts. Yost said shale gas industry was in “infant age” at present and there are many uncertainties to be clarified and problems to be resolved. One of the problems is rapid depletion of wells. The article offered an index schedule of average productivity of a typical well which showed the yield rises only in the first year of operation after which it radically falls and continues to slowly decrease during the second, third, and fourth years of operation down to a low level of some 12-13 points from maximum 100. As for competition between shale gas and imported LNG, Yost analyzed three options of gas demand and price movements and convincingly showed that in any option LNG will continue to come to the United States (the amount is the question) and will exert considerable competitive pressure on shale gas and thus decrease its production. We should not expect that LNG will stop coming to the US market because of fear of competition with shale and other non-traditional gas, he concluded.

A similar opinion of LNG prospects in the United States was voiced by another expert – Nikos Tsafos who published an article in the British Petroleum Economist in May 2010. He monitored the staged movement of LNG in 2007-2009 and concluded that the United States was “the last resort” for LNG as exporters can always come to the market if they fail to profitably sell the gas in other countries. He noted that even before the shale gas boom LNG did not strike root in the USA after regular supplies began from Trinidad and Tobago in 1999 but stressed that in 2008-2009 two-three re-gasification terminals did not stop operations and in 2009 LNG staged a comeback to the United States.

The shale fever only slightly resembles the oil fever which lit up the star of Rockefeller when oil was discovered in Pennsylvania and hundreds and thousands of people rushed there. They drilled the earth literally stamping on each other feet. To save money they bought a very small plot of land which could accommodate a primitive drilling rig and its wooden supports often stood on neighboring plots. They nearly ruined the oil industry. It was Rockefeller who saved it by creating the first vertically-integrated company in the world. He deserves a monument for that. The main difference of the current fever is that shale gas wells rapidly deplete. A normal gas well operates for 16-20 years while you have to keep constantly drilling for new shale gas.

Maybe the technology is imperfect?

The Americans learned how to partially offset the problem. Today horizontal drilling is accompanied by drilling in several directions through only one surface well. In Russia they also drill the same way at Vankor field in the north of Krasnoyarsk territory. Shell invented the flexible bore when it helped Brunei cope with the problem of depleting fields in which oil remained only in the so-called pockets.

Rapid depletion of fields is not the only problem of the business. It triggers others and makes shale gas production a loss-making business which is subsidized. Thousands of people took bank loans to buy or lease land and acquire equipment. The heat continued up to 2009. In 2008 oil prices were still very high. (In contrast to Europe the United States does not tightly link oil and gas prices, but the exchange feels the dynamic). Then prices began to fall for one, two, three years. The “thermal price” of the gas was 3.5 dollars per MMBtu. Falling prices were accompanied by depletion of numerous shale gas fields and new drilling costs. Many people who believed in shale gas revolution went broke but 10-12 medium independent companies emerged and succeeded to survive. The most distinguished of them is Chesapeake Energy which pioneered in purchasing land for shale gas drilling and now has huge debts and fourteen billion dollars in the red.

In the summer of 2012 MGIMO published a collection of articles under your supervision called Russia and the Asia Pacific Gas Cooperation Prospects. I had an impression after reading it that shale gas revolution in the United States was a result of a sophisticated state policy aimed at creating maximum favorable conditions for private enterprise in shale gas production. The policy aimed at decreasing US reliance on imports. In general the flow of publications about shale gas revolution does not highlight the role of governments.

There is also another misunderstanding. The news makes public opinion believe that shale gas revolution helped the United States stop buying liquefied natural gas and the biggest importer quit the world market. The withdrawal naturally affected prices and the market structure, as well as strategic prospects of its main players. But the main thing is that the United States increased its independence from foreign supplies and came close to the cherished dream when Arab countries will no longer be necessary and it would be able to deal with them in the way it treated other states and territories.

Let’s recall the situation of late 2008. Barack Obama was preparing to occupy the Oval Room. The public paid all attention to election results and upcoming appointments. The NYMEX and the US oil and gas industry were waiting to clarify the course of the new administration as the previous one was closely related to the mining sector. Obama and supporting elites signaled a course for change and the oil business suffered major losses as a result. However there was an exception for shale gas as benefits were preserved. Why? Economic globalization played a low-down trick with US industry which suffered from global outsourcing. It became profitable to move production to China, India, and Southeast Asia. Profits from production were partially reinvested and partially kept offshore. On this background production of traditional gas sharply decreased in the United States, fields depleted and no new licenses were issued according to the principles adopted yet by the Roosevelt administration in the end of World War Two which triggered the emergence of “seven sisters” that shared the world among them and established the price of a barrel of oil.

Obama decided that widely advertised shale gas can compensate for the decreased production of traditional gas and prevent major price hikes for energy carriers which could deal the final blow to thousands of American enterprises. If we count all gas, including traditional, sand, and shale, there has been no quantity revolution at all. I believe the revolution boiled down to an efficient impulse to keep the US industry more or less viable and prevent further deindustrialization.

People who overslept the changes now speak about shale gas revolution which is rarely recalled today in the United States. But we continue to issue gloomy forecasts by inertia.

What did the real or imaginary revolution mean for energy security and independence of the United States?

Today shale oil is more popular in the United States as it was found at certain shale gas fields. It is praised to high heaven now. They promise to outshine Saudi Arabia soon. The wave emerged in 2010. One very stubborn independent investor in North Dakota continued to unsuccessfully drill one plot after another. He first drilled for shale gas. He then got disappointed in his gas dream but found the oil one. And he was lucky. The second stage of the fever began in the United States. Chesapeake Energy was again in the lead. But it is noteworthy that it no longer buys but sells land. The Upstream weekly said on March 1 that Chesapeake announced the sale of 427 thousand acres at the popular Bakken field located in Montana, Wyoming, and North Dakota states.

It is true that shale gas is produced and sold for cheap in the USA. It is good for industry, economy in general, and the government. But those who invested in it will not get expected profit.

Daniel Yergin, current president of Cambridge Energy Research Association (IHS CERA) predicted in Foreign Affairs in 2003 that in several years America will be the biggest import market for LNG. The article was co-authored by Michael Stoppard. Sergei Karaganov immediately reprinted it in his Russia in Global Politics magazine. But it was a bluff. America did not become the major LNG buyer. As for Yergin, he switched to the propaganda of shale gas. He visited Moscow once and I asked him: In 2009 you addressed the International Gas Congress in Buenos Aires and promised to satisfy not only America with cheap shale gas but also teach the whole world how to produce it. Aren’t you afraid the forecast will face the same plight as the one about LNG?

Under the influence of such experts President Obama said before the Copenhagen conference on climate change (December 2009) the United States will teach China to produce shale gas and signed with Hu Jintao an agreement which promised US assistance to China in mastering the necessary technologies.

Naturally, it was aimed against Gazprom, in particular. For example, Obama’s aide Joseph Aldy said the following about the role of shale gas in US policy. He told the Center for Strategic and International Studies (CSIS) that shale gas provides a possibility to ruin cartels and help many countries produce gas.

Why did I recall the story with the old forecast by Yergin? America is a country where business listens very attentively to such forecasts. As soon as prospects of large-scale LNG imports were announced investors immediately rushed to build terminals and re-gasifying facilities. They built twelve of them and there were twenty projects in the line. At present four are operating at reduced capacity while others have been mothballed or construction suspended.

Under the influence of forecasts about shale gas exports from the USA investors again lined up to build export terminals. However they did not have time to erect something significant. Europe, to which Russia belongs, is not critical in assessing the fluctuations in US business. Kommersant newspaper reports about the projects as if they had already been implemented and serious people begin to believe in it. One of them is Board Chairman Rainer Seele of Wintershall, which is a major partner of Gazprom. He supported the construction of both Nord Stream pipelines and now supports South Stream construction. Through Gazprom Wintershall enjoyed a possibility to develop Achim fields while Gazprom got a share in midstream sector of Wintershall. That is what he said in an interview with Kommersant on April 30: the US demand for imported gas is practically equal to zero.

Look at figures! Don’t be afraid of looking deeper. Every June British Petroleum publishes an excellent statistical report on all energy sectors – oil, gas, coal, and nuclear. It clearly shows the situation on the US gas market. But they forget a small detail: there is Canada close to the United States which continues to export to the US 88 billion cubic meters of gas. It is more than Seele’s native Germany imports!

It is truly strange for a German. But some Americans do not view Canada as another country…

That is what Americans think. But when Bush administration requested Ottawa to supply huge water volumes for fracking the Canadians responded: Any volume but of bottled water.

I will repeat that British Petroleum provides the best statistics. It is one of the best things it is doing. They show that US LNG imports which decreased to the minimum of 0.57 billion cubic meters began to grow in 2010 and reached 10 bln in 2011.

Does it mean the major buyer which is the United States did not quit the world gas market?

No, it didn’t. I will again cite Nikos Tsafos who categorically predicted in the same article that no matter how upstream developments progress the United States will remain an LNG buyer. I am looking forward to July when the next annual BP bulletin comes out with 2012 import volumes. The upward trend in evident anyway.

If there was no shale gas revolution but only an attempt in the United States, if the country returns to the global market as a buyer, what does it mean for the European Union as consumer?

In November 2010 the annual US-Russian Energy Dialogue was held in Washington. I delivered a report there and praised the achievements of the United States in at least partially replenishing the outgoing gas production capacities and thus saving the real sector from recession. But I also cited data confirming there was no alleged gas flow from the USA to the European Union. It is only natural as the Obama administration is in no hurry to encourage LNG exports from the United States as they will inevitably raise domestic prices on the US market. It is not accidental that up to now (May 2013) federal authorities have approved only one out of twenty submitted bids for Sabine Pass terminal in Louisiana (Cheniere Company). In case the regulator approves the project the first shale gas batch will be exported in late 2015 – early 2016 (less than 5 mln tons a year). Moreover, there is “coal renaissance” in some European countries today which squeezes out more expensive gas. There are also other LNG consumers in the world – Japan, South Korea, and Taiwan. In future there are China and India. There are also suppliers, first and foremost, Qatar which since 2002 has developed into the biggest LNG supplier in the world. Two years ago its exports amounted to 90 billion cubic meters. However they include also pipeline gas supplied by Qatar to Arab neighbors with existing discounts. It comprises over 19 billion cubic meters.

They scared us by claiming Europe will be flooded with excessive gas. Statistics do not confirm it so far. On the contrary, consumption is falling in some EU countries because of the crisis. Naturally, Norway revived as it always gets a green light in the European Union in contrast to Gazprom. It is noteworthy that nobody demands Norway to decrease gas prices.

There is evidently a prudent man in Gazprom who likely said: let’s justify our inaction at Shtokman and other offshore fields by reported surplus of gas in the world and that shale gas suppressed everything. These will be objective reasons for our inaction.

Naturally, Gazprom overslept the market, but not American, as Russian newspapers claim, but Asian and the Pacific Rim. The lion share of Qatari LNG goes to Japan, South Korea, and other Asian countries although Russia is closer to them. LNG transportation costs comprise 40 percent minimum. It takes two-three days to sail from Sakhalin to Japan or may be even 36 hours depending on the island while transportation from Qatar takes two weeks. The Japanese are interested in LNG exports from Russia and their companies operate in Sakhalin-1 and Sakhalin-2 projects. They insisted at talks with the Russian government to make Gazprom build the third line at Sakhalin-2. It is cheap and close. We have to remember that neither we nor Shell built everything on Sakhalin. Shell was in command as an operator. The Japanese built everything. Now after the Fukushima tragedy their interest increased. One more gas pipeline will go to Vladivostok where it is planned to complete the construction of an LNG plant in 2019 for exports to Japan. An agreement between Gazprom and with several Japanese companies has already been reached.

Let’s go back to Europe. What do you have after shale gas development? Moon landscape. France rejected any shale gas development projects. Nuclear power plants account for 40 percent in its energy mix. Germany decided to get rid of NPP but it also banned fracking. The whole of Old Europe is a garden where people care about each meter of land. Why should they subject it to shale gas tests?

They say there should be a lot of shale gas in Poland…

Yes, there is much ado about shale gas in Poland. ConocoPhillips and other forty companies arrived to prospect for it. They promised energy independence to the Polish government and said Polish gas would oust Russian gas from the EU market. In 2011 the US department of energy estimated Poland can have 5.3 trillion cubic meters of shale gas which are enough for 300 years of consumption. Today there is no shale gas in commercial energy mix of Poland but they delayed for a year the signing of a new transit agreement with Gazprom. In the meantime Exxon Mobil withdrew from Poland in 2012. ConocoPhillips is thinking so far. In May 2013 three companies refused to develop shale gas in Poland – Marathon Oil, Talisman Energy, and Polish state-run Lotos! They said there are no commercial gas reserves. However the Polish leadership keeps insisting it will not affect its decisiveness to find and develop shale gas.

Well, Poland is a big country. It is no Denmark or Austria. But I pity Poland.

Do you mean it is worth producing shale gas in a country which you do not pity?

Yes, in general. The Americans do not pity Texas as it is big and scarcely-populated and people would not protest a lot.

Does it mean there are no shale gas prospects for Baltic countries? They do not let migrants in, will they allow such environmental devastation?

No. Besides, they struggled a lot to make Gazprom lay its pipelines through their territories. They recruited Poland as an ally and demanded a new pipeline to go along the Ukrainian one.

It is exactly the pipeline which Gazprom is offering to Poland at present, but Tusk is rejecting it for unclear reason. They claim it would be a politicized pipeline and they would not support a project that bypasses Ukraine. Do they really mean that oil and gas can be unrelated to politics? Does the fantastic Nabucco project have anything besides politics?

It is a very instructive story. Russia and neighbors should learn lessons from it. Which lessons?

Today we are talking with the European Union as if we are on different sides of barricades. It is abnormal. It is better to discuss existing problems at a round table and take common interests into account. Energy security problem is double-edged and risks shall be shared by both parties – suppliers and consumers. It is the main thing. They should not politicize the issue or resolve it unilaterally.

Nodari Simonia  is the leading expert in global energy research.

From 1990 he is corresponding member of the Soviet Academy of Sciences and from 1997a Russian Academician. In 2000-2006 he directed the Institute of Global Economy and International Relations at the Academy. In 2001-2006 he was special representative of the Russian president for relations with leaders of African countries in the G8 framework. He participated in G8 summits in Kananaskis (2002), Evian (2003), Sea Island (2004), Gleneagles (2005). He is currently professor of the desk of international problems in fuel and energy complex of the International Institute of Energy Policy and Diplomacy at MGIMO University at the Russian foreign ministry.

Speaks English, Indonesian, and Chinese languages.

In 2012 MGIMO published a volume of selected works by Academician Nodari Simonia.

The energy situation in three post-Soviet Baltic countries differs from each other. Latvia has fully exhausted the resources of the major Daugava River in the region as nothing can be added to the existing cascade of hydropower plants there. Estonia generates power at Narva hydropower plant and heat plants and also receives electricity from Finland. Experts call for the construction of a liquefied gas terminal. Lithuania shut down the Sovietbuilt nuclear power plant and there is talk about the construction of a new one. It seems Lithuania lags behind the cherished dream of energy independence most of all.

How can the goal be achieved?

Green, but unprofitable

“Green” energy and co-generation (combined production of electricity and heat) are the most promising types of energy. It is disappointing that the “green” energy support system, say in Latvia, is branded as “political business”.

The country remembers the recent story of the construction of small hydropower plants which “accidentally” got into the hands of the wives of high-ranking state officials. Today any production of bio energy is also linked in Latvia to businessmen who are close to authorities. One cannot but agree with Economy Minister Daniels Pavluts who called for reforms and transparent energy management system.

The economy ministry submitted to the government its initiatives aimed at introducing new transparent and efficient standards of support to renewable sources of energy and cogeneration. The EU works to increase the share of renewable energy in the total power end-use to decrease reliance on fossil fuel. Latvia has pledged to achieve 40% of renewable energy in the total balance by 2020. “I am convinced it is an important goal and we have to support alternative energy producers. However economic growth possibilities and improved wellbeing of people cannot be sacrificed for the sake of statistical indicators. We cannot allow Latvia to preserve inefficient and nontransparent system under the cover of movement towards the conditional EU goal. The system has already created a new elite of green speculators at the expense of the taxpayer,” the economy minister said.

The obligatory purchase principle is currently in force in Latvia to support “green” energy producers: Latvenergo utility has to pay for renewable energy and co-generation much more than the market price. The difference is paid by all end-users, i.e. by every resident of the country.

What is to be done in the situation?

Naturally, cost efficiency of production has to be improved and the policy of endless subsidies has to be gradually abandoned. Lithuania and Denmark guarantee support to electricity producers for ten years, Hungary – 8, Estonia provides its current 7-year discounted tariff to the plants operating with biomass and hydro energy. There is no other country in the EU besides Latvia that provides unlimited support to renew able energy.

“I hope that in 2020 when we assess the implementation of the National development plan we shall state that the dream about green, economically feasible and competitive Latvia has come true and was no disappointment,” said optimistic Daniels Pavluts.

Vysaginas sword

There is also atomic power besides alternative energy sources. The construction of the Vysaginas NPP is on the Lithuanian agenda. Initially it was planned to engage neighboring countries in the construction but Poland and Estonia delicately refused. The Latvian position remains unclear.

Visaginas is said to be very lucrative for Latvia, however nobody has provided any convincing evidence. Politicians and their close businessmen claim the co-ownership of the plant will provide cheap electricity to Latvian consumers. However nobody explains how it is possible to buy electricity below market prices. There is no answer how the used nuclear fuel will be disposed of. Who and where will keep it? The hypothetic Latvian billion euro suggested for investment into Vysaginas NPP can be used for other guidelines.

“Latvia has to invest a billion euro not into Lithuanian economy and the construction of Vysaginas NPP, but into its own economy,” said President of the gas company Itera Latvija Juris Savickis. Although he represents competing industry he supports not only the construction of Vysaginas NPP but also the nuclear power plants in Belarus and Kaliningrad enclave of Russia. But he insists Latvia has to limit itself by bids for partial assignments in the Vysaginas projec which will be fully controlled by Lithuania and the strategic partner – the Japanese Hitachi Corporation.

The nuclear project in Vysaginas is not just a power plant. It is a major and profitable project for Lithuania which will push the ailing economy from the deadlock. ” I know the neighbors and have no doubt that most orders for the NPP will remain in Lithuania and that Lithuanians will win the tenders. Everything which Lithuania is capable of producing for the NPP will be made in the country. Naturally, Lithuanians cannot make the turbine while uranium will be supplied by Americans who cooperate with Hitachi,” Savickis said. Who will control the whole project? Lithuanians and Hitachi. However Vilnius is interested in getting the Latvian billion euro. . .

What can Latvia build with the billion? For example, a big gas storage in Dobele and its own liquefied gas terminal. It is an expensive project but it will be owned by Latvia. The billion can be invested into “green” power. Besides power engineering there are related industries which need investments.

It is also important that Lithuanians did not support the NPP project at a consultative referendum held together with parliamentary election. The NPP was backed by 34.09 percent of voters while 62.68 were against.

Gas puzzle

Baltic countries have no commercial gas reserves and buy the fuel in Russia. In seven months of 2012 Latvia imported natural gas worth 400 million dollars which is a 24.5 percent increase against the same period in 2011, the central statistics service of the country said.

Gas to Latvia is imported by the Latvijas gāze Company which pumps it into the Incukalns storage and then delivers it to Latvian, Estonian, Russian, and Lithuanian consumers. Gas to Latvia is supplied by Gazprom and Itera Latvija which is a part of the international Itera Group. In 2011 the supplies were worth over 200 million dollars or 52.2 percent above the 2011 figure. Profit exceeded 16 million dollars and was 60.9 percent above previous indicators, according to the financial statement of the company.

Lithuanian Energy Minister Jaroslav Neverovic said his country wants to ensure competitive gas prices at talks with Gazprom. Key to the aim is the construction of a liquefied gas terminal. Lithuania wants to build it in Klaipeda in order to supply also Latvia and Estonia. Latvian experts believe it is more profitable to build the terminal in Latvia as it already has developed infrastructure and an underground storage in Incukalns. There is also a good site for a new storage on the border with Lithuania. According to research, the storage can decrease Baltic reliance on Gazprom from 100% to 59%.

There are alternative points of view in the dispute about the liquefied gas terminal. Thus, the Booz&Company consultancy believes it is more profitable to build it in Estonia or Finland rather than in Lithuania or Latvia.

Shale gas

The basic technology of shale gas production was borrowed by the Americans from Nazi Germany which had no oil and had to learn how to produce synthetic petrol from coal.

In Europe shale gas resources in-place are estimated between 19.4 and 91.4 trillion cubic meters. Extractable reserves are estimated at 15 trillion cubic meters. The U.S. Energy Information Administration puts the figure at 22.6 trillion.

The main shale gas deposits are located in northern Germany, France, Great Britain, Norway, Sweden, Poland, Ukraine, and Baltic countries while extractable reserves of the shale gas, according to the estimates of the U.S. administration, are accumulated in Poland (6.6 trillion cubic meters), France (6.4), Norway (2.9), Ukraine (1.5), Sweden (1.4), Denmark (0.8), and Great Britain (0.7 trillion cubic meters).

Main shale gas, gas and coalbed methane basins in Europe.

The estimates made over 40 countries prospect for shale gas in Europe close to consumption areas which minimizes transportation costs. They include Shell, Chevron, Exxon Mobil, Conoco Phillips, OMV, Halliburton and other giants. Poland, Hungary, Sweden, Spain, France, and England are experiencing a genuine shale gas boom triggered by the hope to repeat American shale gas revolution.

However there are skeptical voices as well.

Head of the British energy regulator Office of Gas and Electricity Markets Alister Buchanan said shale gas production was unlikely to begin in Europe earlier than 2025 and production volume can reach 15 billion cubic meters by 2030. BP estimated total European production of all nontraditional gas (shale, coalbed methane, etc) at 50 billion cubic meters by 2030. Therefore, imported gas will continue to play a major role in supplies for a long time. BP estimated it will account for 75 percent of gas consumption in the EU by 2030. Over a half (nearly 60%) will be supplied by pipelines.

Latvian scientists are in general skeptical about shale gas production in the country. However some politicians promise “to liberate” Europe from Russian natural gas at the expense of Latvian shale gas.

Latvian geologist Lyudmila Kartunova said Latvia is rich in all elements of the Mendeleev table. However, the entrails, like in most European countries, differ in structure from North America. It might be cheaper to fly to the Moon for some natural resources than produce them at home.

No sensations

Latvia plans to have a half of renewable energy in its balance by 2030. “At present Latvia produces first-generation biofuel from rape and grain. Production will continue for some time however the products do not satisfy durability criteria. Transition to second or even third generation of biofuel is expected by 2030. In 2017 Latvia may get a refinery to produce biofuel from wood,” said State Secretary of the Latvian economy ministry Juris Putse.

Properly purified rape seed oil used to produce biofuel is also suitable for food consumption although it depends on personal taste. Unfortunately, over a half of all fields in Latvia continue to grow the beautiful but very harmful plant for agriculture.

What do Baltic countries have to do to ensure energy independence? Anyway they shall not expect sensational solutions.

For example, Latvenergo plans to reconstruct the cascade of Daugava hydroelectric power plants by 2021 and replace all 21 turbines to increase their capacity. By now eight out of ten turbines of the Plavinas hydropower plant and four out of seven turbines of Keguma plant have been reconstructed. Investments exceeded 200 million dollars but will generously repay.

Prospects to reduce prices are offered by the planned construction of three nuclear power plants which is too many for the small region.

Wind turbines are promising on the sea coast.

What else? There are forests and marshes, wood and peat. However firewood would hardly keep the region warm.

Valery Zaitsev,

Valery Gorbov,

for Amber Bridge