What's been happening in the energy sector lately?
Wk 43-44, 2021
I took the opportunity to take a closer look at the oil production sector in Lithuania. Took me a bit longer than expected to brush up on the subject. Throw in a cold I caught and here we are just now filing a newsletter for the two weeks to 7 November. Hope it will be worth the wait.
In addition to the dispute about oil production, we’ll take a look at the massive investment that is indeed coming to Mažeikiai. Also of note, Vilnius cogeneration plant project is moving forward, and Lithuanian energy agency is looking to build an app for you to track your carbon footprint. In addition, the tender for offshore wind is heading to the Parliament.
Here‘s all of that in more detail.
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Notes: Set to go Extinct
Minijos Nafta, one of a handful of oil producers in Lithuania, has been exploring the possibility of developing crude oil production in Kintai, by the Curonian Lagoon, since 2005. The geological structure here, ~2 km deep, could potentially hold up to 7.3m bbl of recoverable oil. The exact figures would be known only after an exploratory well was done. The company could obtain a permit without a tender, as the edge of a field falls within the area currently held by the company.
However, at the end of October the Ministry of the Environment decided not to grant a permit for such activities. According to the Ministry, the project is not in line with the spirit of European Green Deal and is opposed by the local community. The project is deemed to be too close to the settlement, close to Natura 2000 protected areas and would harm the area's recreational and tourist activities.
The company argues that the field would be developed safely and that the project would bring economic benefits to the local community. It called the Ministry's decision an "abuse of power" and promised to appeal. Local community had previously promised to monitor the project closely if it was implemented.
My 0,05€: oil and gas extraction in Lithuania is a sensitive subject. I understand the local community, and Kintai seems to be a more of a tourist spot rather than an oil town. Those nature reserves are there not without a good reason. Is it properly safeguarded by the law? That’s a different matter altogether and I would not bet on the outcome of the dispute.
We are talking about a relatively small amount of oil and an industry in its, what seems to be, twilight years, it’s prospects becoming dimmer with each passing year. The Polish oil companies, however, are showing considerable interest here. Minijos nafta is owned by Lotos Geonafta, a subsidiary of the Polish oil group Lotos Petrobaltic, and the Danish company Odin Energi.
It’s worth noting that PKN Orlen, which is investing in the refinery in Mažeikiai, is in the process of acquiring Lotos.
Oil in Lithuania is produced exclusively onshore. But a couple of years ago there were reports of Lotos becoming more vocal about its intention to look for production opportunities in the Baltic Sea. The Russian Lukoil produces oil from well D-6, located offshore in the Kaliningrad region, not far from the area of the dispute described above.
More broadly speaking, a broader picture of the sector's prospects is hard to gauge, since there is very little attention paid to exploration of Lithuania's subsoil, even for scientific purposes. This became obvious a couple of years ago when a dispute erupted about carbon capture and sequestration (CCS). Ignorance, let alone a wilful one, is never a good strategy.
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Here's what else has happened in the last couple of weeks:
Orlen Investment in Mažeikiai
Orlen Lietuva, the oil refining company owned by Polish PKN Orlen, announced on 27 October that it has signed an agreement with Petrofac Limited, an oil and gas infrastructure company registered in London. For €550m, the company will implement a "bottom of barrel" project at the Orlen Lieuva oil refinery in Mažekiai.
In short, the plant will be equipped with a hydrocracking unit. It will add a new refining processes that will convert the heavy chemical oil compounds, which have traditionally contributed to the fuel oil output, into lighter, more expensive petroleum products such as low-sulphur diesel.
According to Petrofac, the contract covers design, procurement, construction and testing of the plant. This includes "mainly greenfield" design and construction work, as well as some improvements to existing infrastructure and additional design tasks.
The project is developed on a turnkey basis, with lump sum payment, i.e. Orlen expects to pay the money and get the equipment already installed and operational. Completion is expected by the end of 2024. Orlen Lietuva estimates that the total investment will amount to ~€641m and will allow it to generate €68m more EBITDA per year.
Why it matters:
The signing of the contract has dispelled my doubts about the real prospects of this investment. It was promised for a long time, it is needed, it is good that it will come.
Back in mid-March this year, Orlen Lietuva mentioned that once the tender envelopes were opened, the project costs had to be reviewed to the upside - it would cost "more than €200m". How this turned into a €550m contract is a good question.
The fact that Petrofac's latest company news include the announcement that it has been fined £77m for bribes given between 2012 and 2015 is underwhelming.
Vilnius CHP Plant
Ignitis Group's Vilnius Cogeneration Plant (CHP) has signed a contract with Ramboll Polska and Ramboll Danmark for the design of a biomass boiler house and fuel preparation facilities. The contract is worth almost €1.4m. The contract will be fulfilled in three phases:
preparation and planning;
design, construction and commissioning management;
the technical evaluation, though company has not committed to secure these services.
The company plans to sign 7 more contracts for the supply of equipment, construction, and other works.
The Vilnius CHP consists of two parts – waste incineration and biomass. The first part is already operational, but the construction of the biomass boiler stalled when Poland's Rafako, under restructuring, announced in October last year that it was unable to complete the work. This delayed the completion of the project by a year.
Why it matters:
It is one of the most expensive energy projects in the country in recent years (€350m), with large amounts of EU taxpayers' money being invested. Also, the state is the main shareholder of the group of companies implementing it. Thus, the project needs an eye kept on it from a public interest perspective. It is good that the project is moving forward.
This is also the most notoriously stalled energy project in recent times for political, regulatory, and technical reasons. It is riddled with the most bizarre stories and incidents, and I would not want to miss out if anything else happened.
Mobile Carbon Tracker
The Lithuanian Energy Agency (LEA) is offering €58,400 to develop a prototype of an app that allows its users to easily track their energy use. As well as measure their carbon footprint. It should monitor energy consumption commuting, households and the carbon footprint left by purchased goods. The app could also offer suggestions on how to reduce one’s impact on the planet.
Three prizes will be awarded and the winner will receive a €38,600 contract to develop the app. Most of the money for the prototype will be provided by the government's Agency for Science, Innovation and Technology.
However, it is not clear who would fund the maintenance and upkeep of the app once it is developed. Despite that, the LEA has hinted that it would like to see the possibility for apps users to trade in carbon savings, turning the app into a kind of retail platform for trading pollution allowances.
Why it matters:
The idea is interesting in theory, and I would like to see such an app, provided it works. However, this seems like an idea for a start-up, not for an analytical advisory body to the Ministry.
LEA, established under the Ministry of Energy, is tasked with overseeing the implementation of energy and climate strategies, auditing energy consumption, and monitoring the country's oil reserves, not with developing apps.
The head of the agency was replaced without a widely publicised tender following a change in the leadership of the ministry, which is not inspiring. The Minister's friends and allies should receive political posts.
Maybe this explains some things. I would speculate that the first head of the agency did not have time to cement the structure, vision, and activities of the institution (set up in 2019), and the new head does not necessarily know what to do with it. But I'm just speculating here.
What’s Next?
Here are a few things we may be paying attention to in the future:
The Parliament will soon vote on amendments to the law that will set up the principles for the offshore wind park tender. As it stands, it looks like the standard contract for difference (CfD) model will be amended with the option to apply for support for only a part of the electricity generated.
There will be ample time to familiarise oneself with the changes to the law. The initial information on the tender is planned to be made available to investors in 2023. The tender would last 180 days and the winner is expected to be awarded in Q1 2024.
On the 1st of December Litgrid shareholders (the state indirectly owns 97,5% of the company) will vote on the approval of €87.7m contract with Siemens Energy for the installation of synchronous compensators in Lithuania. They will be installed by the end of 2024 at transformer substations in Alytus, Telšiai and Neris. I. e. near Vilnius, the country's biggest energy consumer, and near international interconnectors with Poland and Sweden.
The LitPol Link electricity interconnection with Poland was switched off for a few days while testing the third autotransformer installed there. This is one of two synchronisation projects to be completed by the end of the year. 3 of the 15 projects have already been completed.
This LitPol Link expansion should allow all the Baltic countries to seek support for their electricity systems from Poland if they were forced to work outside the Russian IPS/UPS systems. However, to see how that could happen, the Baltic countries still need to test their systems in isolated mode collectively. This is planned for 2023.
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