2006 Review: The year when the Baltics awoke to the energy threat

By Ben Nimmo Dec 28, 2006, 17:32 GMT

Riga - In the Baltic states, 2006 will be remembered as the year in which the three countries woke up to the danger of relying on Russian energy.

From the moment Gazprom cut gas supplies to Ukraine at the new year in an argument over tariffs, Baltic reliance on Russian supplies has been the region's overriding concern.

Despite their membership, since 2004, of the EU and NATO, the Baltic states are physically far more closely linked with Russia than with the West. Their energy grids are connected to CIS grids, but not EU ones, making them an 'energy island' within the EU.

Last year's agreement between Germany and Russia to build a gas pipeline linking their countries under the Baltic Sea strengthened that feeling of isolation, with Baltic politicians alleging it would allow Moscow to cut them off, as it had Kiev.

And events this year have fed suspicions that Russia intends to use their isolation, pressurising politicians and businesses in order to increase its influence in its former satellites.

The Ukrainian gas crisis was followed, in spring, by a bitter legal wrangle over the ownership of the Baltics' only oil refinery, Lithuania's Mazeikiu Nafta (MN).

The dispute pitted MN's owner, defunct Russian oil giant Yukos, against Yukos' main creditor, Russian state oil firm Rosneft. In May, a New York court gave Yukos the right to sell MN: a few days later, a deal was announced with Polish refiner PKN Orlen.

But two months later, the sole pipeline feeding oil to MN sprang a leak in Russia, and was closed. Five months later, it has not yet been reopened, with many in the Baltics calling the shutdown punishment for allowing the Poles to buy the refinery.

As well as gas and oil, alarm bells also rang this year over future supplies of electricity. Much of the Baltics' power is currently generated in the Soviet-built nuclear power station of Ignalina in Lithuania - a twin to the ill-fated Chernobyl reactor.

According to the terms of Lithuania's EU accession treaty, the Ignalina reactor has to close by 2009. The closure is expected to lead to a serious shortfall in Baltic generating capacity - something which all three states now view with alarm.

However, if 2006 became the year in which energy security leapfrogged to the top of the Baltic agenda, it was also the year in which the first steps were taken to secure it.

In February, the Baltic governments agreed in principle to build a new nuclear reactor on the Ignalina site - a project hailed by local analysts as a critical step towards energy independence.

In summer, Lithuania and Sweden agreed to study the feasibility of constructing a power cable linking their countries. In December, Poland and Lithuania signed a landmark deal providing for the construction of an energy link between their countries.

Also in December, Estonia and Finland inaugurated an electric cable linking their countries - the first bridge from the Baltic 'island' to Europe. The project was funded by all three Baltic power generators, in collaboration with two Finnish firms.

Diplomats have also begun to look for energy. This year, the Baltics have pushed for closer ties with states such as Kazakhstan and Azerbaijan - seen as potential alternative sources of supply.

But despite all this activity, the Baltics still face serious energy questions. At the earliest, a new nuclear plant could only come online around 2013 - four years after the Ignalina closure.

Any new gas and oil pipelines from Central Asia to Central Europe would also be the work of years to construct - to say nothing of the massive investment they would require.

And with Russian gas a major source of Baltic heating and electrical generation, Moscow's dominance of Baltic energy sources looks set to remain for years to come.

2006 was the year the Baltics awoke to the energy problem. It will not be remembered as the year in which it was solved.