Baltic Gas Report 2007

8/6/2019 Baltic Gas Report 2007

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Market Report

Baltic Gas Association

2007

2007-05-22


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Content

Introduction ...........................................................................................3

Estonia...................................................................................................4

Finland...................................................................................................6

Germany ................................................................................................8

Latvia...................................................................................................13

Lithuania..............................................................................................17

Poland..................................................................................................20

Sweden ................................................................................................23


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Market Report 2007 - Introduction

Baltic Gas is working on issues related to the development of an integrated gas

market in the Baltic Sea Region.

The Market report 2007 has the aim to reflect the business environment country by countryaccording to the position of Baltic Gas described in the Position Paper of Baltic Gas 2005 andin addition giving some basic figures regarding the gas market in respective country.

1. Possible or decided new infrastructure project and their effect on thegas markets

New gas infrastructure projects are required in the Baltic Sea Region in order to develop newand existing gas markets. Investments in transmission pipelines are necessary to connect theisolated gas markets in the region with each other and integrate them to the Pan-European gaspipeline network.

2. Plans or decisions on new storage facilities

Investments in gas storages are important to improve both the security of gas supply and afurther development of gas as an energy source.

3. Changes in the business frame work affecting the gas businessFair, harmonized and predictable business framework and conditions in the Baltic Sea Regionare prerequisites to develop the gas market in the region.

4. The regulation regime in the country including allowed rate of return

In order to attract investors to invest in new gas infrastructure the economical viability of newinvestments must be comparable to other similar investments in the society. A sufficient andreasonable rate of return on investments in new infrastructure projects must therefore beaccepted.

5. The development of the harmonization of the regulation betweencountries

In order to improve the conditions of the cross border pipeline investments the harmonizationof regulations like concessions, licensing and technical standards is vitally important.

6. Basic figures regarding gas consumption

The report includes some basic statistics regarding use of gas during 2006.


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Report Estonia 2007 2007-05-22

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Market Report 2007 Estonia

1. Possible or decided new infrastructure projects and their effect on thegas markets

The gas supply systems of the three Baltic States are not directly connected to the Europeangas supply system, and Russia is the only one who supplies gas to all the three Baltic States.The gas networks of the Baltic States are connected solely with each other and with theRussian gas supply system and therefore the Baltic States can be classified as an isolatednatural gas market.

The natural gas supply system in Estonia exists via two routes the Russian border stationVrska and the Latvian border station Karksi in the southern part of Estonia

As a result of the completion of the natural gas pipeline to Prnu (high pressure pipeline 58

km from Vndra to the town Prnu and including Prnu County) the gas consumption in thetowns of Prnu and Sindi as well as in the immediate areas surrounding these towns started inOctober 2006. Our customers in the towns of Rapla and Pssi started to consume natural gasas well. The company also started the sale of natural gas to the first filling station usingnatural gas as car fuel. 751 new customers were connected to the natural gas network in 2006and the company had 51 thousand customers as of December 31, 2006.

Today, with Gasum OY, we are developing a new interconnector between Estonia andFinland. First stepconstruction of a gas transmission network to the town of Paldiski.

The new Government (after the Parliament election in March 2007), an alliance between three

parties, has launched the energy policy priorities:- regional development focused on local fuels, oil-shale utilization,- concerning natural gas it has been stated:

security policies and security of supply aspects have to be considered within aframework an increasing dependency from one supplier.

Infrastructure

and Sales 2006

1.010.79


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2. Plans or decisions on new storage facilitiesNo plans exist concerning additional storage facilities in Estonia.

The gas reserve up to 1/3 billion m3 belonging to the company is stored in the Latvian

Inchukalns underground gas storage.

3. Changes in the business framework affecting the gas business

In compliance with the requirements laid down in the Natural Gas Act of the Republic ofEstonia (approved on March 9, 2007), which have been harmonised with the EuropeanDirective on the natural gas internal market, AS Eesti Gaas established a subsidiary, AS EGVrguteenus, operating as from January 1, 2006 and rendering natural gas transmission anddistribution service through the natural gas network. In addition to that, AS Eesti Gaas itsreorganised subsidiary AS EG Ehitus. The principal activities of the company include theconstruction and renovation of gas networks and the construction of heating systems.

Since January 1, 2006 the main field of activity of AS Eesti Gaas, as mother company, hasbeen the purchase and sale of natural gas.

Due to a significant increase in fuel prices in the world as well as the Estonian fuel marketsthe company had to amend its natural gas purchase and sale agreements concluded with itscustomers.


The Estonian regulatory system also includes an ex post decision compared to ex ante systemin most European countries.

The regulatory authority has announced an allowed rate of return on 8.0 percent nominalbefore tax.

5. The development of the harmonization of the regulation between countries

No such activity to be reported from Estonia

6. Basic figures regarding gas consumption in EstoniaNatural gas production in Estonia: no production of natural gas.

Natural gas imports to Estonia and only from Russia (2006): 1 010 MNm3 or 12.4 billionkWh gross calorific value. Remarkable is the growth of natural gas consumption and that the

consumption of natural gas in Estonia exceeded one billion m3 for the first time in the periodafter Estonia regained its independence. Hence, the goal set several years ago has beenachieved.

Share of the primary energy consumption: 16 percent.

The net turnover of AS Eesti Gaas in the 2006 fiscal year totalled EEK 1,711 million. Thenatural gas sales amounted to 793 million m3 in 2006, while the sales in 2005 were 778million m3. The natural gas consumption in Estonia totalled 1,010 million m3 in the fiscalyear, i.e. 1.4 % more than in 2005.


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Market Report 2007 Finland


In its own operations Gasum is working to create the prerequisites for increased natural gasconsumption. To ensure the availability of natural gas, Gasum is currently studying threealternatives. When implemented, the Baltic connector linking the networks of Finland andEstonia would offer the possibility to optimise the transmission of natural gas to Finland andthe Baltic States; besides forming a connection to Latvias gas reserves, the new pipelinewould open up the possibility to subsequently begin the importation of liquefied natural gas(LNG) as a joint venture carried out among the regions gas companies. The joining of

Finlands network to the Nord Stream pipeline, that when completed will transmit 55 billionm3 of natural gas each year from Russia to Germany, would also improve the reliability ofnatural gas deliveries for Finland. What is however most important from the Finnishperspective is the maintenance and strengthening of existing import channels, as well as theconstruction of new compressor stations when necessary. It would then be possible to increasethe capacity of the two transmission pipelines coming from St. Petersburg according toFinlands future needs.

The decisions to expand the natural gas pipeline in the Turku region and Western Uusimaacan be made during 2007 if natural gas users are ready to commit themselves to a sufficientlyample level of natural gas consumption.


No plans exist concerning storage facilities in Finland.

3. Changes in the business frame work affecting the gas business

There are no major changes in the business frame work.

A feed-in tariff for peat fuelled electricity production has been introduced.

The Emissions trading scheme has a strong affect on the gas market. The price volatility on

the emissions allowances market has affects the development on the electricity market. Thusabout 2/3 of the natural gas is used in CHP-plants this affects the gas business very strongly.


Finland being not directly connected to the interconnected system of any other Member Stateand having only one main external supplier may derogate from legal unbundling and TPA.

According to the Natural Gas Market Act, the Energy Market Authority will issue decisionsconfirming the methods that network operators must follow when determining the rate ofreturn of natural gas network operations and the charges to be collected for distribution

services during the regulatory period.


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The first four-year regulatory period started at the beginning of 2006, and it will expire at theend of 2009. The Energy Market Authority issued its first network operator-specificconfirmation decisions in May-June 2005. The confirmation decisions define, e.g., thevaluation principles for the capital invested in network operation, the determination principlesfor an acceptable rate of return on the capital invested in network operation, the method of

determining the result of network operation and correction of the profit and loss account andbalance sheet as required by the method.


No such activity to be reported from Finland.

6. Basic figures regarding gas consumption in FinlandNatural gas production in Finland: no production of natural gas.

Gasum sold a total of 45.2 TWh of natural gas in 2006. The use of natural gas in 2006 was upby 8% compared to 2005. The higher consumption was primarily the result of cold weather atthe beginning of the year and an electricity price that remained high for an extended period.Natural gas meets around 11% of Finlands energy balance.

Combined heat and power (CHP) production, where natural gas is primarily used, increasedby more than 5% in 2006 compared to the previous year. Natural gas was used to generate33% of district heating and combined production electricity. The share decreased by sixpercentage points compared to the previous year.

Electricity consumption in Finland in 2006 approached 90 TWh, 6.5% more than in 2005. The

growth was quantitatively greater than any previous level. Natural gas accounted for 10.9% ofelectricity procurement.


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Report Germany 2007-05-22

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Market Report 2007 Germany

1. New infrastructure projects which are possible or have been decidedand their effect on gas markets

New pipelines in Germany (VNG & E.ON Ruhrgas)

The largest infrastructure project for E.ON Ruhrgas in 2006 was the completion of theEast-West transport system to Belgium/UK by the section from Porz to Stolberg (85 kmand compressor station).

It is planned to complete two pipelines to continue the Nord Stream pipeline by2010/2013 as a joint project of E.ON Ruhrgas and Wingas.

It is planned to construct a pipeline to connect the planned LNG terminal inWilhelmshaven and additional gas volumes (implementation of importoptions/diversification; increasing export options/transit to Netherlands, Belgium, UK).

Nord Stream pipeline through the Baltic Sea

From 2010, about 27.5 billion m of natural gas per year are to be delivered to Europe viathe Nord Stream pipeline. The later expansion will allow for a capacity of 55 billion m ofnatural gas per year.

This pipeline will carry additional natural gas to satisfy growing demand in Europe.

Liquefied natural gas (LNG)

In addition to infrastructure expansion projects and the conclusion of long-term gaspurchase contracts, LNG will make a growing contribution to the security of gas suppliesin the future.

A basic agreement concerning cooperation in the LNG sector was concluded betweenE.ON Ruhrgas and Sonatrach of Algeria in November 2006. At the same time as gaspurchasing activities, specific activities in the field of LNG unloading and regasificationwere pursued.

Germany currently has no LNG terminals. Deutsche Flssigerdgas Terminal Gesellschaft(shareholders: E.ON Ruhrgas; BEB Erdgas Transport GmbH & Co. KG, VNGVerbundnetz Gas AG) plans to construct a terminal at Wilhelmshaven. Design work isproceeding rapidly. The commissioning of the terminal, with a probable capacity of 10billion m/year, is scheduled for 2010 (total investment approx. 600 million).

Other terminal projects in Great Britain and the Northern Adriatic are also being pursued.

2. Plans or decisions on new storage facilities Existing storage: Germany is the country with the fourth-largest storage capacity after

USA, Russia and Ukraine. The storage facilities can be expanded thanks to favourablegeological conditions.

Storage working gas volume amounts to 19.1 billion m at the end of the 2006 with amaximum withdrawal rate of 463 million m/day. In mathematical terms, storage capacityis sufficient to cover demand for more than 80 days.

44 gas storage reservoirs are in operation: 21 cavern (working gas volume: 6.7 billion m)and 23 porous rock (working gas volume: 12.4 billion m) storage facilities. These storagefacilities are operated by a number of companies (the largest include: E.ON Ruhrgas,

Wingas, VNG-Verbundnetz Gas, RWE DEA, BEB Transport und Speicher ServiceGmbH and Gaz de France).


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New projects: Expenditure on the development of new and expansion of existing storagefacilities will continue to increase. 16 underground storage projects with a maximumworking gas capacity of 3.1 billion m are currently planned or under development.

3. Changes in the business framework affecting the gas business

The business framework and the market environment were chiefly characterized by a numberof initiatives and measures for the further intensification of competition within the sector andby the regulatory activities of the Bundesnetzagentur (BNA Federal Network Agency).

Legal framework/regulations

When the Energiewirtschaftsgesetz (EnWG Energy Industry Act) came into force on13 July 2005, the BNA and the state regulatory authorities assumed regulatoryresponsibility for the electricity and gas industries.

A key topic in connection with the regulation of gas networks was the implementation andconfiguration of the network access model under the Energy Industry Act, with simplify-cation of network access based on an entry-exit system, new trading possibilities andcomprehensive cooperation between network operators from the beginning of the new gasyear on 1 October 2006.

In mid-November 2006, the BNA decided that the two-contract model, with only oneentry and one exit contract would be the only binding network access basis in the Germangas industry from October 2007. Under Section 20, Para. 1b, EnWG, network operatorsare obligated to cooperate comprehensively on the implementation of this model.

On the basis of this model, the German gas industry drew up a cooperation agreement atshort notice. By 1 October 2007, all existing gas transmission contracts must be convertedto the two-contract model. Gas supply contracts which are affected must also be convertedcorrespondingly. The adaptations required in connection with these changes represent asignificant challenge for the German gas industry.

Under the two-contract model, a gas shipper only needs to conclude one entry and oneexit contract with the network operators in order to supply gas to final customers. Theentry contract grants the shipper access to the market area and allows it to transport gas tothe market area in line with the capacities booked. The exit contract allows the shipper tosupply gas to final customers in the market area.

The shipper takes the gas for supply to the final customers at the virtual trading point(VTP). From there, the gas is transported under the exit contract irrespective of the actual

number of network operators involved.In order to allow gas shipment via the entire transmission and distribution chain with onlytwo contracts, the network operators involved must carry out internal capacity reserve-tions on a bottom-up basis to the VTP of the market area. On this basis, the downstreamoperator in each case must book the maximum exit capacity to be made available at thenetwork interface station with the upstream network operator in each case.

In the two-contract model, there are therefore three delivery points: the entry point (e.g.import point), the exit point (point where gas is supplied to the final customer andmetered) and the virtual trading point (point where gas is transferred between balancingdistricts or traders).


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Regulatory authority

The Federal Network Agency (BNA) is responsible for regulation and holds the requisitepowers except where these responsibilities and powers are assigned to the regulatory

authorities of the individual German states under the Energy Industry Act(EnWG).The state regulatory authorities are responsible for the regulation of energy suppliers withgas or power networks to which fewer than 100,000 customers are connected, providedthat these networks do not extend beyond the boundaries of a federal state.

The key task of the Federal Network Agency is to create the basis for functioningcompetition on upstream and downstream markets by unbundling and regulating powerand gas networks. Its regulatory functions include ensuring non-discriminatory networkaccess and supervising the network access fees charged by energy suppliers.

Other tasks include supervision to prevent abuse of position and compliance with theregulations concerning network unbundling and the system responsibility of networkoperators.

Network charges

At the regional distribution level, the regulatory authorities in some cases requiredsignificant reductions in the cost-based network access charges applied for by networkoperators. These reductions ranged from 1% to 28% of the charges applied for.

In some cases, the decisions of the Federal Network Agency have placed the companiesconcerned under considerable pressure. At the gas transmission level, discussions are inprogress with the Agency to determine the right system for calculating the tariffs.

Incentive regulation

With respect to the configuration of the incentive regulation of power and gas networksrequired by the Energy Industry Act, the BNA submitted a report to the federal Germangovernment in good time on 30 June 2006.

Incentive regulation will affect network operators previously only subject to cost-basedprice regulation, who will be converted to a system of incentive regulation in the future(originally as of 1 January 2008).

In mid-November 2006, the Federal Ministry for Economic Affairs and Technology laiddown key points for a regulation in this area.

Against the backdrop of these significant economic and regulatory changes, German gascompanies have taken concrete measures to intensify competition on the gas market. Thecomprehensive activities and initiatives that have been implemented aim to ensure greatertransparency, simpler network access and improved opportunities for changing suppliers,increased liquidity in short-term trading and the removal of obstacles to cross-borderdeliveries.

Competition initiatives in detail:

Under the cooperation agreement in accordance with Section 20, Para. 1 b) EnWG signed

between German network operators in July 2006, gas transmission companies assumedthe role of network operators with market area responsibility for their respective


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market areas. Market areas not only include the pipeline system of a gas transmissioncompany but also the networks of downstream network operators within the areasconcerned.

Capacities are now only booked under the two-contract model. Under this model, gastransmission within the market area is ensured on the basis of one entry and one exit

contract, irrespective of the number of networks involved. Gas is shipped via the virtualtrading point.

As a result of the establishment of virtual trading points in the market areas, a highlyliquid market has already developed within a very short space of time (over-the-counter-trading, trading as Choice Market via broker platform or phone). The number of activetraders and the volumes traded are increasing rapidly.

In accordance with legal requirements, the German gas suppliers have taken appropriatemeasures for the publication of key standards conditions for storage access andinformation on their various storage facilities on the Internet.

Internet platforms covering the systems of more than one company have also beeninitiated for secondary trading in gas storage and transmission capacities. Theseplatforms form a meeting point for sellers and buyers of unused capacities,

Gas release programme also contribute to more liquid markets. In total, more than200 billion kWh of natural gas are offered in six separate annual auctions.E.ON Ruhrgas AG has already successfully completed five auctions.

From 1 July 2007, it will also be possible to trade natural gas on the Leipzig EuropeanEnergy Exchange (EEX). This exchange will take the E.ON Ruhrgas northern marketarea together with the BEB region as a reference point for exchange trading in Germany.

Taxes

On 1 August 2006, a new Energy Tax Act came into force, replacing the previousMineral Oil Tax Act, which had also governed the taxation of natural gas. Among otherthings, the new Act implements the provisions of the EU Energy Tax Directive in nationallaw. It is now possible, as is normally the case in Europe, for natural gas to be used inpower generation with full exemption from input tax without any time limit. In addition,under the new act, the tax concessions for natural gas and LPG used as automotive fuelsare now due to expire in 2018.Furthermore, the new Energy Tax Act has introduced a systematic change with respect tothe question of where tax liability arises. Previously natural gas was taxed when producedor imported and the natural gas tax was passed on along the supply chain. Now, theliability to pay natural gas tax only arises when gas is taken from the network for use.


For the purpose of attracting companies or network owners to invest in new gas infrastructure,the economic viability of such investments must be comparable to other similar investmentsin the business sector. An adequate rate of return on investment in new infrastructure must beapproved.

From 2009 a new incentive-based regulatory approach (Anreizregulierung) is planed to beintroduced. A first proposal has been published by the ministry. In this proposal the mostefficient network operator will be the benchmark for all other market operators. The BNA willimpose the price charged by the most efficient network operator on all market players. In


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addition, all operators will have to increase their productivity by 1.5 % each year. After fouryears, a new regulation period will begin.

5. The development of the harmonization of regulations betweencountries

As members ofGas Infrastructure Europe (GIE), German energy suppliers areintensively involved in efforts to harmonize access conditions for neighbouring networksin Europe.

German gas transmission companies also participate in the Gas Regional Initiative ofERGEG which aims to harmonize network access conditions in European regionalmarkets.

6. Basic figures regarding gas consumption in Germany

Natural gas consumption At about 346 million tonnes of oil equivalent (mtoe), primary energy consumption in

Germany in 2006 was about 1.2 % or 4.3 mtoe above the level for 2005. In 2006, German natural gas consumption rose 1.5% to 78.8 mtoe (= 88.3 billion m).

As in the previous year, the share of natural gas in primary energy consumption beliefwas almost 23 %. At 9.24 C, the average temperature was 0.2 C higher than in 2005.

Natural gas consumption by private households and the commercial and service sectorremained at about the same level as in 2005, with slightly higher temperatures.

The number of homes with natural gas space heating rose by about 200,000 to 18.2million (= 48 % of the total number of homes).

With industrial production at high levels, industrial natural gas consumption rose about

2 %. In connection with the commissioning of a number of new cogeneration plants and the

low availability of wind in the first quarter, about 4 % more natural gas was used forpower generation. The share of natural gas in fuel use for power generation was 11.5 %.

Natural gas supplies

Total natural gas supplies and natural gas imports in 2006 remained at about the samelevel as in 2005. German production fell slightly by 1 %. The structure of natural gassupplies by sources only changed slightly including 15 % from German production and85 % from imports.

The main supplier country in 2006 continued to be Russia, with a share of 35 % in naturalgas supplies. The share of Norway rose to 27 % (2005: 25 %), while the Netherlandscontributed 18 % (18 %) of the gas used in Germany. The remaining 5 % (7 %) camefrom other countries, especially Denmark and Great Britain.


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Report Latvia 2007-05-22

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Market Report 2007 Latvia


The gas supply systems of the three Baltic Countries are not connected to the EuropeanUnions gas supply system, and Russia is the only one that supplies gas to all the three BalticStates. The Latvian gas supply system is connected only to the Russian, Estonian andLithuanian gas supply systems.

The gas networks of the Baltic States are connected solely with each other and with theRussian gas supply system, and they are not directly linked to the joint gas system of the otherEU member countries and therefore the Baltic Countries can be classified as an isolatednatural gas market.

At the moment there are no real projects in pipeline that will change this situation. In

the last country review by the EC it was admitted: In the longer term, new pipelines throughPoland or in the Baltic sea, or LNG terminal could provide alternative supply of gas. In shortterm the Russian gas is the only viable alternative.At the same time, JSC Latvijas Gaze is implementing ambitious investment programwithin the country, including construction of new pipelines and connection of new customers.Since year 2000 the company is constructing around 150 to 200 km of pipelines annually.Last year 160 km of gas pipelines have been commissioned and number of customersincreased by 4.3 thousands and reached 437.2 thousands.


There are no real plans on construction of the new storage facilities, however, the decision is

passed regarding launching of the feasibility study on potential Dobele storage facility and itsconnection to the North Stream project. This study will be financed 50% from EU funds and50% by the state.In existing Incukalns UGS working gas volume gradually have been increased and in 2006reached 2.325 BCM comparing to 1.9 BCM in 2000. The study performed by OAOGiprospecgaz confirms possibility of expansion of Incukalns UGS up to 3.2 BCM ofworking gas.


In 2006 the trend of gas purchase price increase continued. It is expected that gas suppliers

OAO Gazprom and SIA Itera Latvija will continue to increase gas purchase prices in2007, but in 2008 they will reach European level, and then will depend only on fluctuationsof HFO since calculation of price in Latvia is based on average semi-annual HFO price inAmsterdam region.At the same time, all businesses, including gas business, were affected by high inflation,which in 2006 in Latvia reached 7%.On June 27, the government approved the document of energy policy planning Basicstatements of energy development for the years 2007-2016. The basic statements includegovernment policy, goals of development and both mid-term and long-term priorities in thefield of energy. The statements mentioned in the document can also affect the economicactivity of Latvijas Gaze in future.


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The main principles of energy policy defined in the basic statements are:

improvement of safety and durability of supply;

diversity of ways and sources of resource supply;

active usage of resources;

retention and increase of considerable share of renewable and local resources in the balanceof primary resources and energy supply;

regional cooperation and coordination with countries around Baltic sea, especially Lithuaniaand Estonia;

environment protection and participation in reduction of climate changes.

Overall, the purpose of state policy of renewable energy resources is to promote to their usage,respecting the environment and attaining reduction of CO2 emissions. The main goals of renewableenergy resource policy are as follows:

power obtained from renewable energy resources in 2010 comprises 49.3% of the totalamount of produced power;

proportion of renewable resources in the total balance of energy resources is at least 37%;

proportion of bio fuel in power-intensity of all transport fuel commercialised in 2010comprises at least 5.75%.

The goal of government policy is to attain balance between power demand and potential of supplyfrom the power stations of Latvia in 2011-2012. For reaching this goal, there will be maximumpromotion to events of effective power usage and supply from power stations using local fuel andrenewable energy resources in high-efficiency cogeneration network. The remaining part of thenecessary supply capacity will be diversified to other types of fossil fuel in order to prevent excessivedomination of natural gas.

Division of installed capacities in the supply structure recommended in the basic

statements, MW2005 2010 2015 2020

Hydro power stations 1535 1535 1535 1535

Cogeneration power stations 310 450 650 650

Condensation power stations (gas/heavy fuel oil) 220 220 220 220

RES power stations1 63 180 280 350

Solid fuel (coal + RES) condensation power station 0 0 400 400

Import 700 500 0 3002

Promoting to the development of cogeneration stations and production of energy from renewableenergy sources the potential of power capacities will be increased both in transmission and distributionsystem. For this purpose two supporting instruments have been chosen:

compulsory purchase for a specific price which will show as payment of all power consumersof Latvia proportionally to their consumption;

there is an earmarked subsidy planned to promote to development of cogeneration powerstations using renewable energy resources for investments for construction of such powerstations, using the resources of EU structural funds for this purpose.

For better usage of renewable energy resources and development of biomass-using cogenerationstations, it is planned to attract resources from ES Structural funds and Cohesion funds. The strategy

1 - including RES cogeneration stations2 - taking into account the new Ignalin APS.


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of use of renewable energy resources is closely related to implementation of energy efficiencymeasures, therefore an integrated approach to issues of energy efficiency has been included in thepolicy of renewable energy resources.

State support in energy will be given only to projects which are related to modernization of heatsupply systems according to environment requirements and improvement of energy efficiency in

producing, distributive and end user side, supporting reconstruction of heat supply systems, as well asreduction of heat units and other heat-regulating devices, and thermal loss in buildings.

In the basic statements, both the amount of necessary funds and sources of financing are given.

Sources of financing, million LVL

2007 2008 2009 2010 2011 2012 2013

2014-

2016 Kop

State budget 16.40 19.55 36.49 36.29 42.29 21.44 21.53 118.81 312.79

Self-government budget 7.16 7.57 8.38 8.38 8.38 8.88 8.88 116.25 173.88

Private financing 6.51 9.97 97.20 97.20 130.89 12.39 13.00 119.74 486.91

European structural funds 8.48 10.56 12.41 12.41 12.41 13.11 13.41 179.11 261.91

ES TEN-E program 0.24 0.32 0.55 0.32 1.43

TOTAL 38.79 47.98 155.03 154.60 193.97 55.82 56.82 533.91 1236.92

incl. during ESF period

2007-2013 82.80


In Latvia a unified public utilities regulation system on central and local government levels

was established in autumn 2001. Utilities in the state-regulated sectors, namely, energy(except heat supply), telecommunications, post and railway are regulated by the PublicUtilities Regulation Commission (PUC). While household waste management, water supply,sewerage and heating industries are regulated on local government level by institutionsestablished by the respective municipalities. To reach these goals the regulator carries out thefollowing functions: sets the tariff calculation methodology, approves tariffs for utilities,issues licences and supervises implementation of the set conditions, supervises compliance ofutilities with requirements for quality and environmental protection, technical regulations,standards; performs dispute out-of-court settlement, etc.In gas sector, the PUC elaborates and approves methods of calculation of gas transmission,distribution and storage service tariffs, as well as elaborates and approves method of

calculation of the end users tariffs. The PUC approves also all the tariffs. There are eightcustomer groups in Latvia depending on annual consumption, and PUC approves all tariffs forall groups of customers (including, the largest industrial and power producers). Tariff ceilingmethod is used to set the tariffs.According to the method of calculation of tariffs approved by PUC the rate of return iscalculated by the following formula:

P = RAB * WACC

where:

RAB Regulated Asset Base value at the beginning of the base year of the tariffreview cycle,WACC the weighted average rate of return on capital (%).


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No such activity to be reported from Latvia.

6. Basic figures regarding gas consumption in LatviaNatural gas production in Latvia: no production of natural gas.

Natural gas sales in Latvia in 2006: 1 719.56 MNm3

Share of gas in primary energy consumption 31%.


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Report Lithuania 2007-05-22

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Market Report 2007 Lithuania


The gas supply systems of the three Baltic Countries are not connected to the EuropeanUnions gas supply system, and Russia is the only one that supplies gas to all the three BalticStates. The Lithuanian gas supply system is connected to the Latvian, Byelorussian andRussian (Kaliningrad region) gas supply systems.

The whole Lithuanian gas demand is supplied via Byelorussia. Lithuania also does the gastransit to Russian enclave Kaliningrad region.

The gas networks of the Baltic States are connected solely with each other and with the

Russian gas supply system, and they are not directly linked to the joint gas system of the otherEU member countries and therefore the Baltic Countries can be classified as an isolatednatural gas market with the only viable supply source Russian Federation.

Although a possible construction of Polish/Lithuanian gas connector, LNG import terminaland underground gas storage within the country is widely discussed (the plans to launchfeasibility studies for the first two projects and to finish the investigations for the constructionof UGS are also included in the National Energy Strategy), at the moment there are no realprojects in pipeline that will change the situation in a short term.

Meanwhile, AB Lietuvos dujos continues investments into the development of national natural

gas system. During the year 2006 ~280 km of new gas pipelines have been commissioned and~5.1 thousand of new consumers connected to the gas grid.

As part of implementation of the National Energy Strategy, in 2007-2010 AB Lietuvos dujosplans to construct a transmission pipeline from akiai to Klaipda, which would complete thering connection of Lithuanian natural gas transmission grid. The pipeline will allow toconnect new consumers of the towns alongside the pipeline, ensure a stable gas supply to thewestern part of Lithuania and improve the security of energy supply, especially afterdecommissioning of Ignalina NPP projected in 2009. In addition, a construction ofcompressor station at Jauninai (near Vilnius) is planned to maintain a necessary gas pressurefor sustainable potential gas supply to Western Lithuania and increasing transit to the

Kaliningrad region.


Government of Lithuania (GoL) had initiated establishment of the 0.5 bcm working gascapacity UGS in Syderiai, North-West part of Lithuania. Very preliminary investigationsshow the potential structure. The special purpose company, where State will hold 51% and therest distributed between the gas companies and major consumers, for further investigations,construction and operation of UGS will be established.


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In 2006 the trend of gas purchase price increase continued. It is expected that OAO Gazpromwill continue to increase gas purchase prices in 2007, in 2008 they should reach Europeanlevel, and then will only depend on fluctuations of HFO since calculation of price in

Lithuania is based on average semi-annual HFO price in Rotterdam.

In the beginning of the year 2007 two important legal documents affecting natural gasbusiness in Lithuania were adopted. On January 18, the Parliament approved the NationalEnergy Strategy the period until 2025, indicating national strategic goals of energydevelopment, main interests and goals of Lithuania concerning energy development in theBaltic region and EU energy policy, basic guidelines for government policy and specificactions for particular energy sector development. In connection to natural gas sector, theNational Energy Strategy provides for the following priorities:

Increase of security and reliability of supply (including investigations on construction

of potential underground gas storage and LNG terminal and means to assure anecessary capacity for increasing transit volumes);

Integration of Lithuanian natural gas systems to the EU natural gas grid (in particularconstruction of Lithuanian/Polish connector in order to get access to the diversifiedEU gas supply sources);

Expansion of internal natural gas market (increasing security of supply in the westernLithuania).

On March 20, 2007, after almost 3 years of disputes, Lithuanian Parliament finally adopted anew Law on Natural Gas, transposing the provisions of the EU Directive 2003/55/EC andother legislation regulating the market of natural gas to the legislative framework of theRepublic of Lithuania. However, considering a monopolistic supply situation the new lawprovides for a commodity natural gas price regulation for all consumers, which maynegatively affect the results of the gas companies working in Lithuanian natural gas sectorand prevent new players from entering the market. As a lot of shortages and gaps in the lawwere left some amendments of the law will follow in the nearest time.


According to the new Law on Natural Gas, the prices for transmission, liquefaction, storage,distribution and supply shall be regulated by setting their caps and prices for connection (for

household customers) and system balancing services shall be regulated by setting concreteprices.

At the moment the price caps of natural gas transmission and distribution services and thecaps of natural gas prices for the regulated customers (consuming up to 15 MCM of naturalgas annually) are fixed by the National Control Commission for Prices and Energy (NCCPE)in accordance with the Methodology for the Natural Gas Price Caps Calculation approved on29 April 2005. Hence fixed caps of prices stay in force for a three-year regulation term.

The price caps are adjusted on the annual basis considering the inflation, the efficiencyrates set by the NCCPE, changes in the gas consumption volumes and any other

developments beyond the Companys control.


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Gas companies, on an annual basis, sets the actual transmission and distribution tariffs, notexceeding the price cap. The prices are applied following the post stamp principleirrespective of the distance between transmission and distribution points. The prices forconsumers are differentiated according to the annual consumption volumes.

The price caps for the regulated customers are adjusted on a semi-annual basis consideringthe changes in the natural gas purchase price.

According to the Methodology for the Natural Gas Price Caps Calculation the rate of returnfor transmission and distribution prices are calculated using the following formula:

100

rnRABP

, where

RAB - Regulated Asset Base value at the beginning of the base year of thetariff review cycle;

n average annual interest rate of 3 year term Government securities in thecourse of previous 12 months;

r investment risk factor (up to 3%).

At the moment the profitability rate for transmission operations comprises 5% pre-tax, fordistribution 6% pre-tax.

It should be noted that only the value of economically justified assets are included. The

transmission and distribution prices are build on the costs + principle, however, only 70%of actual depreciation costs were accepted by Regulator.

Following the Law on Natural Gas, new Methodology for the Natural Gas Price CapsCalculation shall be established where the new price caps for the 5-yeas regulatory period willcome into the orce since January 1, 2008.


No such activity to be reported from Lithuania.

6. Basic figures regarding gas consumption in Lithuania

Natural gas production in Lithuania: no production of natural gas.

Natural gas consumption in Lithuania in 2006: 3032 MCM

Share of gas in primary energy consumption 28.3% (2005).


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Report Poland 2007-05-22

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Market Report 2007 Poland

1. Potential or decided new infrastructure projects and their impact on the gasmarket.

The main goal of constructing the LNG Terminal in winoujcie is to ensure the energysecurity by diversification of natural gas supplies to Poland and to cover the increasing naturalgas demand.

In 2006, a feasibility study was undertaken for the project of importing the LNG into Poland.On the basis of the study the Management Board of PGNiG S.A. made a decision to locatethe terminal in winoujcie harbour. The first deliveries of LNG to the terminal are plannedfor the year 2011. The regasification capacity of the terminal will be developed by stages toreach the target capability of receiving up to 7.5 bcm of natural gas per year from the terminal

by the year 2020.

In 2007, the initial phase of the Project was launched. The plans for this phase includeorganization of the tender process for engineering design , selection of the general contractorof the terminal, contracting the LNG supply, securing the funding, and obtaining of thenecessary legal and formal licenses and permits for the execution of the project.PGNiG set up a dedicated company - Polskie LNG (PLNG) - to build the terminal and,subsequently, to provide the re-gasification service. The company is based, in winoujcieand is controlled by PGNiG S.A.


PGNiG has a task to build or enlarge four underground gas storage facilities: Mogilno,Wierzchowice, Strachocina i Kosakowo:

- Mogilno enlarging by two caverns (start of the investment in 2007, completion by 2012) Enlarging the working capacity to 0,44 bcm

- Wierzchowice Enlarging the working capacity up to 1.2 bcm

start of the investment in 2007, completion date 2011,

- Strachocina Enlarging the working capacity up to 0.330 bcm, start of the investment in 2007, completion scheduled for 2011,

- Kosakowo development of the working capacity up to 0,25 bcm,

All of the mentioned above programs are part of the operational program approved by theCabinet of Ministers on the 1st of August 2006 Energy Security.


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We are planning to increase the working capacity of underground gas storage facilities from1.6 bcm up to 2.8 bcm in period 2008 2012.

3. Changes in the business environment affecting the gas business

A predictable business environment is crucial for gas infrastructure investments. Currently,there are discussions on the future DSO unbundling, which will affect the willingness of thecompanies to develop the grid.


According to Polish law, the energy sector companies, operating in the area of:- production of gas fuels- storage of gas fuels in storage facilities,- transmission or distribution of gas fuels,

- trading gas fuels,are obliged to obtain a license.

License-holding gas companies are obliged to set their gas tariffs, which are afterwards

approved by the President of the Energy Regulatory Authority.

The tariffs are set according to the relevant licensed activity, such as:

- trading gas fuels,- transmission activity,- distribution activity,- storage activity.

When setting the tariffs and prices for the above-mentioned activities, companies are allowed

to include a profit at a level based on analysis of cost of the projects included in their plans.

Currently, the law does not specify the rate of return on assets. The President of the Energy

Regulatory Authority sets it on a case by case basis.

Only in gas storage activity, the minimum rate of return on assets has been specified whichshould not be lower than economic rate of return of 6%.


In April 2006, ERGEG launched its Gas Regional Initiative. The goal is to create threeregional energy markets (REMs) for gas in Europe. PGNiG takes part in the work of two ofREMs: South-South-East (SSE) and North-West (NW). The Regional Initiatives arespecifically designed to unite stakeholders, including the EC and the governments of theMember States within each region to tackle barriers to trade and market integration in eachregion. The regional approach offers a pragmatic and realistic way of delivering step-wiseprogress towards competitive single European energy market by establishing regional energymarkets. Each REM, under the leadership of the regulators, has prioritized the keyimpediments to trade and market integration and have developed action plans to address theseproblems. Priorities of the REMs are as follows:


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NW: Transparency, Gas hub development, 1ary and 2ary interconnection capacity,Gas balancing, Gas quality, Regulatory coordination including investment

issues

SSE: Transparency, Gas hub development, Interconnection, Practical transportationcases, One stop shop.


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Report Sweden 2007 2007-05-22

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Market Report 2007 Sweden


Today a single supply rout exists to Sweden via the Danish border station Dragr to thesouthern part of Sweden. Several projects regarding new supply routs have been or are beingstudied.

The consortium Baltic Gas Interconnector (E.ON Sverige, DONG Energy and VNG amongothers) has been granted permission for a new interconnector between Sweden and Germany.No final investment decision has yet been taken. The planned capacity is approx 3 BCM/a

The Skanled project would connect Sweden to the Norwegian gas sources. The pipelineswould run from Krst in Norway to the east part of Norway and then to the Swedish westcoast. Within the same project also Denmark and Poland could be connected to theNorwegian gas sources. The planned capacity in the transport system from Krst is20 Mm3/d. A final decision regarding the investment is scheduled for late 2009.


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When the Nord Stream project will be realised a spur connecting the Swedish gas market toNord Stream could become a possibility.

No decisions regarding new supply routes to Sweden has been taken.

Today the Swedish gas market is limited to the south west part of the country. Plans are madeto develop the Mid Sweden gas market, i e east and center of Sweden covering some areaswith a number of base industry plants. The estimation of the market potential indicatesvolume in these areas of at least 15 TWh.

The new Government (after parliament election Sept 2006) is an alliance between fourparties. The Alliance has launched a common energy policy as a guideline. Concerningnatural gas the following is noted:

- Natural gas, a fossil and unsustainable fuel, may have importance during a transaction

period.- Political incentives and EU environmental framework will probably lead to the use of

natural gas mainly for combined heat and power generation and to substitute oil andcoal in existing industrial production plants.

- Aspects of security politics and security of supply has to be considered with anincreasing dependence of gas.

- An extension of the natural gas grid has to be made by commercial conditions andthere will be no state support or subsidies.

A new supply from Norway will probably be accepted. The aim is a regional developmentfocused on the supply to petrochemical industries and viewed as a means to improve theutilization of the existing grid. Still, a connection of Sweden to Norway has the potential ofdoubling the market.


No plans exist concerning additional storage facilities in Sweden.


The single most important factor is the taxation on different energy sources. Indications onlong term stability in this area are not foreseen so far in Sweden.

4. The regulation regime in the country including allowed rate of returnThe regulatory regime regarding allowed rate of return on gas infrastructure is a severeproblem in Sweden. The regulatory authority has announced an allowed rate of return on7.8 percent nominal before tax (year 2005). This is considered by the network owners being tolow and thus unreasonable due to economical risks. The Swedish regulatory system alsoincludes an ex post decision compared to ex ante system in most European countries. An expost regime complicates investment decisions in general and especially combined with a lowrate of return and long term uncertainties.


No such activity to be reported from Sweden.


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6. Basic figures regarding gas consumption in SwedenNatural gas production in Sweden: no production of natural gas.

Natural gas imports to Sweden (2006): 923 MNm3 or 11.2 billion kWh gross calorific value

(10.1 billion kWh net cal).

Share of primary energy consumption: 1.6 percent.

Documents

Baltic Gas Report 2007