The arrival of expensive LNG in Paldiski this winter forcing the capital's heating provider Utilitas not to use shale oil reserves it could be forced to procure as backup would constitute a bleak scenario, CEO of Utilitas Tallinn Robert Kitt says.
By the end of May, Utilitas had managed to secure a little over 200 gigawatt-hours of the 676 GWh of gas Tallinn will need in the coming heating season. Winter has come six weeks closer since then. How much gas do you have stored in Latvia?
We have held another tender since then and received bids, while they have not covered our need. We have a third of the gas we need. If we can replace a third of our need with reserve fuel, with shale oil solutions in place, we still need to secure the final third.
You asked the Environmental Board for permission to replace a part of gas with shale oil in late May. Mayor of Tallinn Mihhail Kõlvart is suggesting declaring an emergency to allow pollution norms to be exceeded when burning oil. Does it make any difference whether an exception is made following a state of emergency or an abrupt discontinuation of gas supply as they are governed by different laws?
Indeed, Estonian shale oil is the best alternative to gas today. It makes no difference to the consumer which law governs the exception. The consumer should not have to think about any of it, as long as supply security is ensured. I remain cautiously optimistic in that the matter will be handled sensibly and that we will be able to secure the permits based on either of the two laws or following amendments.
The emergency provision only allows exceptions for sulfur dioxide concentration. Would using shale oil only hike the sulfur dioxide concentration in emissions?
Taking a closer look, exceptions can be made for other limit values, and nitrogen compounds and fine particles also need one. The matter is a little more complicated.
Meaning that the emergency option is not really a good fit. The exception should be made based on abrupt disruption to gas supply.
But again, I do not find the current energy market situation to be ordinary. We are experiencing several simultaneous crises. The laws regulating different aspects therein were made in their own time and space. Risks have piled up, which is why I believe we will have to work together to find a solution.
That said, the Environmental Board cannot do anything beyond the scope of the law.
Do you feel it would be easier for Estonia to simply change some norms instead of looking for ways to interpret them?
I'm sure solutions will be found, whether through interpretation or some sort of adjustment of norms.
The Environmental Board recently suggested that it is too soon to talk about an abrupt disruption of gas supply. Gas company Eesti Gaas also said the market is operational. Would offering a 30 percent premium buy you more gas at tenders?
We have been procuring existing quantities for which we have asked for bids.
We have no certainty today in terms of being able to procure all the gas we need from the market. Two consecutive tenders have missed the mark.
But would offering 30 percent on top of market price get you what you need?
We have been procuring quantities. We have not set any price limits and have still failed to secure the quantities we need. There just isn't enough gas in the system.
Therefore, we can talk about a disruption in supply? Do you agree with Eesti Gaas in that the market is functional?
It is working today – there is gas in tanks and pipes.
The problem is that knowing our consumption and potential for gas deliveries, considering existing capacity at the Klaipeda LNG terminal, Latvia and Lithuanian transmission capacity, we cannot claim the necessary quantities exist in the system for the entire heating season.
The combined gas consumption of Latvia, Lithuania, Estonia and Finland is 60 terawatt-hours a year. We have a deficit in a situation where the Ministry of Economic Affairs and Communications says the system has 39 TWh available.
It comes as excellent news that Eesti Gaas has managed to procure two more terawatt-hours. But we are still in the red.
Therefore, you are hoping for an exception and looking to buy shale oil? Timo Tatar, deputy secretary general of the Ministry of Economic Affairs and Communications, says that gas supply security will be ensured in terms of quantities with the completion of the LNG terminal this fall. Will Utilitas return to gas heating in that case?
Of course we prefer to use natural gas with its much smaller environmental footprint if we can get it. It is also easier to handle.
What about if that gas costs twice what it does today? It is considerably cheaper to use shale oil.
I believe this needs to be a discussion with the local government and regulators. We have a set of norms according to which we need to use specific fuels. We have environmental norms that we are adhering to. And, finally, we also have social norms, the social aspect of it.
The Environmental Board's guidelines read: "Use of gas fuels needs to be resumed inside 10 working days after the disruption that serves as the basis for the exception ends and gas deliveries are resumed." I can imagine a situation where Utilitas has procured shale oil, hired new staff only for expensive LNG to hit the market at some point. This aspect presents quite a predicament for you.
Yes, that is a possible scenario. But it is also possible that LNG will not be expensive. And it is also possible the terminal will not be completed.
While this is a dark scenario, I believe no one is prepared… I think that should something like that happen, we will sit down with the watchdog and regulators to hear whether that is what they wanted.
Is it in Utilitas' interests to have this clause taken out of the rules straight away?
That would be ideal. Decisions regarding shale oil need to be made now. Any decision to use reserve fuels when gas supply has already run out in November would come hopelessly late. Stockpiles need to be created today. Producers need to handle logistics, which is a great challenge. On our side, we need to make minor investments in facilities.
We have decided to prioritize continuous operation. Because we do not have enough gas today, investments are in order.
Utilitas is using wood chips for 50 percent of its needs. How you fared with wood tenders?
The price has grown notably since last year. Tenders are in progress, while I cannot divulge any information as the ink on contracts is not dry yet.
A megawatt-hour of central heating costs €97 in Utilitas' heating zone. Will the price of district heating go up?
We cannot rule it out.
Editor: Marcus Turovski