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Cablegate: New Latvian Gas Storage Unlikely Without Push From

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DE RUEHRA #0425/01 2291451
ZNR UUUUU ZZH
P 171451Z AUG 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC PRIORITY 5998
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 RIGA 000425

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON LG
SUBJECT: NEW LATVIAN GAS STORAGE UNLIKELY WITHOUT PUSH FROM
NEIGHBORS

1. (SBU) Summary: Latvia is entirely dependent on Russia for
natural gas supplies. Increased natural gas storage capacity could
act as a stronger buffer against a potential cutoff - but prospects
for a commercial project are bleak. While there has been some
discussion of a new storage facility, Latvijas Gaze holds a monopoly
on gas transit in the country, and sees no commercial potential for
such a project. Only significant outside efforts, such as funding
from the EU, would make such a project realistic in the
medium-term.

Existing and proposed capacity

2. (U) The storage facility at Incukalns holds 4.5 billion cubic
meters (bcm) of gas, with 2.3 bcm active and the rest serving as a
necessary "cushion." Officials at Incukalns say they could expand
capacity to 5.5 bcm without significant investment and to 6.2 bcm
(3.2 bcm active) with only modest investment. The most frequently
mentioned potential new storage site is Dobele, a structure in
southwest Latvia that could potentially hold 20 bcm (10 bcm active).
Existing Soviet-era studies of Dobele's suitability give it a cost
advantage over other sites. There are, however, other large
structures suitable for gas storage that are much closer to the
coast, making them more suitable for LNG or pipeline connections.

3. (U) After having dropped from sight, discussion of the topic has
increased in recent months. The most prominent reason was Gazprom's
new representative office in Latvia. During a television news
segment on the new office, Gazprom representative Jevgenijs
Roldugins discussed at some length the potential to build additional
storage that could be connected to NordStream. He claimed that
Gazprom is ready to move ahead on a storage project, but that delays
were due to the European side.

Limited commercial interest in Dobele

4. (SBU) NordStream Baltic representative Romans Baumanis says that
there is no chance now of Nordstream working to connect to Latvia.
He stated that a new storage facility is simply not commercially
viable. While the infrastructure costs of a new storage facility
are substantial, the real barrier is the 10 bcm of cushion gas, the
cost of which could not be offset by the revenue generated by
storage fees.

5. (U) Latvijas Gaze (LG) officials argue that the existing
Incukalns facility is sufficient to meet all of the Baltic States'
needs, and therefore investment in a new facility could only be
feasible if it had customers from elsewhere in Europe. They are
considering plans to expand Incukalns to take advantage of a
potential pipeline connection to Finland, but absent such a new
market, the current capacity is sufficient to meet demand for
storage. LG (majority owned by Gazprom and its associates) holds
monopoly contracts on all existing gas transit lines in Latvia.
Constructing storage capacity would not get Latvia around the
monopoly on distribution.

6. (SBU) Some independent analysts see greater potential. Gregory
Rubinchik (protect), a Senior Manager at KPMG focused on the energy
industry, argues that project detractors are ignoring the potential
profit in speculation on energy prices. While certainly a riskier
proposition, a company with the cash to invest up front could fill a
storage facility while prices are low and sell when prices rise -
and given projected long-term trends on energy prices, storage
facilities could be hugely profitable. He further argues that
Gazprom and others interested in the status quo dominate the issue
and prevent serious discussion.

Existing contracts and GOL opinions

7. (U) The new EU Baltic Energy Market Interconnection Plan (BEMIP)
notes that better gas grid connections in the region could open the
potential for increased gas storage in Latvia, but the GOL does not
see the urgency. The government cites factors ameliorating their
dependency on Russian sources, and notes that the GOL could not
finance additional strategic capacity themselves even if the need
existed. Government sources argue that because gas from the existing
storage facility is pumped back to Russia to heat St. Petersburg in
the winter, any attempt by Russia to cut off Latvia from gas would
be self-defeating. (FYI: Incukalns holds enough gas to heat all of
Latvia for at least one and, possibly, two years.) The GOL argues
that if cut off, they would nationalize the gas, freezing St.
Petersburg in the process. It is likely, however, that any such
attempt by Latvia would be fraught with legal and political peril.

8. (SBU) Comment: Gas storage in Latvia could still be a part of a
plan to increase gas security overall, but it will need to be based
on demand from outside of Latvia. The GOL does not feel enough
urgency to prioritize new storage given the many fiscal challenges
facing the country. If Latvian storage is going to be part of a
broader European security strategy, the driver will likely have to
be the storage customers in neighboring countries, not the potential
storage providers here.

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