North Central Europe

May 07, 2003 02:00 AM

North Central Europe is important to world energy markets because it is a key transit point for Russian oil and natural gas pipelines.

Poland, the Czech Republic, the Slovak Republic (commonly referred to as Slovakia), and Hungary are members of the Visegrad Group, created in February 1991 at the northern Hungarian town of Visegrad. After World War II until 1989-1990, these countries were Communist states, as well as members of the Warsaw Pact. (On January 1, 1993, the Czech and Slovak Republics, previously Czechoslovakia, split to form two separate states).
During the last decade, the Visegrad group has made the transition to democracy and to market-based economies. They also have reached the final stage of attaining membership in the EU. The EU Athens Summit on April 16, 2003 ended with the signing of an accession treaty. Poland, the Czech Republic, the Slovak Republic and Hungary can now attend EU meetings with observer status and will become full members on May 1, 2004, assuming the treaty is ratified in each country.

In 1999, Hungary, Poland, and the Czech Republic became the first former-Warsaw Pact countries to join the North Atlantic Treaty Organization (NATO). Slovakia is a member of NATO's Euro-Atlantic Partnership Council. The Czech Republic became a member of the Organization for Economic Co-operation and Development (OECD) in 1995, Hungary and Poland joined in 1996, and Slovakia in 2001. As members of the Visegrad Group, the four countries also belong to Central European Free Trade Agreement (CEFTA). Slovenia, Romania, and Bulgaria are members too.
The Visegrad countries are dependent on trade with the EU, in particular with Germany. These four countries also continue to face economic restructuring challenges, including: modernizing large, and to a certain extent, antiquated agricultural sectors (especially in Poland); implementing more energy efficient processes for industry in order to decrease energy consumption (although energy intensity is decreasing; see chart below); absorbing the costs from cleaning up heavily-polluting industries; and adapting industries and services to EU standards.

Regional energy issues
The Visegrad countries are neither large producers nor consumers of energy. Coal is the single abundant fossil fuel in the region, with only Poland and the Czech Republic having significant quantities. The Visegrad countries therefore import most of their crude oil and natural gas requirements, mainly from Russia.
The exceptions are Poland and Hungary, which met roughly 39 % and 24 % of their natural gas consumption demand with domestic sources in 2001. This dependence on Russian gas and oil imports is also a point of contention for these countries, particularly as they privatise their energy markets in preparation for EU accession.
Some government officials have argued that giving up stakes in state energy companies will compromise national energy security, as the state will no longer have control over production. During the last decade,the Visegrad countries have tried to diversify their energy supplies to reduce their dependence on Russia. The strategic importance of the region, however, lies largely in the crude oil and natural gas pipelines which traverse the Visegrad countries on their way to Western Europe.

Oil transit
Druzhba (Friendship) pipeline transports Russian crude oil to the Visegrad countries and to Western Europe. The pipeline splits in Belarus into northern and southern branches. The 1-mm-bpd capacity northern branch brings oil to Poland and Germany. The 1.2-mm-bpd-capacity southern branch splits in the Ukraine, with one section going through Slovakia and the Czech Republic and the other section going to Hungary, where it connects to the Adria pipeline.
The Adria pipeline in turn transfers oil to Serbia and to Croatia. In December 2002, the governments of Russia, Belarus, Ukraine, Slovakia, Hungary and Croatia signed an agreement to integrate and expand the capacity of the Druzhba and Adria pipeline systems in order to facilitate the transportation of Russian crude oil to the Croatian deepwater port of Omisalj.
This would allow direct shipments of Russian oil to North America, which Russia's oil company Yukos, one of the main supporters of the project, envisions. However, the 110-mile segment of the Adria mainline between Omisalj and Sisak, Croatia, can only accommodate imports. This section will need to be reconstructed in order to allow both the importing and exporting of crude oil.

The Odessa-Brody pipeline allows Caspian Sea region oil that is piped to Black Sea ports to be shipped across the Black Sea to a terminal near Odessa. The oil is then transported to Brody, where it connects with the southern Druzhba pipeline for shipment to Slovakia, Hungary, and onward.
There is discussion of extending the Odessa-Brody pipeline to Gdansk, Poland, allowing Caspian crude oil to reach Poland, Germany, and other Baltic states.

Natural gas transit
The Visegrad region is a key transit centre for Russian natural gas exports to Western Europe. The Yamal-Europe pipeline, which is routed through Belarus and Poland to Germany, is Russia's only natural gas export pipeline to Europe that does not cross Ukrainian territory.
The pipeline has an expected capacity 1.1 tcf per year. Most of this natural gas is destined for German markets. A second natural gas pipeline, the Yamal II, is planned, but the pipeline has not been formally approved. If built, the combined annual capacity of the two pipelines would be 2.3 tcf. The Brotherhood and Soyuz natural gas pipelines that pass through Ukraine to Slovakia have annual capacities of about 1 tcf each.

The natural gas that transits Slovakia represents about 25 % of the natural gas consumed in Western Europe and about 70 % of the Russian natural gas exported to Western Europe. With natural gas demand increasing in Europe, Russia is attempting to expand its natural gas export capacity.
In addition, Russia is seeking to build new pipelines to diversify its natural gas export routes away from the Ukraine, increasing the potential importance of the Visegrad region.

Regional integration
The Visegrad region shares the CENTREL electricity system, which links the Czech Republic, Slovakia and Hungary. In 1995, the CENTREL system was connected with Western Europe's grid. Poland also has electricity connections with Ukraine and Belarus. Currently, both north-south and east-west connections are being expanded, as part of the EU's Trans-European Energy Network project, including a new link to Lithuania. The four countries of the region are also members of European electricity transmission system Union for the Coordination of Transmission of Electricity (UCTE). UCTE coordinates the interests of transmission system operators in 20 European countries.

Oil
The Visegrad countries have total proven oil reserves of approximately 222.9 mm barrels, with 102.5 mm barrels of that located in Hungary, as of January 2003. Poland has proven reserves of 96.4 mm barrels, while the Czech Republic and Slovakia have only 15 and 9 mm barrels, respectively.
Crude oil production in the region is minimal, averaging 47,158 bpd in 2002. Hungary is the largest producer of crude oil out the Visegrad Group, with about 24,083 bpd, followed by Poland with 16,800 bpd, Czech Republic with 5,275 bpd and Slovakia with 1,000 bpd. Despite almost negligible oil reserves from a global point of view, firms continue to explore the region for oil deposits. For example, in the Czech Republic, exploration has been taking place in the Western Carpathians, an area bordering Austria and Slovakia. Australia's Carpathian Resources is leading this exploration.

According to its three-year strategic plan, the Hungarian Oil and Gas Company (MOL) aims to double its oil exploration and extraction. The company plans to spend $ 40-$ 50 mm on exploration in Hungary. The company estimates that only 60 % of the country has been thoroughly explored.
In 2002, the Visegrad countries met 5.7 % of their total oil demand of 828,000 bpd from domestic production, making them heavily dependent on imports. Most of the imports came from Russia via the Friendship pipeline. Poland also receives oil from the "Naftoport" terminal at Gdansk and from the Odessa-Brody pipeline. The Czech Republic imports oil from Russia, as well as from Germany, via the Mero pipeline, which allows the land-locked country to import crude oil from the Italian port of Trieste via the Trans-alpine pipeline network. The Mero pipeline also enables the Czech Republic to reduce its reliance on Russian oil.

Downstream
Poland has 350,000-bpd in refining capacity, the largest in the region. Ceska rafinerska is the Czech Republic's largest crude oil refinery, owning and operating two refineries: Litvinov and Kralupy. The two refineries have a combined capacity of 178,000 bpd. Hungary has one crude oil refinery in operation, the 161,000-bpd Szazhalombatta refinery. Slovnaft is Slovakia's only refinery, with a capacity of 115,000 bpd. Hungarian oil and gas concern MOL owns 70 % of Slovnaft after increasing its stake in March 2003.
As a prerequisite for admission to the EU, each of the Visegrad countries must have 90 days of oil storage capacity. In November 2002, Hungary and Slovenia signed an agreement on an oil storage partnership, which will allow both countries to meet the EU rules. Poland expects its strategic oil reserve to be completed in 2008.

Natural gas
Proven reserves of natural gas are also minimal in the Visegrad countries, with a combined total of 7.7 tcf, as of January 2003. Poland, with roughly 75 % of the Group's total, has an estimated 5.8 tcf of natural gas reserves, with Hungary at 1.2 tcf. Slovakia and Czech Republic contain 530 bn cf and 140 bn cf, respectively. In 2001, Poland produced 193 bn cf, which met 39 % of its domestic natural gas demand. Hungary produced 114 bn cf, accounting for a quarter of its demand. Slovakia produced only 10 bn cf while the Czech Republic supplied a mere 5.1 bn cf.
As the Visegrad countries strive to meet EU membership criteria, natural gas is becoming increasingly important to the region's energy mix. Increased consumption of natural gas, as an alternative to coal, is considered to be a key component of the region's plan to meet the stricter EU regulations.
Slovakia's per capita natural gas consumption is the highest among the Visegrad Group countries. About 80 % of Slovak households are connected to the natural gas network. In the Czech Republic, natural gas consumption has increased by 35 % between 1993 and 2001. In 2001, natural gas represented about 43 % of total energy consumption in Hungary and 13 % in Poland.

Imports
Similarly to crude oil, Russia supplies most of the Visegrad group's natural gas requirements via the Yamal and Brotherhood pipelines. Poland and the Czech Republic import small amounts of natural gas from Germany and Norway. About 80 % of Hungary's natural gas imports come from Russia through part ofthe Brotherhood pipeline. Hungary also imports natural gas via the Gyor-Baumgarten pipeline, which is connected to Western Europe's natural gas grid.
Poland Imports: Russia Given increased domestic natural gas production and flat demand, Poland has had difficulty in maintaining its Russian, Danish, and Norwegian contracts in their present state. The Polish government has already amended or even deferred some of these contracts. On February 12, 2003, PGNiG, Poland's state oil and natural gas firm, and Gazprom renegotiated the original Yamal pipeline contract, reducing Poland's annual imports from Russia by a third in the years 2003-2022.

The Yamal pipeline, which began operations in September 1999, transports natural gas from the Yamal (West Siberia) field in Russia to Poland, where it is further distributed to Germany and to other Western European countries. EuroPol Gaz operates the Polish section, in which both PGNiG and Gazprom have a 48 % share. A consortium of Polish firms called Gas Trading owns the remaining 4 %.
The pipeline is not yet transporting natural gas at capacity, as it requires the construction of three compressor plants. Plans to build a second pipeline (Yamal II) have also been postponed. Under the original agreement, the second pipeline was to become operational in 2002.

Poland imports: Denmark and Norway
In July 2001, PGNiG reached an agreement with Dansk Olie Naturgas (DONG) to import 565 bn cf of natural gas over eight years, starting in 2003. This would be done through a planned $ 330 mm, 186-mile Baltic pipeline. The project, however, was deferred because Poland's natural gas demand was less than expected. The September 2001 contract, in which PGNiG and Norway's Statoil agreed to the delivery 2.6 tcf over 16 years, has also been postponed. Norwegian exports to Poland would require construction of the $ 1.1 bn, 683-mile Austerled pipeline.
In February 2003, PGNiG along with DONG and Lithuania's Lietuvos Dujos announced the "Amber" project. The project is a joint Polish-Danish-Lithuanian venture for the construction of a gas pipeline to supply natural gas from Poland to Lithuania. Its main goal is to connect the Polish and the Lithuanian gas system with the EU network in order to ensure gas supplies security to Poland and to Lithuania, as well as possibly to Latvia, Estonia and Finland.

Sector liberalization
The EU accession treaty requires the Visegrad countries to liberalize their natural gas markets according to the EU 1998 natural gas directive. Along with divesting and unbundling state owned natural gas companies, governments are required to open the natural gas market to outside competition, thus allowing customers to choose their own supplier. The Slovak government, for instance, has been incrementally opening up the country's natural gas market.
The process began in July 2002, which allowed customers with an annual consumption of more than 882 mm cf to choose their supplier. The next stage took place in January 2003 (more 530 mm cf). The third stage will take place in 2008 for customers with an annual consumption of more than 177 mm cf.

In March 2003, Hungarian parliament's budget and economic committees approved a draft Gas Act, which will set in place the regulatory framework for a liberalized natural gas market in Hungary. The Act is set to move to the parliament for general debate. If the legislation is passed, it would partially liberalize the gas market as of 2004, allowing power plants and those consuming more than 17,500 cf per hour to choose their supplier. The Gas Act included a clause for compensating household consumers for the increase in natural gas prices. The clause would shield household consumers from a part of the 15 % increase in gas prices that will come into effect as of May 15, 2003.
The Czech Republic market should open up for all consumers except for households in mid 2004. Households should enter the market in mid 2007. In Poland, PGNiG is supposed to relinquish its monopolist position on the natural gas market, enabling industrial companies to being choosing their supplier before joining the EU on May 1, 2004.

Coal
Coal is the most prevalent energy source in the Visegrad countries, although its role as a fuel and an industry is declining. Poland is the exception, where coal accounted for 93 % of the country's primary energy production in 2001, and remains one of the country's most important employers. Coal also remains significant in the Czech Republic, where it constituted 47.7 % of the primary energy consumption.
The region holds 32,090 mm short tons of proven recoverable coal reserves, of which Poland has 24,400 mmst. The Czech Republic contains 6,300 mmst; Hungary 1,200 mmst; and Slovakia 190 mmst. In 2001, the region produced 270.1 mmst, of which Poland was responsible for 66 %. Slovakia was the smallest producer (2.5 mmst), preceded by the Czech Republic (72.8 mmst) and Hungary (15.9 mmst).
Consumption has decreased sharply in the region in recent years. Between 1993-2001, coal consumption fell by 26 % in Slovakia, 21 % in the Czech Republic, 22 % in Poland and 12 % in Hungary. Overall consumption for the region in 2001 was approximately 246.3 mmst.

Restructuring
Over the last decade, the Visegrad countries have continually restructured and downsized their coal industries. Governments have reduced the number of inefficient mines in operation, cut the labour force associated with coal mining, and increased awareness of environmental issues related to the industry in order to bring their countries in line with EU standards.
The Hungarian Economic and Transport Ministry recently reported that, during the last decade, the number of operating coal mines has fallen from 41 to 9, and the number of jobs from 50,000 to 8,300. CEZ, the largest Czech power company, operates 10 coal power plants, which will be decommissioned between 2008 and 2010.

On February 1, 2003, the Polish government created Kompania Weglowa (KW), Europe's largest coal company. The original plan called for the closing of the country's 39 mines; the consolidation of mines from five failing coal firms (Bytomska, Rudzka, Gliwicka, Nadwislanska and Rybnicka); and the reduction of 35,000 jobs by 2006. After protests from coal unions in December 2002, the government toned down initial restructuring plans.
The government changed the total employment reduction to 27,200; gave workers job placement guarantees in surviving mines, if their own unit goes under; and required kW to be responsible for 24 mines held by the country's five worst mining firms. Kompania Weglowa should be relieved of its five worst mines, provided that an expert group demonstrates that they are no longer economically viable.

Electricity
The Polish power generation sector is the largest in Central and Eastern Europe. In 2001, Poland's installed electric capacity was about 30.6 mm kW. Electric generation reached 135 bn kWh, while consumption was 119 bn kWh in 2001. Coal-fired power plants meet most of Poland's annual electricity demand. Poland is also a net exporter of electricity.
Most of Hungary's capacity and generation is thermal (oil, gas, and coal), although the country's sole nuclear plant at Paks produces slightly less than 40 % of total electricity generated. Hydropower generates less than 1 % of Hungary's electricity. In 2001, Hungary generated about 34.4 bn kWh and consumed about 35.1 bn kWh of electricity. Consumption peaked at 37 bn kWh in 1989, but declined in the early 1990s as Hungary's post-Communist economy grew less energy-intensive. Hungary is a net importer of electricity, mostly from Slovakia.

Both electricity generation and consumption have been rising in the Czech Republic in recent years. Between 1993 and 2001, electricity production in the country rose 26 %, from 55.6 bn kWh to 70.0 bn kWh, while electricity consumption increased 12 %, from 49.6 bn kWh to 55.6 bn kWh. In 2001, the country exported an estimated 9.45 bn kWh, primarily to Germany, Austria and Slovakia.
Electricity exportsare becoming increasingly important for the Czech Republic, particularly with the commissioning of the Temelin nuclear power plant in 2001. The Czech government also aims to increase the contribution of renewable sources to the total consumption of primary energy sources to about 3 %-6 % as of the year 2010 and about 4 %-8 % as of the year 2020.

In 2001, Slovakia's installed electric generating capacity was about 7.5 mm kW. During the same year, the country consumed 24.4 bn kWh while producing 30.3 bn kWh. Since two nuclear reactors came on line in 1998 and 2000, Slovakia has become more reliant on nuclear generation and less reliant on fossil fuels for electricity generation.
In 2001, nuclear power plants produced 54 % the country's electricity generation while thermal plants provided 30 % and hydro 16 %. The addition of the nuclear power plants has also allowed Slovakia to become a net exporter of electricity, beginning in 1999.

Sector liberalization
In preparation for EU accession, theVisegrad countries are required to liberalize their electricity sectors. All of the countries have introduced legislation to fulfil this requirement. Most of the policies include establishment of a legal framework to define the rights and duties of producers, distributors, and users of energy; foundation of an independent regulatory entity to ensure competition within the energy sector; and guarantee of Third Party Access (TPA) of enterprises to energy distribution grids. The policies also include scheduled opening of the electricity markets and the privatisation of the large state-owned electricity power companies.
In November 2000, the Czech government adopted an Energy Act, which began incrementally opening up the country's electricity market to competition in January 2002. On January 1, 2003, the government lowered the consumption threshold from 40 GWh to 9 GWh, allowing an additional 500 Czech companies to choose freely their supplier. In 2006, all customers will be free to choose their supplier. Additionally, the Czech Energy Regulatory Office eliminated subsidies for household electricity prices in 2002.

Slovakia began liberalizing the internal electricity market in January 2002, allowing the largest consumers -- more than 100 GWh -- to choose their supplier. In October 2002, the government began the external liberalization of the electricity market, allowing larger consumers to import a twelfth of electricity demand. The market will incrementally open up until 2005, when all consumers will be able to choose their supplier.
Hungary's electric power liberalization legislation went into effect on January 1, 2003. Large consumers, with annual consumption above 6.5 GWh, are allowed to choose their power suppliers; however, only 50 % of their power may come from imports. Residential users remain in the government-controlled system, which maintains a cap on retail electricity prices. As of March 2003, fourteen large energy consumers have diversified suppliers, including Hungary's largest electricity consumer, BorsodChem.

Poland began liberalizing its electricity sector in 1998. As of now, companies consuming over 10 GWh annually can choose their suppliers. Next year the threshold will fall to 1 GWh and by 2006, the market will be completely open. In April 1997, the Polish government passed a new Energy Act, which required the Government Economic Committee to pass "Guidelines on Poland's Energy Policy Through 2020."
The document spells out long-term energy forecasts and action plans for the Polish government. The key objectives include: increased security of energy supplies, (including diversification of sources); increased competitiveness for Polish energy sources in domestic and international markets; environmental protection; improving energy efficiency; and reducing energy-related carbon emissions.

Nuclear
The Czech Republic has two nuclear power plants, Dukovany and Temelin. After years of delay, on October 9, 2000, the Czech Nuclear Safety Authority cleared Temelin nuclear for operation, located only 37 miles from the Austrian border. The first reactor was connected to the national grid in December 2000. However, the reactor has been shut down a number of times due to technical problems.
The second unit of the Czech Temelin nuclear power plant was put into trial operation on April 18, 2003. The two units are expected to reach 100 % of their operational capacity at the end of April 2003. When the plant is fully operative, it will provide over 20 % of the Czech Republic's power needs.

Temelin has been controversial since construction first began in 1986. Opponents have argued that the plant is unnecessary, noting that the Czech Republic already produces more electricity than it consumes, and that additional electricity can be generated by improving the existing distribution network rather than installing new generating capacity. Although Temelin meets and even exceeds EU safety standards for nuclear power plants, Czech and Austrian environmentalists claim that it is not safe because it combines Soviet design and western fuel and safety technology.
Slovakia has two nuclear power plants, which generated an estimated 54 % of Slovakia's electricity in 2001. The Jaslovske Bohunice plant at Trnava has four, 408-MW reactors that are functioning, and one decommissioned reactor. The plant's two older reactors are due to be decommissioned in 2006 and 2008 as part of the energy chapter of Slovakia's accession agreement with the EU. The Mochovce plant has two 412-MW reactors in operation and two uncompleted reactors. Construction of these reactors has been halted, as government financial support for them has ended.

The Paks nuclear power plant in Hungary consists of four Soviet-design, second generation VVER-440/213 reactor units. There are plans not only to expand generation capacity of the reactors by 8 % but also to extend the life-cycle of the reactor units by 20 years. The normal lifespan of the four units ends between 2012 and 2017. In order to ensure continuous operation of the plant, the necessary modernization improvements would have to begin in 2007.
On April 10, 2003, some fuel rods in unit 2 were damaged, causing a radioactive gas leak. According to reports, the leak constitutes no threat to the environment, but the incident could result in major financial losses to the company.

Source: EIA
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