Baltic States Special Report: Energy craving

With the Baltic States a hotbed of energy-related activity and practice areas such as M&A decidedly lukewarm, law firms in the region could be ­forgiven for hoping that several high-profile ventures in the sector would brighten up an otherwise gloomy 2009.

But the highly political nature of the energy market means that lawyers are watching frustrated from the sidelines as largescale projects ­consistently fail to get off the ground.

The strategic location of the Baltic States and controversy over dependence on ­energy imports from Russia mean energy is a top priority for the Baltic governments. Yet few law firms are benefitting from the biggest energy developments. The major ­anticipated projects involve the participation of ­several countries, so political issues inevitably arise.

“There’s no certainty, no decisions made and no action taken in these energy projects,” complains Ermo Kosk, a partner in Estonian firm Lepik & Luhaäär Lawin, itself part of the Lawin alliance that includes Lideika Petrauskas Valiunas in Lithuania and Klavins & Slaidins in Latvia. “There are many big plans for the Baltic energy market but nothing is moving forward,” he adds.

Nuclear shutdown

The biggest and most controversial project is Ignalina, Lithuania’s two-reactor nuclear power station. Decommissioning of the plant, which supplies 60 per cent of the country’s domestic electricity, was one of the core issues surrounding the country’s EU accession negotiations.

“The first reactor closed in 2004, with the second due to be shut down at the end of this year, but problems with Russian gas supply to Europe have again called a total closure into question,” says Laimonas Skibarka, corporate partner in the Lithuanian office of Sorainen, which operates across the Baltics and Belarus.

Indeed, the shutting down of Ignalina, at a time when Slovenia and Bulgaria have been considering ­reopening their nuclear stations to reduce their dependency on ­Russia, is so ­controversial that in a ­referendum held in October 2008 the Lithuanian people voted to extend its life. In the end poor turnout rendered the referendum null and void, but public ­opposition to closing the plant remains high.

The plan is to replace the Ignalina reactors with modern, safe and environmentally friendly electric power production technology. “At the end of 2006 the three energy companies of the Baltic States – Lithuania’s Lietuvos Energija, Latvia’s Latvenergo and Estonia’s Eesti Energia – conducted a study into implementation of a new nuclear power plant,” explains Paulius Koverovas, head of the energy team in Sorainen’s ­Vilnius office and secretary of the International Chamber of Commerce Energy Commission in Lithuania.

“The study concluded that a new plant would be economically attractive, was substantiated from a technical, environmental and legal point of view, and could be ­operating by 2015.”

Polish energy company Polska Grupa Energetyczna then came on board, and in February 2007 the three Baltic States and Poland agreed to collaborate on developing a new nuclear plant near Ignalina. According to the most recent estimations on the Lithuanian side, the new plant could ­realistically be launched by 2018.

While its prime minister recently stated that Poland will participate in the project, negotiations between the four countries have continued for the past two years ­without managing to set down the ­parameters for cooperation on the project. “There have been signals that the Estonian government is distancing itself from the project,” says Kadri Kallas, a senior associate in the Estonian office of Sorainen.

A number of other large energy projects are also stuck at the planning stage. ­“Discussions on a high-voltage power bridge to improve transmission capacity between Lithuania and Poland first started 15 years ago,” explains Rolandas Valiunas, managing partner of Lideika Petrauskas Valiunas.

“Discussions gathered fresh impetus ­recently when Poland officially declared its interest in the new Lithuanian plant because the ;present ;transmission ;network wouldn’t have sufficient capacity to support Poland’s requirements from the new plant.”

Renewable energy is also a potential growth sector, particularly in Estonia. “We’re advising Iberdrola, which is planning a 150MW windfarm in Lüganuse, which will be the biggest in the region,” says Sorainen managing partner Aku Sorainen.
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Ironically, the development of the renewable sector may be negatively affected by the closure of Ignalina, explains Valiunas. “At the moment there are a number of incentives to ­promote renewables, but when Ignalina closes, all energy prices will rise so the incentives to invest in renewables over more traditional energy will be lessened.”

One unsurprising reason for the hold-up is investment, or the lack of it. “All banks in the Baltic countries are acting very conservatively right now,” says Kosk, “and they’re simply not giving out any money.”

The differences between the three states and the delicate balancing act of collaborating as one region while still recognising their historical autonomy are also stalling things. “Traditionally these countries have been independent and produced their own energy, with the exception of Latvia, which bought in most of its energy,” Kosk adds.

Conflicts

The pan-Baltic nature of most law firms operating in the region – almost without exception the leading firms in each ­jurisdiction are part of a regional alliance – means conflicts on large mandates are inevitable. “Each country has its own large energy company, with a monopoly over the domestic market, so our member firms are frequently conflicted,” explains Kosk.

But Baltic energy lawyers remain upbeat about the sector’s prospects, and claim that waiting for the large projects to finally get a green light is not a problem. “The biggest projects may be on hold for now while ­governments negotiate,” says Valiunas, “but there are so many other ­smaller ­energy-related deals that we’re not holding our breath for them to start.”