Lithuania Seeks Alternative Natural Gas Sources to Reduce its Energy Dependence on Russia

Business Recorder: Lithuania Sues Russian Gas Giant Gazprom
FT: CEE Nuclear Power: Deeper in Doubt
NYT: Chevron, Intent on European Shale Gas, Buys Lithuanian Stake
Reuters: Chevron to Prospect for Shale Gas in Lithuania
Reuters: Lithuania Gets 16 Proposals to Supply LNG
Reuters: Lithuania Terminal Calls LNG Supply Tender
SF Chronicle: Lithuanians Deal Blow to Austerity, Nuclear Plans
WSJ: Chevron Enters Lithuanian Oil and Gas Exploration 

To reduce its energy dependence on Russia, Lithuania is encouraging private companies to explore for shale gas (a type of natural gas) and actively seeking new liquefied natural gas (LNG) suppliers. Lithuania imports over 60% of its total electricity needs, more than any other European Union (EU) country. In 2009, Lithuania shut down its only atomic power plant, which was built when the country was part of the Soviet Union, due to safety concerns. To make up for this loss of energy, Lithuania began importing more natural gas from Gazprom, a Russian gas company. These imports totaled 3.4 billion cubic meters (bcm) in 2011, or 100% of Lithuania’s natural gas consumption. Countries completely dependent on Gazprom for natural gas have experienced problems in the past. For example, in the winter of 2009, the Ukrainian government entered into a pricing dispute with Gazprom. As a result, Gazprom cut off the country’s gas supply for three weeks leaving hundreds of thousands of Ukrainians without heat. This is why the Lithuanian government recently made energy independence a priority for the country.
   
According to Lithuania’s Prime Minister, Andrius Kubilius, Lithuania has 120 bcm of underground shale gas reserves that could be recovered through specialized extraction methods. In order to access the reserves and reduce its dependence on Gazprom, the Lithuanian government has been auctioning off shale gas exploration licenses to private companies. In May 2012, Minijos Nafta, a Lithuanian oil exploration company, began drilling wells in its license area around Gargzdai. In October 2012, Chevron, the second largest U.S. oil company, announced it was purchasing a 50% stake in LL Investicijos, a privately owned Lithuanian oil and gas exploration company. Investicijos holds a license to prospect for gas on a 2,400 square kilometer field near the town of Rietavas. According to Derek Magness, Chevron’s Director General of onshore European operations, the company believes Lithuania’s government will welcome Chevron’s involvement due to its desire to break free from Gazprom. Prime Minister Kubilius described Chevron’s investment as a “good sign,” and the Ministry of the Environment announced plans to auction off two more licenses to shale gas areas in 2012.
   
The Lithuanian government has also attempted to find new suppliers of LNG to reduce its dependence on Russia. Klaipedos Nafta, a state-owned operator of oil terminals (facilities for storing natural gas), is opening a new LNG storage unit in 2014 that it expects will distribute up to 4 bcm of natural gas to Lithuania each year. In October 2012, Klaipedos Nafta received bids from 16 companies offering to supply LNG to the new storage facility. Rokas Masiulis, Klaipedos Nafta’s Chief Executive, said the number of bids received was “unexpectedly high” and would help put an end to Lithuania’s dependence on a single gas supply source. The bids came from companies all over the world, including the U.S., Qatar, and Norway. Klaipedos Nafta hopes to sign one of these non-Russian companies to a ten year supply contract for 0.75 bcm of natural gas per year. In addition, Klaipedos Nafta entered negotiations with Cheniere Energy, an energy company based in the U.S., to purchase LNG in the spot markets (purchase of gas for immediate delivery at current market prices) beginning in late 2015.
   
The Lithuanian government’s efforts to reduce dependence on Russian natural gas are coming at a critical time for the country. In October 2012, Lithuania filed an international lawsuit against Gazprom seeking approximately $1.9 billion in damages. Lithuania alleged that Gazprom abused its market clout to increase Lithuanian gas prices almost 500% from $84 per cubic meter of gas in 2004 to $497 in 2012. Lithuania’s Prime Minister hopes Gazprom will ultimately agree to a settlement involving more favorable gas prices, but warned the lawsuit could drag on for several years if no settlement is reached. Although Gazprom angrily contested the lawsuit’s allegations, the Lithuanian government’s continued efforts at energy independence may provide a powerful economic incentive for the company to reach a settlement.

The Role of Foreign Investment in Mongolia’s Mining Industry

Aspire Mining: Update on Mongolia Foreign Investment Law
FT: Chalco—Mongolia’s Angst Attack
FT: Mongolia Open to Talks on Investment Law
MarketWatch: Mongolia Tavan Tolgoi IPO likely in 2013: Banker
NPR: Mineral-Rich Mongolia Rapidly Becoming ‘Mine-golia’
NYT: In Mongolia, a New, Penned-In Wealth
Reuters: Mongolia Passes Watered-Down Foreign Investment Law
WB: Mongolia Quarterly Economic Update – February 2012
WB: Poverty Level Estimated at 29.8 Percent in Mongolia
WSJ: Chalco Bid for SouthGobi in Peril
WSJ: Geography Rules: Why Mongolia’s China Mining Strategy is a Mistake
WSJ: Mongolia Sets Plan to Cap Investments
WSJ: Rio’s Timely Antidote to Poison Pill

Mongolia has a vast amount of underdeveloped natural resources, including coal, copper and gold. Although these resources will likely be the driving force behind Mongolia’s economic growth for the foreseeable future, foreign investment is necessary to take advantage of this natural wealth. Nevertheless, Mongolians worry about the possibility of foreign exploitation, which led the government to pass a new foreign investment law limiting the ownership equity that foreign investors can hold in Mongolian companies within strategic industries. However, investors have become uncertain about the state of Mongolia’s business environment because of the foreign investment law, which is exemplified by the Aluminum Corporation of China’s (Chalco) decision not to proceed with its planned acquisition of SouthGobi resources, a coal mining company based in Mongolia.

Mongolia’s untapped natural resources could make the country’s citizenry economically better off if they were able to share in the profits of the mining industry. Mongolia is home to 10% of the world’s coal reserves, as well as the largest underdeveloped copper mine in the world. Analysts estimate that Mongolia’s resources are worth more than $2.75 trillion, while Mongolia’s population is only about 2.8 million. Moreover, the construction and exports from mining projects thus far have caused Mongolia’s gross domestic product (GDP) to grow 17.3% in 2011, a drastic increase from only 6.4% GDP in 2010.

As of yet, however, the average Mongolian citizen has seen very little benefit from the development of the country’s natural resources. About 29.8% of the population still lives in poverty, and stories abound of mining projects that leave behind ruined pastures or lead farmers to abandon their livestock to work in the mines. Many Mongolians are upset that foreign investors receive the majority of the financial benefits from projects such as Oyu Tolgoi, one of the largest copper and gold deposits in the world. Ivanhoe Mines of Canada owns a 66% stake in Oyu Tolgoi, while the Mongolian government owns the remaining 34%. Thus, Mongolia will receive less than 50% of the profits from mining its own natural resources when the mine is operational next year. On the other hand, Mongolia would likely not have had the $4 billion necessary to invest in the mine because the country’s GDP last year was only $8 billion.

To correct the wealth distribution problem, the Mongolian government has promised to give every Mongolian a share in the multi-billion dollar initial public offering of a state owned enterprise that runs part of the Tavan Tolgoi coal deposit. The government has also passed a law that limits foreign investment in “strategic” industries such as mining, finance, media, and telecommunications. Pursuant to this law, foreign investors must now register with the Foreign Investment Agency of Mongolia (FIA) after they acquire more than 5% of an enterprise that operates in a strategic industry. Foreign investors must also obtain government approval to acquire more than 33% and parliamentary approval for acquiring more than 49% of enterprises in these key sectors. However, foreign investments only trigger the approval process if they are worth at least $75 million or if a foreign state-owned enterprise is involved.

The foreign investment law may have negative consequences for future foreign investment in Mongolia. For example, Chalco announced on September 4, 2012 that it had abandoned its plans to purchase a controlling interest in SouthGobi Resources, an investment that was worth about $920 million. Chalco announced the initial deal in April of this year, just one month before the government passed the foreign investment law. Many analysts believe that the government passed the law because of concerns about further Chinese involvement in Mongolia’s economy. Mongolia is dependent upon China both for export transit and as a market for these exports. China currently purchases 80% of all coal produced by Mongolia for 30% less than global prices. Thus, the investment law and its timing may create an uncertain business environment that discourages foreign investment and hinders Mongolia’s potential economic growth and development. The key for foreign investors going forward is to create ownership structures for projects in strategic sectors that are acceptable to the government.

The Canadian Territory Nunavut Approves Uranium Mining for the First Time

Sources:

Alaska Dispatch: Canadian Federal Territory Supports Uranium Mining

CBC: Nunavut Government Announces Uranium Mining Policy

CBC: Nunavut Group Says Uranium Policy Process Biased

Nunatsiaq News: Areva Touts Proposed Kiggavik Uranium Mine on Eve of Nunavut Mining Symposium

Nunatsiaq News: Impact of Proposed Nunavut Uranium Mine Worries Baker Lake MLA, HTO

Nunatsiaq News: Nunavut Government Says Yes to Uranium Mining

Nunavut Government: Government of Nunavut Uranium Policy Statement

Nunavut Government: Nunavut Facts

Winnipeg Free Press: Ottawa, Nunavut Discuss Province-like Powers Over Natural Resources

On June 6, the government of the Nunavut Territory, Canada approved the creation of the first uranium mine within the territory. The Nunavut Government sees the mine as an opportunity for job and economic growth through the construction and operation of the mine and the taxes it would produce for the government. In giving its approval, the Nunavut government provided specific guiding principles that must govern any uranium mining, as explained below. While community groups express concern about the formulation of the policy and the environmental impact, local leaders continue to be open minded about the mine’s potential economic benefits.

Nunavut is a federal territory in northeastern Canada created in 1999. Its land covers 20% of Canada, and has a population of 33,330 as of 2011. While it currently does not have control over its natural resources, Nunavut is in negotiations with the Canadian federal government to obtain this control and to ensure any mining of natural resources would directly benefit Nunavut. In fact, the Nunavut government stated that its approval of uranium mining is specifically contingent on ensuring that Nunavut is the main beneficiary of government revenue from mining activities within the territory.

 

The Nunavut government created its uranium mining policy after a mining company named Areva Resources Canada expressed interest in creating a uranium mine within the territory. In its policy, the Nunavut government approves uranium mining, provided the five stated guiding principles are met. The five guiding principles came from consultations the Nunavut government held with local communities, particularly those close to the proposed mine. The guiding principles articulated by the Nunavut government include: 1) that the mined uranium only be used for peaceful purposes, such as producing energy, and not for nuclear weapons; 2) residents of Nunavut must be the primary beneficiaries of the mining revenue; 3) uranium mining must meet national health and safety standards of the Canadian Nuclear Safety Commission (CNSC); 4) high environmental standards must be met, as approved by the Nunavut Impact Review Board (NIRB); and 5) Nunavut residents must approve the uranium mining. These principles are simply the first basic articulation of the Nunavut government policies, and any uranium mining operations require further approval from the NIRB and the CNSC.

 

The Nunavut government’s approval of uranium mining has been met by opposition and concerns from local community groups. An environmentalist group called Nunavummiut Makitagunarningit claims that the process for creating the territorial government’s policy was biased because the government hired a consultation company whose primary clients are in the mining industry and stand to directly benefit from governmental approval. Meanwhile, a local community group of hunters and trappers expressed concern about the uranium mine’s potential negative impact on the migration patterns of local caribou populations, a major source of food and income for communities around the proposed mine. The community worries that if the mine is built, the caribou would change their migration pattern to avoid the mine, and thus no longer come near the village.

 

In spite of these concerns, however, local leaders have expressed support for the mine as a source for increased employment and economic development. The Areva mine would provide 700 jobs during its construction and 600 jobs during its projected 14-year operation. In addition, the mine would bring an increase in infrastructure necessary for the mine—such as roads and telecommunications—which would also benefit local communities by providing greater access to economic activities.

 

Seeking to broaden opportunities for economic growth, the Nunavut government approved uranium mining within the territory. In doing so, it provided specific guiding principles for any uranium mining. Although local communities have environmental concerns, many residents of Nunavut are interested in the economic development a uranium mine could provide for the territory.