Mr Sergei Jefimov - Konkurentsiamet

ESTONIAN GAS SUPPLY SITUATION
11.01.2012 Tallinn

AGENDA
1.History review.
2.Security of supply.
3.Investments in gas system 2006-2011.
4.Future development plans.
5.Tariff regulation.
6.Draft Natural Gas Act.
7.Conclusion.

1. HISTORY REVIEW
1-st of November, 1990, Eesti Gaas – the first
Estonian state enterprise was created.
In period 1993-1998 all shares was sold to
foreign companies.
During the year 2005 Eesti Gaas was reorganised
into a group, comprising of the subsidiaries
AS EG Ehitus and AS EG Võrguteenus.

AS EG VÕRGUTEENUS
AS EG Võrguteenus is the combined
system (transmission and distribution) operator.
The cost of transmission, distribution of the natural
gas and ancillary services are separated and
disclosed.
AS EG Võrguteenus started its economic activity
on January 1, 2006.

AS EG VÕRGUTEENUS
AS EG Võrguteenus rents and is responsible for
both gas networks, totaly 2 314 km, incl:
- transmission gas network (> 16 bar 878 km),
- distribution gas network (0,1- 16 bar - 1436 km).
On the 01. of January 2006 we had 177 employees,
On the 01. of January 2012 – we have 155
employees.

2. SECURITY OF SUPPLY
Transmission network –
‣878 kм, MOP 38/55 bar
‣36 GRS, 3 GMS*

ESTONIAN GAS SUPPLY SYSTEM CAPACITY
•Total capacity is 11,0 mil m 3 per day.
•Karksi connection with Latvia 7,0 mil m 3 per day;
•Värska connection with Russia 4,0 mil m 3 per day;
•Narva connection with Russia 0,5 mil m 3 per day.
•As a rule, only the Värska and Karksi connections are
operational.
•Criterion N-1 = 59,7%.

ACTUAL PEAK FLOW FOR EACH CONNECTION
Narva
connection with
Russia
Värska
connection with
Russia
Karksi
connection with
Latvia
mil m 3
per day
mil m 3
per day
mil m 3
per day
MW
MW
MW
2008 0,94 365 3,11 1209 4,61 1792
2009 0,23 89 2,48 964 4,35 1691
2010 0,29 112 2,62 1014 4,45 1722
2011 0,36 139 1,70 650 4,00 1536
26.09.2010 24.11.2010 22.01.2010
12.10.2011 3.01.2011 18.02.2011

Total peak load
1000 m 3 per
Year
day MW
2005 5 200 2 021
2006 6 700 2 604
2007 6 400 2 488
2008 5 200 2 021
2009 4 350 1 684
2010 5 300 2 060
2011 5 200 2 021
2012 prognosis 4 800 1 866
2013 prognosis 5 000 1 944
2014 prognosis 5 200 2 021
2015 prognosis 5 200 2 021
2016 prognosis 5 300 2 060
TOTAL GAS PEAK
CONSUMPTION OF
TRANSMISSION SYSTEM
maximum
minimum
20.08.2011 min consumption
- 560 000 m 3 per day
The Estonian gas transmission system today has
sufficient pass- through capacity and until 2016 there will
be no capacity deficit.

GAS SUPPLY SCHEME FROM APRIL TO
OCTOBER
During this period
the necessary
pressure level in the
Estonian gas system
is maintained by the
Russian transmission
system’s compressor
stations (in Irborska).

GAS SUPPLY SCHEME FROM NOVEMBER TO
MARCH
During this period Estonia
and NW Russia depend on
underground gas storage
facility at Inčukalns.
The necessary pressure
level in the Estonian gas
system is maintained by the
Inčukalns underground gas
storage.
In our history we had not
significant problems with
supply.

NATURAL GAS SUPPLY FROM INČUKALNS UGS
Capacity
Distribution between countries,
mil m3/year
UGS volume in Russia in Latvia in Estonia in Lithuania
mil m 3 mil
% m 3 mil m 3 mil m 3 mil m 3
%
%
%
%
2005-2006 2139 100 396 19 1180 55 558 26 5 0,2
2009-2010 2150 100 355 17 1234 57 409 19 17 0,8
Average used
by:
UGS max
output
capacity
mil m 3
per day 24 4,32 18 13,44 56 5,50 23 0,24 1
There will be a need to further increase for
underground gas storage capacity for
security of gas supply.

SUPPLY DEPENDS ON THE INLET GAS PRESSURE
Technical flow capacity
Inlet
pressure
Värska
connection
with Russia
Karksi
connection
with Latvia
Total capacity
Mil m 3
per day
Mil m 3
per day
mil m 3
per day
bar
40-42 4,0 7,0 11,0
34-36 3,5 6,1 9,6
30-32 2,4 4,8 7,2

GAS INLET PRESSURE BEFORE VÄRSKA AND KARKSI GMS
The problem for Estonia is not the limitations of the transmission
capacity, but in the case of peak load of gas consumption the inlet
pressure on the Estonian border may drop below the agreed limit
(35 bar).

3. INVESTMENTS IN GAS SYSTEM FROM 2006
TO 2011
All investments in the period 2006-2011 - 48 mil € incl:
Transmission - 12,0 mil €,
Distribution - 9,0 mil €,
Cathodic protection - 1,5 mil €,
Measurement of gas - 2,5 mil €,
New pipelines - 23 mil €, incl Pärnu transmission
pipeline 50 km - 5,4 mil €.
More than 2 000 new customers have been connected.
We invest in new projects if it is technically and
economically justified.

PIPELINES INSIDE INSPECTIONS
In 2006-2008. was carried out the
inside inspection on transmission pipelines:
Vireši-Tallinn, Dn700 (202 km),
Izborsk-Tartu-Rakvere, Dn500 (219 km),
Pskov-Riga Dn700 (2x21 km),
Tallinn–Kohtla-Järve will be prepared for inside inspections in 2013

PERFORMANCE OF REPAIR WORK
In period 2006-2011 over
480 transmission pipelines
were replaced (~ 6 000 m)

LINE VALVES STATIONS
15 new LVS were
built and
11 existing LVS
were reconstructed

ESTONIA - LATVIA CONNECTION
before
Karksi
GMS
new bypass line
valve station
after

GAS REGULATION STATIONS
Kohtla-Järve GRS,
2009
Roiu GRS,
2011
2006-2011 – 4 new GRS were
built and 5 old ones
reconstructed
Pärnu GRS,
2006

4. FUTURE DEVELOPMENT PLANS
Balticconnector - gas pipeline between Estonia and
Finland.
Kiili-Paldiski transmission pipeline - Estonian
transmission system connects with planned
Balticconnector.
Reconstruction of the Tallinn – Kohtla-Järve –
Narva transmission pipeline.

BALTICCONNECTOR
Project started in 2004 by Gasum in order to gain
access to the gas storage facility in Latvia.
The connecting pipeline is an instrument for
ensuring security of supply of the whole region,
primarily in Finland and Estonia.
The final decision concerning the Balticconnector
project will be made in 2013-2014.

KIILI-PALDISKI TRANSMISSION PIPELINE
Started in 2004 by Eesti Gaas as the underground
part of the Balticconnector project.
New cities, Keila and Paldiski, and planned Paldiski
LNG terminal would be connected to gas system.
Currently we are carrying out a planning procedure,
necessary for the construction of Kiili — Paldiski
transmission pipeline.

TALLINN – KOHTLA-JÄRVE – NARVA
Reconstruction of the Tallinn – Kohtla-Järve –
Narva transmission pipelines (old pipe 38 bar
change to new pipe 55 bar) and 10 GRS.
Russia is going to do the same - replace the pipe
from Narva to St Petersburg.
Opening the direct connection between Estonia and
Russia from St. Petersburg side and that would
enable us to comply with the N-1 criterion of gas
network.
Estimated construction period in 2015-2022.

THE ESTIMATED COST OF FUTURE DEVELOPMENTS
Project mil € year
Paldiski – Kiili pipeline
DN700 PN55, 47 km
28 2014-2016
Gas Metering Station (Paldiski) 3
2015-2016
Loo GRS rek. (55/38) 4
2015-2016
Balticconnector, 80 km 100 ?
Compressor station (Paldiski) 22 ?
Karksi GMS (reverse metering) 5 ?
Tallinn-Kohtla-Järve-Narva pipeline
(200 km) and 10 GRS
Sum: 317
EU grants … % ?
155 2015-2022

LNG TERMINAL
All four countries of the
East Baltic area have
shown their strong
interest in offering the
location for the LNG
terminal, but it is clear
that only one LNG
terminal is feasible in the
region according to
limited annual gas
consumption.

PALDISKI AND MUUGA LNG TERMINALS
Today we are constantly holding constructive negotiations with all
investors planning construction of an LNG terminal in Estonia.

WHERE TO CONSTRUCT LNG TERMINAL?
LNG terminal in Finland (alternatively Estonia)
(Ramboll 2009 - Future Development of the Energy Gas Market in the
Baltic Sea Region).
The Estonian LNG terminal infrastructure project
seems to be more mature (BEMIP - Entry/Exit Model for the
East-Baltic Gas Market, June 2011).
Paldiski would appear to be a good solution as it sits
next to the proposed interconnector with Finland,
the largest of the four gas markets and close to the
potential demand centre of Tallinn (PÖYRY 2011:
Liberalisation of the Estonian gas market).

LNG FOR SECURITY OF SUPPLY
Only with an LNG terminal located in Estonia or
Finland, the current gas pipeline with
Balticconnector can be used as an additional reserve
in high season winter periods and would improve
the security of supply in the gas systems of Finland
and Estonia and, if necessary, in that of Latvia.
If the location of LNG terminal were in Latvia or
Lithuania, current gas network could be used only
for conventional supply of gas to Estonia or Finland
(not in high season winter periods).

5. TARIFF REGULATION
According to law the Authority approves
separately the following network services and
methodologies:
- price of transmission service,
- price of distribution service,
- methodology of calculation of the charge for
connecting to the network

TARIFFS FROM 01.07.2009
Pressure €/ 1000 m 3 part of the
final gas
price
(average %)
Transmission > 16 bar 8,79 3,0 %
Distribution 0,1 - 16 bar 17,66 4,0 %
≤ 0,1 bar 53,01 11,0 %
AS EG Võrguteenus has a market share of about
90% and the number of its customers is 43 500.
Annual turnover – 13 mil €. Only !

Arguing issue - regulatory asset base (RAB)
RAB comparison
1000 €
CA
Resolution
7.1-7/09-0023 31.03.2009
base year 2009/2010
EGV declared depreciated cost of
fixed assets of gas network 99 018
CA determined as RAB 49 457
EGV declared depreciation of fixed
assets of gas network 5 256
CA determined depreciation
Reasonable profit, WACC 7,57 %
Reasonable profit + capital cost
4 402
3 746
8 148

GAS CONSUMPTION IN ESTONIA
The overall size of the gas market is small, 70-75% of gas used for heating.
Estonia must transform National Energy Policy by switching power
generation from oil shale to gas and to end support for renewable
energy sources. This is the key issue of increasing the use of gas!
If the National Energy Policy will not change for gas, consumption will
reduce even more.

6.NATURAL GAS ACT DRAFT
Natural Gas Act Draft – requires full ownership
unbundling from 01.01.2015.
If the EG owners are not agree – is the Estonian
state going to court against shareholders from
Russia, Finland, Germany, Estonia and Latvia???
If then the owners are agree - EG shareholders
agrees to sell the transmission grid. Price?
The new transmisson grid owner shoud establish
new company/TSO - NewCo.

WHATS HAPPENING WITH EG VÕRGUTEENUS?
Now – one company (155 employees) is maintained both gas
grid – the transmission and distribution networks (2314 km).
Efficiency ratio: 2 314/155 = 14,9
In EU gas companies average efficiency ratio is 7,6.
We have the same professionals for transmission and distribution
network.We have a one common (transm. and distrib.) operation
center and common different functional appliances, cars, etc.
We are confident that for Estonia the one combined system
operator is the most effective way to maintain the small
existing gas networks efficiently and at minimal cost.
And this is proven by our experience of 6 years.

EG VÕRGUTEENUS AFTER 01.01.2015
AS EG Võrguteenus – continue as
distribution company.
90% of current employees should be to
continue in the distribution company to meet
all technical and safety standards and rules.

NEWCO FROM 01.01.2015
A NewCo needs to purchase all the special
equipment and cars, to build a new operation center
(with SCADA and GIS and other IT programms)
and the most important thing to find around 70
highly qualified professionals who would be able
to safely maintain the gas transmission network
accordance with the technical standards and rules.
How will NewCo/TSO be certified and licensed
without their staff?

QUESTIONS
How much is EG Võrguteenus restructuring costs and
the NewCo establishment costs?
What is the transmission system sale price which goes
into the transmission tariff?
How many and what investments are made at the
expense of the tariffs?
If Parliament adopted the existing Draft Natural Gas
Act, the Competition Authority must approve the all
those costs. How much will the transmission tariff
increase after that?
Today an independent and complete analysis does not
exist.

UNBUNDLING STRATEGY – FIRSTLY ITO
Our suggestion is to use ITO transmission unbundling
model (in Chapter IV of Directive 2009/73/EC).
Pöyry recommends the same - may be desirable as an
intermediate step to move to an ITO model, which
would enable the current ownership structure of Eesti
Gaas and EG Võrguteenus to continue with stricter ring
fencing requirements.
Full ownership unbundling is recommended but only as
a part of the wider package of liberalisation measures
( developing a regional approach, increasing demand,
national gas policy, especially in power generation).
Source: LIBERALISATION OF THE ESTONIAN GAS
MARKET (PÖYRY, nov 2011)

7. CONCLUSION
The Estonian gas transmission system today has sufficient
pass-through capacity.
We are strongly supporting LNG terminal in Estonia or
Finland (with Balticconnector) because they increase our
security of supply.
Today we have the law of non-discriminatory access to
transmissions pipelines. None of the investors has pointed to
the ownership of the transmission network as a factor
hindering construction of an LNG terminal.
Planned reorganization (full ownership unbundling) will
bring additional costs to be sure that, in view of today's
income and the amount of gas, a very large and require
considerable value to the tariff increase.

THANKS FOR YOUR ATTENTION !
Sergei Jefimov
CEO
AS EG Võrguteenus