Kallas refuses to re-examine energy deal

  • 2002-03-28
  • Kairi Kurm

Estonia's Prime Minister Siim Kallas last week turned down an offer from the U.S. company NRG Energy to restart negotiations on the sale of two Soviet-era oil-shale fired electricity plants in the Estonian city of Narva.

Under a privatization agreement that was canceled Jan. 8, NRG Energy was to borrow 285 million euros ($252.21 million) for renovation of the two plants, which account for 90 percent of electricity production in Estonia.

The Estonian government canceled the deal, which was six years in the making, because NRG Energy failed to obtain funding by the end of 2001.

Under the deal, NRG Energy would have bought a 49 percent stake in the facility.

Then Prime Minister Mart Laar resigned soon after the unpopular deal was quashed.

Dave Peterson, president of NRG Energy, wrote in a letter to Kallas, who was finance minister when the deal was initially signed, on Feb. 19 that NRG was prepared to conclude the deal in three to four weeks if necessary.

"Prime Minister Kallas, when you and I sat down together to sign the memorandum of understanding at the U.S. State Department more than six years ago, we were full of excitement at this opportunity to revitalize Estonia's oil-shale energy sector and northeast Estonia," he wrote. "I ask you to return to these noble goals."

Kallas, who was finance minister when the deal was signed, refused.

"I sincerely regret that the parties were unable to achieve the expected outcome set down six years ago in the memorandum of understanding," Kallas wrote to Peterson on March 21. "We should, however, acknowledge that the political and economic situation in Estonia has changed dramatically in the past six years.

"There have also been significant changes on the international level, most notably in the European Union energy market policy that we must take account of in light of our impending EU accession."

Kallas went on to present several reasons why the deal could not be completed. The main argument was that the banks requested a state guarantee although it was agreed from the start that the state would not provide one.

There were also complaints about a planned price hike that would help cover NRG's profitability demands.

The deal's cancellation had long been demanded by former Estonian President Lennart Meri, Estonian scientists, environmental organizations and the former opposition Center Party, which is now a governing coalition partner.

"It is my understanding that the real reason for the failure to finance the project as originally intended was in fact the situation in the markets that changed significantly after the events of September 11," said Kallas.

The U.S. Embassy in Estonia issued a sharp reaction on March 22, stating that the U.S. government was disappointed by the Estonian government's flat refusal to re-examine the deal.

"We are continuously supporting NRG in all its efforts to make it a successful deal," said Thomas Hodges, the embassy's public affairs officer. "This was a deal that held many positive aspects for Estonia, especially for the public and for communities in northeastern Estonia, and is something that the U.S. government attached great importance to.

"It would have improved the technology, reduced pollution, enabled more efficient energy production and involved investments in Ida Virumaa (the region where the plants are located)."

Peeter Kreitzberg, deputy chairman of the Center Party, told The Baltic Times in January when the deal was canceled that NRG Energy had gone to unacceptable lengths to secure the deal, with Petersen even saying that backing out would jeopardize Estonia's chances to join NATO and the EU.

The Estonian government has tasked the Economy Ministry with finding alternative ways to finance the renovations of the plants. Some analysts have suggested that the company should be listed on the stock exchange.