“Albania still holds the greatest potential in oil, gas and electricity and necessary reforms are being conducted”.
FIAA: We believe the Ministry of Energy and Industry is planning a hand over some more concessions in oil, is that right? And what is your expectation for the development of the sector from here baring this in mind?
Mr. Gjiknuri: Albania still holds great potential for oil and gas that is what we believe in and that is what the geological historical data shows us. We do have oil production and we are intending to give the free blocks to potential international oil and gas companies which are interested to explore, and we have opened some blocks for auctioning and we hope that by the end of the summer we close the first two blocks and we will continue with the rest of the blocks in onshore and offshore. Our intention is to bring the best companies which have the expertise and the capital and are ready to invest in the exploration of hydro carbon potential in Albania. So, basically if you ask me what would be the intention, I would say that I hope we will have some good companies which will be really investing, not like in the past where mainly unknown companies, which maybe were created for a specific project and to trade in the stocks, they were sitting on it and not investing.
What I mean is that oil and gas needs investments and we need companies which have the capability for investment. We do have Shell now in Albania which is a very good sign. We do have some new other names coming which are taking over some of the smaller partners here and we hope that we will receive companies with similar characteristics like Shell.
Have you put in place anything that would try to make investment in the sector here more attractive, have you pushed to any reforms or to look at it in another way, have you unblocked some of the blockades that might have existed in the past?
In the terms of oil and gas sector we are improving legislation for the next blocks. We want also to do some better contract modelling in order to have more clear terms between the size and not to leave room for any grievance of mismanagement in the future because always in oil and gas industry there is a tendency or tension between what public expects and what the companies expect. We still have one of the most relaxed taxes regime and I think we will maintain that in general, because our oil is still a non conventional oil, it’s a heavy oil and some of the geological characteristics makes the operation expensive so, we want to create a contract model which allows the investors to recover their cost with integrity, which means to be out of speculation like has happened in the past with transfer prices which brings tensions. We are also intending to involve the foreign companies in auditing oil and gas contracts, so we would rather prefer to have professional companies auditing oil and gas companies, rather than only the Albanian administration which also can raise doubts or prejudgments and tensions all the way in how the contracts are administered.
In the blocks that are going to be available how would you characterise the interest that you had so far?
Interest has been good so far. I don’t want to reveal names, but we have signed confidential agreements with very big companies which are large size and also we are talking about mid size companies which are operating all over the world. But I want to be very confidential on that. I am talking just to give you an idea as 3 or 4 of the names are in the family of the big 7 names.
What about the Hydropower sector? What is going on there and what are your aspirations and some of the challenges that you will have to overcome?
Albania has a lot of potential for hydro power, the total potential for hydropower to be transformed into electricity its around 7000mw installed capacity and right now we are at 1600 mw installed capacity. Of course we don’t intend to have all the rivers transformed into hydro powers so, we believe we can explore around 3000mw of installed capacity which is the double of what we have now and that will strike a balance between preserving the environment and using some of these resources for power.
So, this process is continuing. In the past, the process was a little bit chaotic, there were a lot of licences awarded to firms that did not have the financial capability. They were intending to trade those licences, they were not really doing a lot. But, also there are some very good examples of projects which have moved forward and we have been trying to save this momentum and push this type of process.
Of course, we are changing some of the regulatory environment in a positive way which will create more stability in the investments in hydropower. More exactly this year we are approving a national action plan for renewable, which we will know exactly the capacities, and the alternatives, not only in hydropower but also in other sources of renewable.
And also the financial plan for backing this investment, which means they will start to operate in a more sustainable environment. Before, every hydro power was guaranteed by a power purchase agreement, but these goes against the market model that we are developing and many other countries are developing, which is to liberalise the market model and going to a less controlled market model of energy. So, we are exploring the ways to incentivise them with premiums, maybe like a feeding premium above the electricity market just for the beginning, to create some incentives, and always build in the tariffs. This is not to be left like in the past where all these premises were not left anywhere and were not included anywhere, which exposes the government budget always to contractual obligations and this really hits the financial stability. So, basically we are also reluctant on the procedures with the new legislation, which makes easy to get licensing, especially for small hydropower plants. Of course always they are going to be competitive and as I said, besides hydro, we would want to include also some types of alternative sources of energy. In the meantime we have some big projects going on with no power purchase agreement, which is going on towards the market based model, like Statkraft from Norway that is building a huge cascade in the south of Albania. And also some other Turkish companies which in the past have been very actively involved in giving the experience of building in Turkey and now they are trying to replicate here in Albania.
Is there any way you can do to help financing for these projects?
Well, project financing is always a difficult part. Projects to be bankable and financed have to be feasible. As a government, we don’t have an engine to promote financing, but however we have communicated with the banks and we have established communications with them for those projects which have high priority or projects which the Albanian Government finds with a great public interest in the future of energy security, we will create a kind of dialogue engine in order to talk with the financial sector to support this kind of projects. Since we don’t have a kind of engine to promote investments in this way, so we use more incentives and leave it to the financial institutions to judge which projects are more efficient. Projects financing is always a tough cookie for countries in the region.
Let’s have a look at electricity market for a moment. Of course, with electricity market with Cez and all of this there has been some volatility or some turbulence and chaos. What are your plans in that respect, do you have any plans to normalise the retail side of the electricity market and if so, what do you expect to do in the future?
In fact, we are doing that since we are governing. We are doing that heavily and the reforms are giving benefits. We have reduced loses a lot and non commercial losses which are technical loses. We are investing to improve the technical capability of distribution and electricity distribution, but also to fight the illegality and using sometimes tough law enforcement measures and now as we speak, collection rates have improved and we are reaching to the point of normality in paying of the electricity bills because this is the key if the electricity bills are not paid by all, we can’t talk about retail market or about real retail.
Can you illustrate with some numbers the technical improvements and also the…?
In 2013 the average loses in the distribution sector were 45% of the electricity measured and 45% of electricity lost. And only 82% of electricity was collected, which means we were operating with 60% loses. Practically it means that energy was stolen, there were technical losses and also non payment of electricity bills. So, we are in a situation now where the collection rate has gone around 90% and it is going steady. This year the average losses we intend to go is to 32% and we started from 45%, and in the previous year the losses were around 37%, which is still high but anyway it was a big jump and this year we intend to go not more to 32%.
We are working steady in that and I believe we are within targets. Only these figures demonstrate immediately the gains in terms of financial gains, these are immediately converted into money, because only by reducing loss, we have managed to save 45 million dollars in one year. So imagine in 2 years if we accumulate total amount for 45% to 32% that we are intending, which means is 30% in general, 30% multiples per 7 million, average for 1 percent on average loss, which means 100 million saved and the collection rate is better. So if we speak now, we have managed that only in the six months of 2015 have been collected 100 million dollars more.
And what investment did that require?
All this was achieved without big investments, but with better policies, with a reform in the tariffs policy, as well by reducing the blockings and the abuses existing between the different blocks and the general subsidies. We are subsidising now only the poor’s and the families in needs and it is more the type of regulatory and the enforcement policy.
The question now is what next? What are we going to do with all this money? Of course we want to strengthen the sector by paying all the debts because the companies have a chain of debts with each other, including the private producers which are already paying so, we are giving more security to the private investments in the hydro power generation. We are also investing in the grid. This year we have a plan to invest in the distribution grid like 35- 40 million dollars, also we have a World Bank program which we intend to invest only in the distribution sector with around 100 million dollars and our intention is that by 2020 we will invest in the electricity sector more than 450 million dollars, which will improve the interconnectivity between the countries will also improve the grid. The reason we choose interconnectivity is because we want to integrate Albanian market with the region and make more liquid marks and then trade with other countries.
The last point is the market model.
It is an important question is our policy reform. We have a new legislation and we are trying to open the market. As I said before, everything was government controlled and centralised, a consolidated market in the state’s hands. Now we are going more and more decoupling the companies and decoupling the markets, making companies more and more act like corporate, not any more centralise them and be controlled the government. For example KESH (the generation company) and/or the other private generations have to go more and more to the market, and KESH which is the mammoth of the electricity production in the country which owns the cascades in the north will more and more sell to market rather than to the regulated customers. Our idea is that year by year, we want to expand the pool of unregulated customers which means industry, commercial, they have to buy electricity in the market and in the meantime we want to create a market, we are also working to create a market exchange and we hope that the further liberalisation will be a market exchange. There will be more liquidity where power producers can go. KESH will serve as a balance in the country but it will also promote further generation. In the future we want to make it more and more the state sector in electricity and we want to make it more and smaller in order to create more incentives for the private sector. So basically in terms of integration with the region this is what we are doing.
What is your message to the readers of the FIAA Newsletter?
The message is clear that the energy sector still holds the greatest potential in oil, gas and electricity and Albania is conducting the necessary reforms where they will not find it very different from their home countries, in terms of policies that we are conducting, but they will find it very profitable environment with a very dynamic market which will create good incentives for them to invest.
About the integration of the market I can say that we are a small market. Albania is a small, like Kosovo is small, Montenegro is small and Macedonia is small. The idea is that all southeast Europe to act like one single market in the electricity sector. It is not an easy target mainly for political reasons, however, if you see the economic logic behind it, there is no other way in order for these countries to have a liquid market of electricity and to attract investment given the natural resources they have. The only way is to open the market, combine and harmonise their policies, to have the same regulatory regime and that would not only attract the main investors in the southeast, but it will also be very good in terms of energy security for this region. Because by investing in the interconnectivity like we are doing in the region is better. Interconnecting will be better also thanks to the financial support of some European financial institutions and by having a proper market that will create the necessary ingredients for investments to thrive.