Having familiarized itself with the conceptual report "On the Management of the State's Oil Product Safety Reserves", during the Cabinet of Ministers meeting on July 13 of this year, the solution recommended by the Ministry of Economics was supported to introduce a new model for the management of the state's oil product safety reserves in 2024 with the limited liability company “Public Asset Manager Possessor” (hereinafter – Possessor) as the future safety reserve manager.
The new model envisages that Possessor will take over the tasks of the Central Storage Maintenance Structure from the State Construction Control Bureau starting from January 1, 2024.
It is also planned that next year 20% of the oil product safety reserves will be purchased as state property, and each subsequent year this volume will be increased by another 20%, meaning that by 2029 and onwards, 100% of oil product safety reserves will be purchased as state property.
The transition of the safety reserve management model, the purchase and maintenance of stocks is planned to be ensured outside the state's main budget, i.e., from the revenue of the public service fee for safety reserves, recalculating once a year the service fee payable by merchants for safety reserves. The current state fee for maintaining safety reserves will be transformed into a service fee. Merchants who currently pay a state fee will henceforth pay this service fee to a savings fund in order to finance the actual purchase, maintenance, and rotation of the state-owned oil product safety reserves.
For the implementation of the new management model, the Ministry of Economics will prepare and submit the necessary amendments to the Energy Law and the Public Person's Property Alienation Law for consideration by the Cabinet of Ministers by November 30 of this year.
The new model will offer benefits in terms of the speed and safety of oil product reserve supplies. It will also be cheaper in terms of maintaining reserves. The new model will also be safer, as the oil products will belong to the state, and a larger volume will be stored in Latvia. It should be reminded that currently, the oil products do not belong to Latvia, and payments are made only for the possibility to purchase them. The new solution approved by the government provides that the safety reserves will belong to the state, which will strengthen the security of supplies and timely availability of oil products in case of a crisis, as well as the overall stability of the state against threats. Moreover, the established agency will be able to organize public procurement for the rental of oil product infrastructure, which was considered more attractive by the commercial sector than procurement for storage services. This will increase the chances that several Latvian merchants will participate in the procurement and a larger volume of reserves will be stored in Latvia.
In the conceptual report "On the Management of the State's Oil Product Safety Reserves":
• scenarios for the creation of the agency at the national level have been assessed;
• the rotation process of purchased fuel is described;
• an assessment was made of the involvement of commercial operators in the oil product supply chain and their oil products in the formation of safety reserves, using, as far as possible, oil product resources in commercial circulation for safety reserves, thereby reducing direct state expenditures;
• a detailed assessment was made of the necessary funding and its sources, including assessing the possibilities of using financial instruments and borrowed capital.
In preparing the conceptual report, independent studies were conducted – a Deloitte study and two Civitta studies. Recognizing the most economically viable and cost-effective solution for Latvia, as well as focusing on transparency of operations and costs, to avoid unjustified distortion of the oil product market and its storage market, the agency model choice was deemed most suitable for Latvia in the studies. In both Civitta studies, analyzing a comparison of several scenarios, including evaluating foreign experience, it was concluded that Possessor is able to ensure the most effective safety reserve management process, taking into account Possessor's previous experience in asset management and procurement, appropriate staff structure, the ability to attract funding on more favorable terms than in a new joint-stock company and decide on the partial allocation of undivided profits of the existing business for the purchase of safety reserves. It should also be taken into account that the safety reserve management functions, which do not provide 100% workload for the staff, would be an additional function. In this way, a 100% employee workload would be ensured and administrative costs would be distributed over several functions.
As is known, on June 1, 2021, the Cabinet of Ministers, when examining the Conceptual Report "On Ensuring the State's Oil Product Safety Reserves", approved the solution proposed by the Ministry of Economics and the next steps to introduce a change in the oil reserve creation model. In accordance with this government decision, the volume of safety reserves stored in the territory of Latvia is to be gradually increased over 3 years - up to 75% in 2023, up to 85% in 2024, and up to 100% in 2025. At the same time, it was decided that there will be a change in the reserve maintenance model over the next 5 years, providing for the purchase of safety reserves as state property and the transition to an agency model.
Directive 2009/119/EC[1] Article 3(1) requires each EU Member State to ensure oil product safety reserve volumes that correspond to at least the average net imports over 90 days or the average domestic consumption for 61 days, depending on which of the two quantities is greater, and also sets out action to use mandatory reserves in the event of a serious supply disruption. Since Latvia is an importing country of oil products, the safety reserve volume is subject to 90 days.
Published: 13.07.2023.