Berlin gives Russia green light to quash Estonian energy independence

By bne IntelliNews August 16, 2012

Tim Gosling in Prague -

A German official pledged on August 14 that Berlin will not interfere in the ongoing tussle between Estonia and E.ON Ruhrgas over the unbundling of the country's gas pipeline network from Eesti Gaas. That appears to signify a German green light for Russia to continue to fight attempts by the Baltic states to break free from their 100% dependence on Russian gas imports.

"There is a dispute over the implementation of the unbundling of the gas network, but the German government is not going to interfere in it. This is a dispute between the two companies who need to find a solution," the German minister for economics and technology, Philipp Rosler, said during a visit to Tallinn on August 14, according to ERR.

The minister then appeared to offer a barely concealed prod to Estonia as to the direction Berlin would like to see things resolved, noting that unbundling is the right way "in principle," but adding it must be implemented in full compliance with EU directives. That is presumably a reference to free trade and ownership rights.

At the end of June, German giant E.ON wrote to Estonia's prime minister and president threatening legal action in an international court of arbitration if the government presses ahead with a plan to split the distribution network off from Eesti Gaas. On June 6, the parliament in Tallinn approved legislation requiring the company to sell the infrastructure by the end of 2014 - a decision in line with the most far-reaching option offered by the EU's Third Energy Package.

In the letter, E.ON CEO Matthias Kohlenbach complained that the enforced sale of the pipelines is damaging to the interests of Eesti Gaas shareholders. However, the only shareholder that stands to lose anything significant in the tiny state is Russian gas giant Gazprom, which is fighting to prevent the Baltic states from tapping new gas suppliers in order to keep its monopoly. The shareholder structure of Eesti Gaas is remarkably similar to that of Lithuanian state gas company Lietuvos Dujos - with E.ON and Gazprom holding 36.66% and 37.02% respectively.

Vilnius, which has suffered to a greater extent from Russian dominance of its energy market than Estonia - which enjoys some alternative from oil shale deposits - has accelerated its drive for alternatives in recent months, and plans to launch a floating liquified natural gas (LNG) terminal by the end of 2014. Estonia has also spoken of developing its own facility to accept frozen gas by ship, but without wrestling control of their respective distribution systems, neither plan will work.

Following a bitter fight, Lithuania secured a vote from shareholders on unbundling Lietuvos Dujos in June. Gazprom promptly took the matter to international arbitration, claiming it had only approved the plan under the duress of threats from the government. Publicly, E.ON has remained on the sidelines in the Lithuanian spat.

The German giant revealed on August 13 that its first-half profit more than tripled after it was one of just a handful of European customers to have secured a gas price discount from Gazprom, which supplies around 25% of the gas it buys. E.ON said the deal - which dozens of Russian gas buyers have requested - saved it €1.2bn across the period. The company also saw profit from its power assets in Russia rise 39%, and is Gazprom's partner on the giant Nord Stream pipeline, which carries Russian gas directly to Europe under the Baltic Sea.

Meanwhile, E.ON also said as it announced its results that it intends to continue with plans to divest European assets in order to boost investment in emerging giants such as China, Brazil and Turkey. It is currently selling its stake in the Slovakian gas pipeline network for instance. Apparently, it is willing to fight tooth and nail for its Estonian asset however.

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