EU demands Latvia open its gas market

EU demands Latvia open its gas market
By Tim Gosling December 3, 2015

The EU is demanding that Latvia fully liberalise its gas market, now that the Baltic country is connected to neighbouring Lithuania's LNG terminal.

The European Commission's letter to Riga is clearly intended to offer support to the government as a fight intensifies over the unbundling of national gas utility Latvijas Gaze.

Latvia has delayed liberalising its gas market - effectively controlled by Russia's Gazprom - for some years, because of the Baltic region's status as an "energy island". However, that has now ended, Brussels insists, pointing at the link to Lithuania. The EU's gas directive says liberalisation must take place once a country is plugged into two suppliers.

The European Commission sent the letter to the economy ministry, informing it that the derogation allowing Latvia to postpone the liberalisation of its gas market has been annulled, Economy Minister Dana Reizniece-Ozola told members of the parliamentary economy committee, according to Leta. Reizniece-Ozola has led the recent effort to free Latvia's gas market from Russia's grip.

The pipeline linking the Lithuanian LNG terminal in the port of Klaipeda to Latvia is expected to start operations by end of the year. It will link in to the Latvian network as it connects to the region's only gas storage facility at Incukalns. The pipeline now allows Latvia to access gas from sources other than Russia, the European Commission said in its letter.

"This pipeline, used in conjunction with the Klaipeda LNG terminal, will allow a substantial part of Latvia's peak consumption of 12.5mn cubic metres a day to come from an alternative source," the letter says, according to Reuters.

What must follow, the commission continues, is that Riga must now come to terms with the fact it is no longer an isolated gas market and must fully apply the provisions of the gas directive. The directive requires member states to split gas transmission and sales, which are held in Latvia by utility Latvijas Gaze.

"The European Commission clearly says that there are two reasons for lifting the derogation: the operation of the Klaipeda liquefied natural gas terminal [and] the development of the Klaipeda-Kiemenai gas pipeline," Reizniece-Ozola said.

Hotting up

The EU demand comes as the fight over Latvijas Gaze - which is controlled by Russian state-controlled companies - is heating up. Having delayed an earlier plan to split the company up in 2014, the country's powerful gas lobby is now working to scupper the new date of 2017.

The objections over the timing and schedule of the unbundling comes as the necessary amendments to the energy law are making their way through the Latvian parliament. The EU's recognition of the Lithuanian link is clearly intended to offer Riga support to push it through this time. It also appears to specifically answer a recent court decision in Latvia that ruled against the efforts of the country's gas regulator to push elements of the liberalisation through.

Following its privatisation in 1997, Latvijas Gaze has a guaranteed monopoly on the local market until April 2017. In 2014, Riga delayed the unbundling by over two years to that date. LG and the gas lobby now says the process of liberalisation is being rushed, and should be delayed to 2019.

Unbundling would split LG into a distribution/sales unit and a seperate operator of the country's pipelines, and most crucially, Incukalns. The storage facility is key to gas trading across the Baltic region - and particularly the plight of Lithuania's LNG facility, which is the first alternative to Russian supply in the region - but the Russian-controlled LG maintains a tight grip.

It is now fighting to maintain its control of the wider gas market. The powerful gas lobby will pull out all the stops, just as it did in 2014, when parliament unanimously voted to delay unbundling on the back of "a few threats regarding raising the gas price in combination with election year", as Latvian energy analyst Reinis Aboltins put it to bne IntelliNews earlier this year.

The letter from the EU is designed to offer the counter argument. "There are no more grounds for any derogation of unbundling," Aboltins adds. "Latvia is not an isolated market any more since the Klaipeda LNG terminal started its operation in December 2014. Latvia is breaching the rules of the EU Gas Directive by not implementing the requirements fully and effectively."

However, LG and the gas lobby have successfully argued to the Latvian parliament in the past that interconnections within the Baltic region do not negate the derogation. The Baltic region remains highly isolated by its recent Soviet past. The first pipeline link to wider European gas networks - connecting Lithuania to Poland - is due to launch in 2019.