Gazprom and Lithuania both claim victory in gas network arbitration

By bne IntelliNews August 2, 2012

Tim Gosling in Prague -

The long tussle over control of Lithuania's gas pipelines continues, with both Russian gas giant Gazprom and the Lithuanian energy ministry claiming victory in a international arbitration court ruling late on July 31. The contrasting statements leave the future of the Baltic state's gas pipelines - and the region's energy security - unclear.

Both Gazprom and Vilnius claimed that the independent arbitration tribunal in Stockholm has ruled in their favour in a dispute over governance of Lithuanian gas provider Lietuvos Dujos, reports Platts. Lithuania wants to unbundle the company, in which it owns 17.7%, and place control of a new gas network operator with the state. The move is key to the government's plans to diversify its energy sources; Russia currently supplies 100% of gas consumed in the Baltics. Lithuania plans to launch an liquified natural gas (LNG) platform in 2014, but it will be useless without control of the distribution system.

After a long and bitter fight, Gazprom - holding 37.1% in Lietuvos Dujos - voted for unbundling along with the other shareholders (E.ON holds 38.9%, with small minorities retaining 6.3%) in May, but immediately claimed that it had only done so under legal duress from Vilnius, claiming that the Lithuanian authorities threatened to apply sanctions on Lietuvos Dujos if the vote did not pass. The Russian company quickly launched the arbitration proceedings. The court was to decide on Gazprom's application to have governance of the company decided in arbitration, which it claims is in the shareholders agreement.

On the one hand, the Lithuanian energy ministry statement claims: "The arbitration acknowledged that Gazprom can by no means prohibit the Lithuanian government from questioning the eligibility of Lietuvos Dujos' management bodies." It added that the tribunal dismissed "all of Gazprom's claims for damages." But Gazprom said that the arbitration tribunal found in favour "for most of Gazprom's demands against the Lithuanian energy ministry, relating to the ministry's initiation of court proceedings against Lietuvos Dujos and its management for breaking the shareholder agreement."

A representative of the Stockholm Arbitration Tribunal declined to comment, citing confidentiality guarantees given to companies involved in arbitration. A spokeswoman for Lietuvos Dujos also declined to comment, saying it was a matter for shareholders rather than the operator to comment on.

Lithuania's energy ministry said the ruling is a sign that further dialogue over implementation of changes under the third energy package should not involve arbitration. "This positive decision once again demonstrates that the issues of Lietuvos Dujos' governance and those of the third EU energy package implementation in the gas sector should not be resolved by arbitration, but by negotiations," energy minister Arvydas Sekmokas claimed in the statement.

Gazprom said that the tribunal's ruling was instead an indication that arbitration should play a key role in the dispute, in line with the Lietuvos Dujos shareholder agreement. "The decision of the independent arbitration confirms the validity of Gazprom's position in the long-running dispute with Lithuania, in which the Lithuanian energy ministry has tried to win a decision on commercial issues in its favor with the help of Lithuanian courts, instead of taking the dispute to independent arbitrators, as is stipulated in the Lietuvos Dujos shareholder agreement," the statement said.

At the core of the dispute is the price of Russian gas imports to Lithuania, and indeed the Baltic region. Cut off by history from Euroean energy networks, Lithuania claims that it is paying the highest gas prices in Europe, but that the LNG terminal will give it the leverage to reduce them significantly. The Swedish tribunal also heard applications on the pricing arguments, but again both sides came away with very different impressions of its response.

"Arbitration stated that the issue of high gas price for Lithuania cannot be resolved during the same court procedures -- this question should be separately submitted to Stockholm arbitration," the energy ministry's statement said. Gazprom meanwhile claimed that the tribunal had ruled: "Lithuanian authorities do not have the right to appeal to Lithuanian courts with the aim of a forced change to conditions on the sale and transit of Russian gas, which had previously been agreed," the Gazprom statement said.

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