Latvia finally pushes past Russian lobby to legislate split of gas monopolist

Latvia finally pushes past Russian lobby to legislate split of gas monopolist
Latvia is key to developing a single Baltic gas market
By Wojciech Kosc in Warsaw February 11, 2016

The Latvian parliament pushed amendments to the energy law through their third and final reading on February 11. The legislation confirms Riga's schedule to unbundle the country's Russian-controlled gas monopoly Latvijas Gaze (LG), which is key to opening a single Baltic market and reducing the domination of Gazprom in the region.

Latvia is the last of the Baltic trio yet to free its gas infrastructure from Russian control. After efforts to split LG by 2014 were derailed by the powerful gas lobby, the government has mounted a push to maintain the new schedule which commits the company to split its supply and transmission by 2017. While LG now appears to have lost the fight, the company was quick to suggest it will mount a legal challenge.

During privatisation, LG was granted a 20-year monopoly on Latvian gas supplies and transmission. With the expiry date is approaching, a lobby war has intensified in the Baltic state, with LG – which is controlled by Russia’s Gazprom and Itera, a subsidiary of Rosneft – attempting to block or at least delay the unbundling.

Other shareholders in the company include Germany’s Uniper Ruhrgas International (formerly E.ON). Meanwhile, signifying the mounting scrap, the EU-backed investment fund Marguerite bought into the company last month. The Latvian state also has a tiny stake in the company.

The amendments passed in parliament dictate LG will be split by April 3, 2017. Controlling shareholders of both companies must be separated by December 31, 2017. Another stage of unbundling will come by 2018, when distribution will be separated from sales.

The amendments also grant the government in Riga the right of first refusal to purchase shares in the new company handling transmission and storage. They also allow third party access to Latvia's grid. Opening the infrastructure would offer consumers access to alternative supplies from Lithuania's LNG terminal opened last year.


LG has been furiously fighting efforts by the government to force early adoption of third party access in the courts for months. Meanwhile, it has also been lobbying to put back unbundling yet again.

The company claims the process is being rushed, and should now be delayed to 2019. Meanwhile it continues to block other companies from using the grid to ship gas. Power utility Latvenergo, for instance, wants to buy from the Lithuanian facility, but was blocked by a court decision in LG's favour.

In response to the vote in the parliament, LG insisted that the amendments breach the 1997 privatisation deal because Riga is pushing to open the grid to third parties ahead of 2017.

“[LG] holds that such legislation is in breach of the privatisation agreements whereby [the company] has been granted exclusive rights of gas supply in Latvia by April 3, 2017,” the company said in a statement. “The timeframes allowed for the divestiture of the transmission and storage operator are unreasonably short and may cause losses for the shareholders."

LG also continues to claim that the legislation has been adopted too late for it to be able to meet the 2017 deadline. The company says it is mulling its legal options.

“Given the non-compliance of the law with the privatization agreements, the company might apply before the Constitutional Court and the Stockholm Court of Arbitration,” the statement continues. CEO Aigars Kalvitis told Leta it is “utopian” to think the split of the company could be carried out on time.

Final frontier

However, Riga seems determined to have it its way, as it is seeks to follow in the footsteps of neighbours Lithuania and Estonia. They both unbundled their gas monopolies in recent years. Lithuania is particularly eager to see the Latvian monopoly broken up, as it would ease its efforts to turn the LNG terminal into a regional supplier and improve the facility's shaky commercial position.

However, it's no coincidence that Latvia is the stand out in the region. While Gazprom was not overly worried about losing the sales of the small volumes of gas consumed in Estonia and Lithuania - total consumption of the pair stands at around 3bn cubic metres - Moscow is keen to maintain the leverage its domination of the gas market traditionally lends. That, in turn, depends on its ability to block development of a regional market that could make alternative suppliers viable.

Latvia - long seen as the closest of the trio to Russia - sits in the centre of the three, meaning its pipelines are strategic in developing a market for facilities such as Lithuania's LNG terminal. Even more vital is the region’s only storage facility at Incukalns. Access would change the dynamics of the Baltic gas trade. Incukalns also serves the Russian enclave of Kaliningrad, and even the St Petersburg region.

However, there are also political pressures at play in Riga. On the one hand, the EU finally insisted late last year that LG now meets all the qualifications to force unbundling under its Third Energy Package. On the other, along with its Baltic bretheren, Latvia is increasingly wary of Moscow's apparent increased imperial ambition over the past couple of years.

The passage of the new legislation was clearly meant as a statement of intent, coming as it did the same day that a new government finally took office.  On the day he was nominated for the post of the prime minister in January, Marins Kucinskis was sure to note he intends to push through the unbundling of LG without delay.