Latvia struggling to break Russian grip as it drops bid for gas utility

By bne IntelliNews October 22, 2014

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Latvia has halted talks with E.ON over buying a 47% stake in national gas utility Latvijas Gaze because the price is too high, the country’s prime minister said on October 21. The move illustrates how Riga continues to struggle to gain any traction in freeing its gas market from Russian control.

Latvia's government announced in September that it had submitted a non-binding offer to the German company for the stake. However, confirming local press reports, Prime Minister Laimdota Straujuma said in a television interview that the price for the asset is too high and that Riga cannot afford the deal. "We cannot continue talking about this process further," Straujuma said, according to Reuters. "The price [asked by E.ON] is what we cannot offer."

Earlier this year, it was reported that E.ON was seeking as much as €220m for the stake. Latvian media reported recently that Riga's offer - coming under pre-emption rights - came to just €116m.

That was always unlikely to tempt E.ON, despite its drive to divest assets because of EU pressure to unbundle or split ownership of suppliers and pipelines. Until recently, it controlled the gas markets across the Baltic states alongside Russian giant Gazprom. However, it has recently sold its stakes in both Estonia and Lithuania.

In Latvia, the German company is reported to have a bevy of suitors willing to join Gazprom - which holds 34% in Latvijas Gaze - and Russian independent gas trader Itera (16%).

Local media reported last month that several US companies are willing to stump up €175m. Meanwhile, infrastructure investment fund Marguerite, owned by European development banks, is also said to be interested.

Another reported suitor is oil trader Vitol, which owns 49.98% of Latvian oil terminal operator Ventspils Nafta, reported Reuters. The company opened an office recently in Riga, and said Latvia's capital will become its regional trade centre, the newswire adds. Described as "a mystery even to many in the oil business”, it's unclear exactly who is included in the Netherlands-based company's private ownership.

Falling behind

Closer to home, and offering the greatest potential for moving Latvia towards freeing itself from 100% dependence on Russian gas supplies, are two Lithuanian state-owned companies - Lietuvos Energija and EPSO-G - which have also submitted non-binding offers. 

The pair were created earlier this year when Vilnius bought E.ON and Gazprom out of Lithuania's gas utility company and pipeline operator. Those acquisitions followed a long and bitter fight against the Russian gas supplier, and were the key step in Lithuania's plan to launch a floating LNG platform by the end of this year. Vilnius already secured a price cut on Russian gas thanks to the leverage it has gained.

Gas from the "Independence" platform is already being sold through Lithuania pipelines. However, Vilnius wants to turn the facility into a regional hub. To sell gas to Latvia, it must break the grip of Gazprom over the country's pipelines. At the same time, Latvia hosts Incukalns - the only gas storage in the region - which is a strategic asset for any gas trading in the Baltics.

However, with Incukalns also serving western Russia and the enclave of Kaliningrad, Gazprom is unlikely to give up control without a fight, and Latvia is falling behind its neighbours. 

Estonia failed to buy E.ON out of Eesti Gas in the summer - Finland's Fortum, which is partly owned by Gazprom, clinched the deal to raise its stake to 51.4%, with Gazprom and Itera holding the rest - but Tallinn has demanded the country's pipelines are unbundled by the end of the year. 

Despite some political talk on unbundling, Riga has yet to take on Moscow. Latvia is traditionally seen as the closest of the Baltics to Moscow, and hosts Gazprom's regional HQ. However, with Estonia now pushing to follow in Lithuania's footsteps, Latvia needs to act soon, independent energy consultant Andres Mae told bne. 

"As the last of the Baltics to break Gazprom control of its networks, Latvia will be left exposed to increased leverage and potential price hikes," he states. At the same time, Riga has a tougher task, he adds. "Russia may not have fought too hard for small markets like Lithuania, but Incukalns is a strategic asset."

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