Latvijas Gaze threatens legal action as it agrees unbundling schedule

Latvijas Gaze threatens legal action as it agrees unbundling schedule
Latvia's gas grid is strategic for the whole Baltic region
By Wojciech Kosc in Warsaw March 22, 2016

Latvijas Gaze (LG) shareholders have agreed to launch measures to unbundle the company by April 2017, the Latvian gas monopoly announced on March 22.

On the surface, the decision appears to denote that the company has given up on its opposition to the Latvian government’s plan to unbundle the company by April 2017, which is key to reducing Russia's tight grip on the Baltic region's gas markets. However, LG suggests to bne Intellinews that it plans to launch a legal challenge. 

The Russian-controlled company has been trying to block Riga's efforts to split it into separate sales and transmission entities, in line with EU regulations, for years. However, Latvia recently approved legislation that will force unbundling to start when LG’s 20-year monopoly, granted during privatisation in 1997, expires.

The shareholders voted on a board resolution "to carry out the necessary actions and prepare the draft documents in order to take the decision of splitting of the Joint Stock Company Latvijas Gaze, a company statement issued on March 22 said. 

Latvijas Gaze CEO Aigars Kalvitis informed shareholders that the board has approved a plan to divide the group into two subsidiaries, in line with Latvia's new Energy Law. Both will be joint-stock companies, each with its own assets and independent shareholders.

"All the shareholders that are associated with energy production will not be able to own shares in the transmission and storage company," Kalvitis said, according to Leta. Every shareholder will have to consider leaving one or the other company," he noted. LG is controlled by Russia via a 34% stake owned by gas giant Gazprom and 16% held by Rosneft subsidiary Itera Latvijas. 

The move suggests Riga is on way to finally freeing its gas market from LG's gip - which is key to creating a unified Baltic market and reducing reliance on  Russian supplies. LG - which managed to get unbundling delayed in 2014 - has fought the government’s push for an April 2017 deadline, claiming it needs until 2019 to carry out the split properly and avoid harming shareholder interests.

On top of the pressure from Riga, the EU is helping to push the issue. The decision to set the wheels in motion on splitting the company came as two representatives from EU-backed investment fund Marguerite, which recently bought close to 30% of LG from Uniper Ruhrgas International, joined the board. 

However, the monopolist is not ready to throw in the towel yet. "The request to split the company by April 2017 is against the privatization agreements between the Latvian State and strategic investors," spokesman Vinsents Makaris tells bne IntelliNews. "But that's what the state decided. Now our shareholders have an option to go to the arbitration court in Stockholm.” 

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 it launched at the start of 2015 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.