Tim Gosling in Prague -

Lithuania launched talks over a new gas supply contract with Russian state giant Gazprom on September 6, with the prime minister claiming a discount is on the way. However, the closed-door talks are likely to stray into a host of issues before a final deal is agreed.

Both PM Algirdas Butkevicius and Gazprom CEO Alexei Miller told the press following their meeting in Vilnius that Russia would lower the price of gas it sells Lithuania. However, no details were offered.

"I'd like to say that we are talking about a substantial reduction in prices. Talks on co-operation scenarios will continue and both parties want to complete them in the near time," Miller told reporters, according to Leta. He would not specify by how much prices - which stand above the EU average - would be reduced.

"We are seeking a new formula for gas prices that would reflect a changed situation in the market," Butkevicius said in a statement released by his office. Gazprom will provide a written proposal for Lithuania to consider, he added.

Miller said in a statement that the talks should be concluded "in the near future." The PM offered no timeline. Miller was careful to point out, however, that any agreement should be favourable both for Lithuania and Gazprom. That translates as an admission that the two are talking over a range of issues thrown up by Lithuania's strategy over the last few years to break Russia's dominance of its gas market.

Leverage

While the previous PM, Andrius Kubilius, led a government that maintained a highly aggressive stance towards Moscow. Butkevicius has - as promised - followed a more "pragmatic" course. While a flagship project to launch an liquified natural gas (LNG) platform by the end of next year is going forward, Vilnius has slowed efforts to hunt for shale gas and build a new nuclear power station.

The unbundling of national gas utility Lietuvos dujos was pushed through over Gazprom's objections this summer, and is a key development as it frees Lithuania's gas pipelines from Russian control. Spun off into a new company called Amber Grid, Vilnius has leant on EU legislation to insist that Gazprom - and fellow Lietuvos dujos shareholder, Germany's E.ON - must sell their interest.

Moscow, which complained it was forced to agree to the unbundling because of threats from the previous government, has been suspiciously quiet on the issue since Butkevicius and his Social Democrats formed a left-leaning coalition in December. Following the September 6 meeting with Miller, the PM said Vilnius is ready to offer to buy out Gazprom and E.ON's Amber Gold stakes.

That clearly offers the pair an extra point of negotiation. The Lithuanian press has not been slow to point out that the last gas contract with Gazprom, negotiated by a previous Social Democrat government in 2004, saw the Russian giant handed its Lietuvos dujos stake for just LTL100m - a price claimed to be around 10% of its true value. Meanwhile, Russia will be looking to secure gas supplies to the Russian enclave of Kaliningrad, which is served through Lithuania's pipelines.

At the same time, another point of leverage for Vilnius is an ongoing arbitration suit in Stockholm. Submitted by Kubilius' government just ahead of its demise, the action has Lithuania claiming LTL5bn in compensation for what it says was overcharging during the 10-year contract gas contract that ends next year. However, during the summer Lithuanian officials - including the PM - have made disparaging comments over the cost of the legal work.