bne -

Locked in negotiation over gas prices, Lithuania and Russia look to have started serious horse trading. Vilnius has offered to drop legal action against both Gazprom and its own national gas utility, Lietuvos Dujos, in return for lower tariffs, according to local media reports.

Vilnius has offered Moscow a deal in which it will end litigation and an investigation into management at Lietuvos Dujos - in which Gazprom owns a 37% stake. The Lithuanian government is also offering to drop a LTL5bn (€1.4bn) claim in a Stockholm arbitration court in exchange for a reduction in gas prices, Baltic News Service reported on August 5.

The start of the bargaining comes in the wake of the spin-off of Lithuania's gas distribution network from Lietuvos Dujos into a new company called Amber Gold. The seal was put on the spin-off on August 1.

The unbundling of Lietuvos Dujos was a crucial step in Vilnius' development of a floating liquified natural gas (LNG) platform in the Baltic Sea. Once it goes into operation in late 2014, Russia will lose its role as supplier of 100% of Lithuanian gas demand. Under current contract conditions, according to Vilnius, Gazprom charges Lithuania a significantly higher price for gas than it does other EU consumers such as Germany.

Lietuvos Dujos announced on July 31 that it plans to extend its current supply contract with Russia's state-controlled exporter for a further five years. However, it insists it will only sign an agreement that features lower pricing and obliges it to take lower volumes.

Those talks are separate from discussions that Lithuania's government is pursuing with Gazprom, Lietuvos Dujos Director Viktoras Valentukevicius said at the time. Lithuanian Prime Minister Algirdas Butkevicius has said the country should avoid signing a long-term supply agreement with Gazprom.

However, years of struggle to break Moscow's grip sets Lithuania in a position from which it can now finally negotiate, as bne noted last week.

Lithuania is now apparently pushing to use that leverage. The outstanding lawsuit in Stockholm, claiming compensation for overcharged gas supplies since 2004, is heavily supported by the EU, which last year launched an antitrust probe regarding gas prices in Central and Eastern Europe.

On top of that, the spin-off - which will see Gazprom and fellow Lietuvos Dujos shareholder E.ON forced to sell their interest in Amber Gold - means Russia will lose control of pipelines supplying the enclave of Kaliningrad.

Reports of litigation and investigations into management at the national gas utility meanwhile appear to tally with earlier threats from Gazprom. The Russian gas giant threatened earlier this year to launch a legal case against the spin-off, claiming that it was forced to vote it through by threats from Vilnius, including a suggestion it could revisit the 2004 privatisation terms.