Lithuania rejects Gazprom's "worthless" offer

By bne IntelliNews February 26, 2014

bne -

Lithuania blasted Russian gas giant Gazprom on February 25, calling its written offer for a new supply contract "unacceptable" and describing the price discount it puts on the table as worthless due to the conditions attached.

Lithuania announced on February 21 that it had received a written offer from the Russian company. While Prime Minister Algirdas Butkevicius admitted in a statement that the gas price put on the table is "the lowest in the period of negotiations," the offer seeks to wipe out the points of leverage it has built up over the past few years at the same time.

"The price discount comes at our expense," President Dalia Grybauskaite said, according to BNS. "The essence of the offer remains the same as it was a year ago, when I said that those conditions were unacceptable for Lithuania," she continued. "The discounts are of no worth because there is the complex of the conditions." She urged the prime minister to return to the negotiation table.

Butkevicius said he complained to Gazprom CEO Alexei Miller by phone on February 24 that the written offer is different from terms that were discussed face-to-face earlier this month. "He said that all verbal offers were still in effect and that there was a need to negotiate," the PM reported, according to Leta.

Too good to be true

The pair has been scrapping over a new gas contract for 2015 onwards for months. Russia wants to keep its grip on the Baltic markets - currently it supplies 100% of the region's gas - while Lithuania has been pushing to break that dominance in order to secure better terms.

However, talks broke down late last year as Vilnius hosted the famous EU summit at which Ukraine backed out of signing a free trade and association pact. With trucks and diary products suddenly blocked from the Russian market, after receiving a first offer from Gazprom, Lithuanian Prime Minister Algirdas Butkevicius accused Moscow of starting a trade war.

However, earlier this month, Butkevicius announced he had received a verbal offer while at the Sochi Olympics, which Grybauskaite described as "worth considering". The officials now claim the terms were changed as they were transposed to paper.

As bne suggested earlier this week, Russia's apparent about face appeared almost too good to be true. The full proposal "in writing is different from what's been offered in words," and "doesn't satisfy the interest of Lithuania and its people," Grybauskaite said in her statement.

Unnamed sources said the offer centred on a 10-year gas supply contract, according to BNS. While Russia has been pushing to sign a long-term inter-governmental gas supply agreement to replace the current deal, which ends in 2015, Vilnius wants a commercial contract between the two companies.

The unofficial source told BNS that the offer also includes a "take-or-pay" clause - which would force the customer to pay for a specified minimum volume of gas whether or not it uses the full amount - that covers 80% of the contracted volume. Overall, Gazprom proposed to lower the price of the gas by 20%, but only for the first three years, with renegotiations to follow.

Those conditions would clearly pull the rug from under Lithuania's major point of leverage. The Baltic state plans to have a floating LNG platform operational by the end of this year, which will eventually have the capacity to satisfy the bulk of the country's annual demand of 3bn cubic metres (cm) or so in the near future.

In addition, the Russian offer would demand Lithuania withdraws all of its lawsuits against the company. At the end of January, Lithuania's largest gas utility Lietuvos Dujos announced it is to launch a arbitration proceedings against Gazprom seeking compensation for gas prices that are 13% higher than Estonia pays, and 20% higher than Latvia. Vilnius is also suing Gazprom in a Stockholm arbitration court for LTL5bn (€1.44bn), which Lithuania says it has been overcharged.

The key point in January was that Lietuvos Dujos shareholders agreed the move despite Gazprom holding a 37.1% stake. Germany's E.ON, the biggest single shareholder with 38.9%, appears to have swapped allegiances. The written offer also reportedly stipulates Vilnius commit itself not to file any claims in future.

It also proposed to conclude an intergovernmental agreement governing the transit of gas to Kaliningrad. Lithuania hosts the only overland route for gas headed from Russia to the enclave, and the Baltic state carried 2bn cm to the territory last year.

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