Lithuania seeks to press home advantage against Gazprom

By bne IntelliNews October 4, 2012

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Encouraged by an anti-trust investigation launched by the European Commission last month against Gazprom, Lithuania announced on October 3 that it has filed an international lawsuit against the Russian giant seeking €1.45bn in compensation for over-priced gas supplies since 2004. The move is just the latest in a longstanding energy tussle between Vilnius and Moscow.

"Lithuania initiated an arbitration procedure at the Stockholm arbitration tribunal against Gazprom over the gas price for Lithuania," Energy Minister Arvydas Sekmokas told journalists on September 3, according to AP.

Vilnius argues that the terms of privatisation signed when Gazprom bought a 37% stake in Lithuanian gas trader and distributor Lietuvos Dujos committed the Russian company to offer "fair prices," calculated by a formula specified in the gas supply contract between the two companies. However, Sekmokas claims the Russian company has violated the privatisation terms by manipulating the Lietuvos Dujos board to agree to a new pricing formula. That has seen Lithuania's gas bill rocket from $84 per 1,000 cubic metres in 2004 to $497 this year, the minister asserted. That fits well with the Brussels investigation, which centres on Gazprom's use of long-term contracts to lock in prices that are tied to that of oil across Central and Eastern Europe.

Sekmokas said that Vilnius is claiming damages for consumers, which it calculates is up to LTL5bn (€1.44bn), adding that he expects the process to take 18 months to two years.

Lithuanian Prime Minister Andrius Kubilius was quoted by Reuters as saying that his government has tried to convince Gazprom with very clear arguments, that Gazprom could correct the price without arbitration, "but we didn't receive it."

However, Vilnius will not necessarily push towards a ruling from the arbitration panel. Pointing out that Poland and Germany's RWE have launched similar proceedings against Gazprom this year, the PM said that Lithuania's main hope is to achieve a gas price discount through negotiation - a scenario trailblazed by German utility E.ON, which won a price cut of 10% on Russian gas after launching its own arbitration. "Lithuania is following the same path," Kubilius said. "We tried to persuade Gazprom to adjust prices and not wait for such an arbitration suit, but we saw that wasn't going to happen."

Moscow has been holding out against multiplying requests to adjust the pricing formula in its long-term contracts from major European gas consumers ever since the 2008 crisis, in tandem with the growing role of cheap non-conventional gas in the US, sank prices on European spot markets. However, no more than a handful of select customers have been blessed with a discount. That is a factor that helped push the European Commission to open its probe into Gazprom over alleged abuse of its dominant market position in Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Poland and Slovakia, as well as Lithuania in early September.

Russia is currently the sole gas supplier to the Baltic markets, which are cut off by their Soviet past from European energy networks. However, Vilnius stepped hard on the throttle last year in its attempts to address the imbalance in the relationship, and plans to bring a floating liquified natural gas (LNG) platform online by the end of 2014, which will allow it to buy gas from around the globe. However, to work, Lithuania needs to wrest control of the country's distribution network from Gazprom.

The Russian company sued Lithuania in the Stockholm Arbitration Court earlier this year, claiming that it was forced to agree to a plan that will unbundle the network from Lietuvos Dujos under duress from Vilnius. However, the case was rejected in July. Noting that the tribunal has also said that Lithuania cannot take claims over pricing to local courts but must present them in Stockholm, and with the European Commission case offering momentum, Vilnius clearly feels the time is ripe to try to push Gazprom to the negotiation table.

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