Lithuania sets deadline to spin off gas pipelines

By bne IntelliNews March 8, 2013

Tim Gosling in Prague -

Lithuanian gas utility Lietuvos Dujos plans to complete the unbundling of its transmission networks on July 31 by splitting off its distribution business to AB Amber Grid and then listing the new company, the company announced on March 7. The news provides a deadline for Russian state-owned giant Gazprom in its attempts to prevent the move, which is a crucial step in Lithuania's struggle to gain greater energy independence.

The terms of the spinoff have been approved by the Lietuvos Dujos board and the state energy regulator, the company said in a statement published on the website of the Nasdaq OMX Vilnius stock exchange. "The shares of the new company and the company that continues the activities after the spinoff will be distributed to all the shareholders in proportion to their shares in the authorized capital of AB Lietuvos Dujos," the utility said in the statement. "There are no legal entities to be wound up after the spinoff."

The new gas grid operator will take LTL1.6bn (€463m) or 57.4% of the utility's assets, according to the terms of the deal. However, a vote on the matter by shareholders is still pending, it said, and therein lies the crux of the issue.

Opting for the most far-reaching reforms under EU legislation aimed at liberalizing the bloc's energy markets, Lithuania - which owns just 17.7% of Lietuvos Dujos - is forcing the spin-off past the company's two major shareholders: Germany's E.ON (39%) and Gazprom (37%). The goal is Vilnius' efforts to diversify its gas supplies, with the country currently reliant on the Russian company for 100% of its demand. ]

Lithuania plans to kick off operations on a floating liquified natural gas terminal (LNG) terminal in late 2014 as a means of sourcing gas from elsewhere in the world, which it will then use as a major point of leverage on the price it pays for Russian gas. However, for that plan to work, it must take control of its distribution system out of Gazprom's hands.

The previous Lithuanian government that lost power in October maintained a highly confrontational approach to Moscow over energy, sparking a bitter fight over the crucial unbundling issue through 2011-2012. Vilnius eventually announced in May that Lietuvos Dujos shareholders had agreed to the plan. Gazprom maintains that it was coerced into the decision by threats from the government, and says it has not ruled out international arbitration.

However, despite the new government in Vilnius following a more cooperative line towards Moscow, that does not apparently apply to the diversification plan for the gas market, on which the EU has lent it heavy support. Leveraging Brussels' Third Energy Package, Lithuania says it requires the spin-off by law, and that companies involved in gas production and supply are forbidden from controlling transmission and distribution. Using that legislation, Lithuania continues to play hardball.

"[E.ON and Gazprom] must sell," Joachim Hockertz, deputy chief executive of Lietuvos Dujos told Reuters. "Otherwise the main shareholders will lose all the management rights (in Lietuvos Dujos itself), and the minority shareholder, which is the government, will take all the rights. That, of course, is an unacceptable situation for the strategic shareholders, E.ON Ruhrgas and Gazprom, which together hold 76% and might have no say whatsoever."

Spreading the risk for Gazprom even further, the Lithuanian LNG terminal could easily be used to break Russia's dominance of the gas markets of the country's Baltic neighbours. While Estonia and Latvia have remained far less confrontational in their dealings with Moscow over the issue - mostly because they pay less for gas imports - should Vilnius succeed in unbundling Lietuvos Dujos, they may be inspired to follow.

While bickering over the location of an official pan-Baltic LNG terminal continues - encouraged by Gazprom - Estonia's Eesti Gaas is expected to sell its gas transport business by the end of 2015. Latvia is due to decide whether or not to unbundle its pipelines in the near future - Gazprom and E.ON also hold stakes in both.

Reflecting that risk for the Russians, following a meeting between Baltic, Finnish and Polish ministers with the European Commission, Latvian Foreign Minister Edgars Rinkevics told Latvian Radio on March 7 that greater coordination on liberalization is on the cards. "We have reached an agreement that Baltic States, Finland and the European Commission will be working closely together in order to coordinate talks with Gazprom. Now it is only the matter of executing the plan," the minister said.

The meeting in Brussels with EU Energy Commissioner Gunther Oettinger also discussed a plan of action for developing Baltic gas infrastructure. Accelerating the range of planned projects to improve the ability of Baltic gas networks to tap alternative sources was discussed, according to Leta, including interconnecters amongst the Baltic states, as well as to Poland and Finland.

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