Lithuania sniffs victory in Gazprom fight

By bne IntelliNews March 20, 2013

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Vilnius' aggressive confrontation with Moscow over the price it pays for natural gas imports may be about to produce results, with Lithuanian Energy Minister Yaroslav Neverovich claiming on March 19 that a deal with Gazprom to lower prices could be secured this year.

Neverovich told journalists that a specific result in negotiations on gas prices is less important now than developing a mechanism for buying Russian gas at global market prices in the future. The minister called it a "political goal," according to Interfax.

While the current administration in Vilnius - which took office late last year - has softened the rhetoric and action towards Moscow, it has not backed down on the major elements introduced by its predecessor in a bid to break Russia's 100% grip on Lithuania's gas market. Current PM Algirdas Butkevicius reiterated recently that the country is looking for a price cut of at least 20%.

After watching major customers across Europe secure discounts from Gazprom over the past couple of years, Lithuania still has a legal case with Stockholm's international arbitration panel pending. It is also pressing on with a plan to launch operations at a liquified natural gas (LNG) terminal in late 2014. In order for that plan to work, Vilnius needs to wrest control of the country's distribution network from Gazprom.

Gazprom said it was forced last year by threats from Vilnius to agree to unbundle gas utility Lietuvos Dujos - in which it owns 37% or so. The Lithuanian company said on March 7 that it plans to spin off a new pipeline operator by July 31, and that EU law prohibits both Gazprom and Germany's E.ON - the other shareholder in what will become the rump sales operation Lietuvos Dujos - from holding an interest.

"[E.ON and Gazprom] must sell," Joachim Hockertz, deputy chief executive of Lietuvos Dujos told Reuters at the time. "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."

According to Interfax, Gazprom is now pushing for new talks involving broader issues. The Russian gas export monopoly wants Lithuania to delay that introduction the EU's Third Energy Package, and is pushing to seal a new long-term supply contract in exchange for a gas price reduction.

Moscow also wants Lithuania to withdraw its suit against Gazprom, with Vilnius seeking €1.5bn from the company on the back of claims it was overpaid over the past four years due to gas prices that were over and above global levels. The Russian company has already paid out billions to other European major customers when agreeing new pricing formulas with them last year, as lower demand from the economic slowdown and the growth in LNG and US shale gas conspired to bring down spot prices of gas, and it's due to make further payments. However, with the Baltic gas networks cut off from the rest of Europe for historical reasons, Russia has a firmer grip on those markets for now.

Spreading the risk for Gazprom even further, the Lithuanian LNG terminal could also help 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 suit.

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.

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