Lithuanian hawk claims Russian gas discount

By bne IntelliNews May 9, 2014

Tim Gosling in Prague -


Lithuanian gas utility Lietuvos Dujos announced it has secured a "significant reduction" in the price of gas it buys from Gazprom on May 8. The news comes as Lithuania continues pushing to break Russia's domination of its gas market, and as Vilnius leads calls for tougher EU sanctions against Moscow.

The company said in a statement to the stock exchange in Vilnius that it "entered into an agreement with … Gazprom that involves a significant reduction in the price of natural gas imported by Lietuvos Dujos". The Lithuanian company, which supplies 40% of the country’s gas, has suggested the new pricing will take immediate effect, but it did not disclose what it will now pay.

Vilnius has been locked in negotiations with Gazprom over a new contract to replace the current deal, which expires next year. Throughout the process, the talk has been of a 20% discount. The Baltic country is reported to currently pay $484 per 1,000 cubic meters (cm), which officials claim is the highest price for Russian gas in Europe.

Prime Minister Algirdas Butkevicius said Gazprom has improved the pricing formula it uses through 2015 to charge Lieutovos Dujos, which may reduce the price paid by 21-23%, reports Bloomberg. The government will continue talks with the Russian company, he added. Lithuania rejected the last offer from Gazprom in February, showing clear anger over the company's approach - it called the terms "worthless" - following months of negotiation.

The apparent breakthrough comes amid much discussion of strategies to reduce European reliance on Russian gas, with Brussels' concern over the issue spiking due to the crisis in Ukraine. The difficulties of securing agreement on an EU sanctions regime against Moscow has put efforts to secure alternative supply into even sharper focus, with the likes of Slovakia, Bulgaria, and crucially, Germany wary of provoking displeasure and higher prices. Slovakia announced last month it has won a discount from Gazprom.

However, recent history in the former Soviet Baltic states looks to have promoted security concerns over economic worries. That has seen Lithuania front and centre in efforts to pull Ukraine into the EU and to apply sanctions. President Dalia Grybauskaite has led those efforts with a feisty swagger, and looks set to retain her office in elections on May 11.

Irons in the fire

Yet the country has been fighting a confrontational gas battle with Moscow for some years, despite being totally reliant on Russian gas, as well as oil and electricity from the east. As a result, it has several irons in the fire that have featured in the talks over a new contract with Gazprom. News flow over the next few weeks will likely illustrate which of those have featured in the deal with Moscow.

Top of the list is the floating LNG platform Vilnius plans to have operational by the end of the year. In a reminder of the hand wringing in Europe over gas dependency since Russia annexed Crimea in March, Vilnius has spent this week talking of its negotiations with global suppliers, including Norway and Qatar. 

“The terminal will allow us to diversify supplies and act as a virtual pipeline that will provide a price benchmark, which our monopoly supplier will not be able to exceed,” Energy Minister Jaroslav Neverovic said on May 7, according to Bloomberg. “The offers we’re getting from suppliers are lower than the price we pay Gazprom. How much we’ll be buying from Gazprom will depend on the price for Russian gas.”  

Another running theme over the past week has been Lithuania's progress in buying E.ON and Gazprom out of Lieutovos Dujos, as well as the distribution spin off Amber Grid. Vilnius forced Gazprom to agree to unbundle the gas companies in a bitter fight two years ago, and is reportedly on the cusp of taking control of Lieutovos Dujos via the acquisition of E.ON's 39% stake. It has applied to the competition watchdog for approval to take over 100% of both companies, but there's little information regarding talks or pricing over the 37.1% stake Gazprom holds in each.

Perhaps the most likely bargaining chip cashed in by Lithuania would be its lawsuits against Gazprom. In January, Lietuvos Dujos announced it was launching arbitration proceedings seeking compensation for overcharging. Meanwhile, Vilnius lodged a  LTL5bn (€1.44bn) suit with a Stockholm arbitration court in 2012. 

Although Butkevicius insisted in early April that a 20% price cut would not be enough to persuade the government to drop the action, he seems to have been careful to note that the discount is 21% or over. February's written offer from Gazprom reportedly featured a stipulation that Lithuania withdraw all legal action and refrain from claims in the future. 

The same proposal included a suggestion to conclude an intergovernmental agreement governing the transit of gas to Russia's Kaliningrad enclave, which sits between the Baltics and Poland. Lithuania hosts the only overland route for gas headed to the speck, and carried 2bn cm to the territory last year.

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