Russia presses pressure points in Lithuanian gas talks

By bne IntelliNews September 25, 2013

bne -

Russian gas giant Gazprom said on September 24 that it is ready to sell its stake in Lithuanian distributor Amber Grid, and also that it plans to build a liquified natural gas (LNG) plant in the enclave of Kaliningrad. The state-controlled company is clearly looking to up the pressure in its talks over a new supply contract with Vilnius.

The shares of Amber Grid - the Lithuanian gas distributor spun off from utility Lietuvos Dujos in the summer - surged to a new record on the back of a report from BNS suggesting Russia has said it is ready to sell its 37% stake to the Lithuanian government. The shares rose as much as 8.8% in Vilnius.

According to BNS, the government has now asked Gazprom to specify how it will sell its holding in Amber Grid, which it needs to do to meet EU competition rules. A Gazprom official said on September 23 that his company is ready to sell, the newswire claims. Vilnius currently holds 18% of Amber Grid; Germany's E.ON is also set to sell it a similar sized stake after the government said earlier this month it is ready to buy out the two foreign investors.

However, the deal is part of a far wider discussion. The Russian company still claims that it was forced to agree to the spin-off of the pipelines by threats from Vilnius. That move was key for Lithuania's plan to have an LNG platform up and running by the end of 2014, which will break the country's 100% reliance on Russian gas imports.

Losing control of Lithuania's gas pipelines presents Moscow with an additional headache. The Russian Baltic enclave of Kaliningrad is fed gas via the network. Gazprom said on September 23, however, that it could build its own LNG terminal to circumvent Lithuania.

Gazprom CEO Alexei Miller has reportedly agreed with Kaliningrad Governor Nikolai Tsukanov to launch a study for the project, with an investment decision seen next year, according to Reuters. Gazprom had previously said in June it was looking into building an LNG plant in the Baltic Sea that would actually produce the gas, rather than just convert imported LNG. Russia's only LNG production plant at present sits thousands of miles away on the Pacific island of Sakhalin.

The announcements directly address two of the three major points of leverage in ongoing talks between Lithuania and Gazprom over a new gas contract. Vilnius insists that the planned LNG terminal offers it the opportunity to negotiate a significant discount to current prices that are among the highest in Europe.

However, having launched trade wars against several eastern European states in recent weeks, Russia is clearly in the mood to play hardball. Vilnius expressed fury in mid-September, claiming that the terms offered and demands made are unrealistic. With hundreds of Lithuanian trucks queuing at Russian customs posts due to increased control measures, and dairy products now blocked, Prime Minister Algirdas Butkevicius accused the Kremlin on September 19 of waging an "economic war".

Regularly criticized for softening the aggressive stance of his predecessor towards Moscow, Butkevicius has one more point of leverage in the talks with Gazprom. An ongoing arbitration suit in Stockholm has Lithuania claiming LTL5bn in compensation for what it says are overcharged gas supplies during the 10-year contract that ends next year. However, during the summer, Lithuanian officials - including the PM - made disparaging comments over the cost of the legal work of the suit. Gazprom may now be hoping to push Butkevicius into dropping it.

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