Signs of a Lithuanian gas deal with Russia mounting

By bne IntelliNews April 8, 2013

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Lithuanian media report that Gazprom has dropped one of its two arbitration claims against Vilnius, as signs continue to mount that the Lithuanian government is seeking to agree a gas deal with Moscow at the expense of the previous administration's drive to diversify the country's energy sources.

The Russian gas giant has dropped its arbitration case for lost income on its Kaunas heating plant, but continues, for the moment at least, to fight Lithuania's plan to unbundle gas monopolist Lietuvos dujos, reports Baltic Business News. However, as bne previously reported, Lithuanian Economy Minister Birute Vesaite said on April 4 that Vilnius could benefit from lower gas prices if it implemented the EU's Third Energy Package - essentially the unbundling programme - at a slower pace, claiming the country is "paying for its mistakes".

The suggestion from the minister, a member of the Social Democrats which leads the coalition that replaced the centre-right administration led by Andrius Kubilius in October, came as Prime Minister Algirdas Butkevicius prepared for a meeting with Russian Prime Minister Dmitry Medvedev on April 5. The Lithuanian PM has long maintained that his administration would seek to reduce confrontation with Moscow, which was infuriated by the previous government's moves to free the country from its energy grip.

Almost immediately following that meeting of the two PMs, reports surfaced that Gazprom had dropped its Paris arbitration court claim seeking $191m in compensation for lost income in Kaunas due to lowered heating tariffs. Gazprom acquired Kaunas' main heat provider in 2008, pledging huge investment. However, with that investment not materializing, Lithuania slashed the tariffs, reports Baltic Business News.

Gazprom sold the heating utility to its Lithuanian partner in 2012, essentially losing its right to the arbitration claim. Yet it clearly does no harm to the ongoing detente to announce that the Russian's have officially withdrawn the claims. Lithuania still has an arbitration case against Gazprom ongoing in Stockholm that seeks over €1bn in compensation for years of alleged over-paying for gas.

That appears to leave both Vilnius and Moscow with one major card each to play. In its hand, Gazprom has its petition against the unbundling of Lietuvos dujos. The Russian company launched the suit in March 2012 under the UN Commission on International Trade Law.

A cornerstone of Lithuania's aggressive drive under Kubilius to improve energy security by devising alternative suppliers to Gazprom - which currently provides 100% of Baltic gas demand - is a plan to launch a floating liquified natural gas (LNG) platform by late 2014. Key to that scheme is wresting control of the country's gas network to distribute the imported energy.

Lithuania's pipelines are currently operated by Lietuvos dujos, and following a long and bitter fight Vilnius leveraged the most stringent options under the EU's Third Energy package to force a decision to unbundle the company past major shareholders Gazprom and Germany's E.ON last year. Gazprom maintains that it was coerced into the decision by threats from the government.

On March 7, Lietuvos dujos announced that it plans to complete the spin-off of its transmission networks from its supply operations on July 31, with the transfer of distribution activity to AB Amber Grid. Lietuvos dujos reiterated at the time that EU regulations mean E.ON and Gazprom must sell their interests in the network.

However, a final vote on the terms and conditions of the unbundling by shareholders is still pending, it admitted. The ongoing signals from both Vilnius and Moscow suggest that there may be a potential route to roll back the process for the Russian state-controlled gas giant.

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