Final call on Lithuanian gas pipeline spin-off

By bne IntelliNews May 16, 2013

bne -

Lithuania has set a deadline of June 11 for the final call on its plan to wrest control of its pipelines from Gazprom and reduce its reliance on Russian gas. The board at national gas company Lietuvos Dujos announced on May 15 that it will hold an extraordinary shareholder meeting to vote on unbundling the company and setting up a new network operator.

In a market announcement, Lietuvos dujos said that shareholders will vote on two major issues - the spin-off of the company's pipelines and the establishment of Amber Grid. The agenda was approved at the company's annual general meeting on May 14.

The meeting will be the ultimate test of the resolve of the recently-appointed government in Vilnius to continue the push for greater independence from Russia, which currently supplies all of Lithuania's gas. Prime Minister Algirdas Butkevicius entered office in December insisting he would take a more "pragmatic" course in relations with Moscow than his predecessor. Since then, officials have openly suggested that Vilnius was mulling a step back on planned projects in return for a price discount on Russian gas, although in recent weeks they've change tack to talk up the projects once more.

Displaying an aggressive stance towards Russia, the government of former PM Andrius Kubilius set up several schemes designed to expand the options of a country plumbed in to Soviet energy systems. While the construction of a pan-Baltic nuclear power plant is now up in the air, a liquified natural gas (LNG) terminal is on course to go into operation by the end of 2014. That will give Vilnius the opportunity to buy gas from other suppliers, and thus offer the country leverage on the price it pays Gazprom.

However, for that to work, Vilnius has to prise control of the country's transmission system out of the Russian company's hands. Using the most far-reaching option under the EU's Third Energy Package, Vilnius - which holds just just 17.7% of Lietuvos Dujos - managed to push the unbundling past major shareholders Gazprom and E.ON, following a bitter fight last year. Gazprom maintains it was coerced into the decision by threats, and says it has not ruled out international arbitration.

Lietuvos Dujos announced on March 7 that it plans to complete the spin-off of its transmission networks, and set up new operator Amber Grid, by July 31. The new distributor will take LTL1.6bn (€463m) or 57.4% of the utility's assets, according to the terms of the deal. However, as it noted at the time, a final vote on the matter by shareholders is still pending. That will now take place next month, suggesting the horse-trading between Vilnius is set to go into overdrive, with both sides having much to lose.

"[E.ON and Gazprom] must sell," Joachim Hockertz, deputy chief executive of Lietuvos Dujos told Reuters in March following the announcement of the spin off plans. "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 said in March 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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