Lithuania mulling Russian gas offer

By bne IntelliNews February 24, 2014

bne -

Lithuania announced on February 21 that it has received a written offer from Russian gas giant Gazprom on new gas supplies. The document is reported to suggest a price cut of 20%, and cover several points of leverage the two countries have brought into play in recent months.

The pair has been scrapping over a new gas contract for 2015 onwards for months. Russia wants to keep its grip on the Baltic markets - currently it supplies 100% of the region's gas - while Lithuania has been pushing to break that dominance in order to secure better terms.

However, talks broke down late last year as Vilnius hosted the famous EU summit at which Ukraine backed out of signing a free trade and association pact. With trucks and diary products suddenly blocked from the Russian market, after receiving a first offer from Gazprom, Lithuanian Prime Minister Algirdas Butkevicius accused Moscow of starting a trade war.

Butkevicius received a verbal offer at the Sochi Olympics, which feisty Lithuanian President Dalia Grybauskaite suggested was "worth considering". Natural Gas Europe, without citing sources, claims Gazprom offered a discount of over 20%.

"We received the offer yesterday evening. At the moment, the experts of the negotiating group are analysing them and they will present the conclusions to the prime minister next week," government spokesperson Rita Grumadaite told Leta. "We received Gazprom's proposals I saw those documents," the PM said later. "But I have not read them yet. The price is the same as I was told it would be."

Too good to be true?

Russia's apparent about face appears almost too good to be true.

On the one hand, Vilnius has been highly vocal in support of the revolution in Ukraine, and even provided refuge and medical care to several prominent figures. At the same time, Moscow has shown little sign of dropping its tough stance over trade with the Baltics and wider neighbourhood.

On the other, it comes as Lithuania's role in the geopolitics of the region has taken more of a back seat since it wrapped up its stint in the EU's rotating presidency at the end of last year. Meanwhile, Vilnius has accelerated its leverage efforts on several pressure points connected to the gas trade.

Officials were in South Korea in mid-February to watch the launch of a floating liquified natural gas (LNG) terminal which is set to be operational by December. One Lithuanian official told the Financial Times it's a "matter of life and death" that the vessel is in Klaipeda in time to be used as leverage in price talks with Gazprom. While Russia has been pushing to sign an long term inter-governmental gas supply agreement, Vilnius wants a commercial contract between the two companies, with the LNG platform set to satisfy the bulk of the country's demand in the near future.

At the end of January, Lithuania's largest gas utility Lietuvos Dujos announced it is to launch a arbitration proceedings against Gazprom seeking compensation for gas prices that are 13% higher than Estonia pays, and 20% higher than Latvia. The key point was that the company's shareholders pushed the move through despite the Russian company's 37.1% stake; Germany's E.ON, the biggest single shareholder with 38.9%, appears to have swapped allegiances. Vilnius is also suing Gazprom in a Stockholm arbitration court for LTL5bn (€1.44bn), which Lithuania says it has been overcharged.

Butkevicius refused to confirm if the new deal means a 20% price cut. However, he added that apart from gas pricing and terms, the package Gazprom has sent tackles three further key points: gas transit to Russia's Baltic exclave Kaliningrad, the EU's Third Energy Package, and Gazprom's ownership of Lithuanian gas pipelines.

In the wake of the Sochi meeting, Lithuania's government released a statement in which Butkevicius had said: "Gazprom agrees not to question (implementation) of the EU's Third Energy Package." Vilnius has said that under the terms of EU legislation, the Russian company must sell its 17.7% stake in Amber Grid, which holds the transmission system.

Amber Grid was spun off from Lietuvos dujos last year, to the fury of Gazprom. The Russian company claims it and E.ON were forced to support the motion at board level under duress. Lithuania (17.7%) has previously said it is ready to buy the stakes of both. Wresting control of the pipelines is key for Vilnius' LNG plan to work.

Such a move would leave Moscow open to further leverage however. Lithuania hosts the only overland route for gas headed from Russia to the enclave of Kaliningrad; the Baltic state carried 2bn cubic metres (cm) to the territory last year. Unnamed sources in Vilnius hinted earlier this month that Gazprom has agreed to stay in Amber Grid as a purely financial investor, reports Natural Gas Europe.

With the verbal offer in mid-February, Lithuania appeared to sense it had taken the upper hand. "The situation in which Gazprom sets a political price for Lithuania and the Lithuanian people overpay -- that can't happen again," Grybauskaite said at the time. The government may consider dropping arbitration proceedings if the new terms offered outweigh them, a presidential adviser added.

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