Lithuania's Lietuvos Dujos joins the pricing push against Russia

By bne IntelliNews August 1, 2013

bne -

Having pushed through major barriers towards securing alternative gas supplies, Lithuania is looking to leverage its hard won diversification by joining major EU importers in pushing Russia for a price cut on imports from the east.

Lithuanian gas utility Lietuvos Dujos said on July 31 that it plans to extend its current supply contract with Russia's state-controlled exporter Gazprom for a further five years. However, the recently unbundled Lithuanian company - in which Gazprom owns a stake of 37% - insists it will only sign an agreement which features lower pricing and obliges it to take lower volumes.

"We're in negotiations about extending the contract while changing some parameters," Lietuvos Dujos Director Viktoras Valentukevicius told reporters, according to Bloomberg. "It would be for a period sufficient for us to assess changes and risks in the market, I think at least five years." Like the vast majority of Gazprom's major customers, the Lithuanian company wants to dispense with oil-linked pricing in its contract.

The talks are separate from those Lithuania's government is pursuing with Gazprom, Valentukevicius added. Lithuanian Prime Minister Algirdas Butkevicius has said the country should avoid signing a long-term supply agreement with Gazprom.

The previous centre-right government of PM Andrius Kubilius pursued a strategy that presented a highly confrontational face to Moscow, which currently provides 100% of Baltic gas and a large chunk of its electricity. However, Butkevicius took office in December, pledging a more "pragmatic" relationship with the Russians, and halting a plan to build a pan-regional nuclear power station at Visaginas.

Yet the current government has pushed through the plan to build a floating liquefied natural-gas (LNG) terminal on the Baltic Sea, which is scheduled to start work in late 2014. The crucial test of its resolve came in June, when the unbundling of Lithuania's transmission network from Lietuvos Dujos was finally sealed, despite the opposition of both Gazprom and fellow shareholder E.ON, which owns a 39% stake.

The freeing of the country's pipelines from Gazprom's control was clearly vital to the LNG plan, which officials have said will offer Vilnius the leverage to push Russia on the price of its gas exports. Claiming to have been forced to agree to the move under duress, Gazprom has threatened to launch a legal case against the spin-off of the distribution assets into Amber Gold, but has not yet moved.

That threat - as well as Lithuania's claim that under the EU's Third Energy Package major shareholders in the rump Lietuvos Dujos import and sales operation will be forced to sell their stakes in Amber Gold - will presumably feature in the talks on a new contract. Another point of leverage for Vilnius is that the spin-off means Russia will lose control of pipelines supplying the enclave of Kaliningrad.

European push

At the same time, Lithuania has an outstanding lawsuit filed against Gazprom in a Stockholm arbitration court for LTL5bn (€1.4bn) in compensation for overcharged gas supplies since 2004. That move was part of a wider European push against the Russian gas giant, itself inspired by the launch of an EU antitrust probe regarding gas prices in Central and Eastern Europe.

A host of consumers in larger markets in Western Europe managed to wrest concessions out of Gazprom in 2012, with the Russian company forced to hand over around $3.3bn in pricing revisions to utilities in countries including Germany and Italy. Lower demand due to the ongoing crisis, alongside the impact of US shale gas and LNG from producers such as Qatar, saw spot market gas prices dive far below crude.

The action is not over, and several European customers started new talks on pricing with Gazprom at the beginning of the year. Russian newswire Interfax reported on July 30 that Italy's Edison - a subsidiary of French giant EDF - has filed an arbitration request against Gazprom demanding a revision of its contract terms to drive prices below those at the end of 2012.

However, analysts at VTB Capital suggest the Russian company has a stronger defence against claims this year. "We do not believe they will lead to any substantial price revisions given that spot prices are not as far from Gazprom's oil-linked prices at the moment," they write.

Edison buys around 2bn cubic metres of gas from Gazprom, which is approximately 1% of Russia's European deliveries for this year, and the contract between companies is valid until 2022. Lithuania consumes around 3bn cm per year, with Valentukevicius claiming Lietuvos Dujos handles around 40% of that trade.

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