Lithuania: Gazprom Reluctant to See Energy Company Split

4 MINS READMay 31, 2012 | 10:10 GMT
A pipeline at the Russian natural gas compressor station in Sudzha

Lithuania's main natural gas company, Lietuvos Dujos, announced May 28 that it would split into three separate units. The split is in compliance with a provision of the European Union's Third Energy Package that requires natural gas companies to unbundle their sales, transport and production operations.

The move will reduce the control that Russian energy giant Gazprom has over Lietuvos Dujos, particularly in the area of transportation, because control of transit operations will be placed in the hands of the Lithuanian state. This marks an important victory for Vilnius, which has been looking to diversify away from Russian natural gas supplies and trying to gain pricing concessions from Moscow.

The EU unbundling regulation is meant to prevent the formation of natural gas monopolies, liberalize the natural gas market and encourage lower prices for consumers. Technically, the EU regulation allows two of the natural gas operations to remain bundled, but Lithuania has been aggressive in unbundling all three operations.

Lithuania's decision to split the company into three units is based largely on its complicated and occasionally contentious relationship with Russia in the energy sector. Lithuania imports 100 percent of its natural gas from Russia while paying a higher price (approximately $460 per thousand cubic meters) than any other European customer, and Vilnius has taken legal action against Gazprom to block the company from forming a monopoly over Lithuania's natural gas sector. Gazprom currently owns 37 percent of Lietuvos Dujos, while Germany's E.On owns 39 percent and the Lithuanian state owns 18 percent.

Gazprom vehemently opposed the division of Lietuvos Dujos into three separate units, since the move would undercut the Russian firm's position in one of Lithuania's most strategic sectors. Gazprom, E.On and Vilnius are still negotiating the details of the split, but it appears that Gazprom will likely retain its share of the company's sales operations and hold a reduced share of its distribution operations. Gazprom will also lose all control over Lithuania's transport sector, which will fall into the government's hands.

This restructuring would give Lithuania greater freedom to pursue its natural gas diversification efforts and, if Vilnius chooses to, link its network to a liquefied natural gas import facility. By 2014, the country is set to have a floating regasification terminal with the ability to supply up to 4 billion cubic meters (bcm) of natural gas per year, though it is currently contracted for only 1 bcm per year. These diversification plans give Lithuania considerable leverage in negotiating with Russia on natural gas issues.

Previously, Gazprom was unwilling to compromise on pricing and unbundling issues and chose instead to drag matters out by pursuing lengthy (and so far inconclusive) arbitration suits while simultaneously raising natural gas prices for Lithuania. But pressure over the past few years from both the European Commission, which took a special interest in the case, and from E.On, one of Russia's largest energy customers and a former Gazprom shareholder, contributed to the Russian firm's decision to agree to Lietuvos Dujos' reorganization.

Moscow realizes that its position in Lithuania's energy sector is weakening. By 2014 or 2015, Vilnius will have the ability to challenge Russia's influence in the sector if it chooses to. Consequently, Russia is positioning itself favorably by making concessions to Vilnius so that it can retain some influence in Lithuania's energy sector after diversification. The agreement regarding the unbundling of Lietuvos Dujos is one such concession. The outcome of the current agreement will still be relatively favorable to Gazprom because it will retain control over one of the three sectors and have some influence over another. This is likely more than Gazprom could expect if an arbitration court ruled in Vilnius' favor.

Russia will use its significant remaining leverage within Lithuania's energy sector to entrench its influence ahead of Vilnius' diversification efforts. In fact, a recent statement by Gazprom reserving the right to action within the Lithuanian and EU legal framework suggests that the firm will try to maintain a strong presence in the sector. It is also unclear how strictly the European Commission would enforce sanctions against Gazprom if it were to breach its agreement to the split.

Still, the concessions Gazprom has offered will allow some degree of liberalization of the Lithuanian natural gas sector and will make it easier for diversification efforts to come to fruition. This in turn will improve Lithuania's position, both in its negotiations with Gazprom over pricing matters and in its energy relationship with Russia.

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