Gazprom Resists EU-Backed Reform of Lithuania’s Energy Sector

Lithuania seeks the European Union’s support for gas sector reform in line with EU law, against pressures from Gazprom. The Russian company enjoys a supplier’s monopoly in Lithuania and controls the country’s gas pipeline system. The reform, based on EU directives, involves ending the gas supplier’s control over gas transportation, and connecting Lithuania with the evolving European energy market. Gazprom is resorting to price discrimination against Lithuania since January as a form of retaliation.

On February 8-9, Lithuanian Prime Minister, Andrius Kubilius, and Energy Minister, Arvydas Sekmokas, called for Gazprom’s top representatives, and the CEO subordinated to them, to resign from Lithuania’s gas trading and operating company, Lietuvos Dujos [Lithuanian Gas].

In public statements and a letter to the company, the Lithuanian officials noted that Lietuvos Dujos’ Chairman, Valery Golubev, and board member, Kirill Seleznev, are concurrently board members of Gazprom; and Golubev is a Gazprom Vice-Chairman. Their dual status places them in a conflict-of-interests situation. By resorting to price discrimination and opposing EU-mandated reform, in the Lithuanian government’s view, Lietuvos Dujos “acts in practice like a branch office of Gazprom,” contravening Lithuanian consumers’ interests and those of the Lithuanian state, which is a minority shareholder in Lietuvos Dujos. The Lithuanian government is even being kept in the dark about the cost of gas transit to Russian-controlled Kaliningrad via Lithuania’s territory, and is concerned lest transit costs are passed on to Lithuanian consumers (BNS, Delfi, February 8, 9).

Golubev is involved in a similar situation as board chairman of the Gazprom-controlled MoldovaGaz, simultaneously with his vice-chairmanship at Gazprom (EDM, February 4, 7). Moldova tolerates a situation whereby Gazprom’s members of the MoldovaGaz board supposedly represent Moldova in negotiating with Gazprom’s board, on which they also sit, about the gas price for Moldovan consumers. Golubev was associated in St. Petersburg during the 1990’s with Russia’s current Prime Minister, Vladimir Putin; and was also a KGB officer prior to that, according to his official biography at Gazprom (https://www.gazprom.com/management/board/golubev).

Lietuvos Dujos shareholders include Gazprom with 37 percent, its German ally E.ON Ruhrgas with 39 percent, and the Lithuanian government with 18 percent. This arrangement dates back to the early post-Soviet years.  At present, Gazprom and Ruhrgas jointly resist the Lithuanian government’s gas sector reform plan. This centers upon “unbundling” gas transportation from gas supply and de-monopolizing the Lithuanian market, preparatory to joining an integrated EU energy market, in line with the European Commission’s 2009 energy market reform package. Gazprom’s control of the pipeline system ensures its monopoly as a supplier, precluding the access of potential competitors to a captive market.

This can even discourage investment in liquefied natural gas (LNG) re-gasification terminals on the coast. If Gazprom retains control of overland pipelines, it can block inland access for re-gasified LNG; or impose Gazprom’s conditions for using the pipelines; or compel the construction of new pipelines, which could raise the overall cost of LNG projects to prohibitive levels, so as to perpetuate the existing monopoly.

The Lithuanian government made public its gas sector reform concept in May 2010. Gazprom and Ruhrgas responded with a joint statement that Lithuania should strictly observe the shareholders’ agreement –i.e., the supply monopoly that EU-backed reforms are meant to overcome. Gazprom and its German ally asked the European Commission for an exemption in their favor in Lithuania; but the commission informed Lithuania in November that it could not grant such an exemption from EU directives. Putin denounced the EU-backed de-monopolization directives as “robbery” during a visit to Germany; he cited several cases involving Gazprom and Ruhrgas, including the Lietuvos Dujos case (Vedomosti, November 29, 2010).

Effective from January 2011, Gazprom has granted a price discount for Estonia and Latvia (Interfax, January 25), on condition that they maintain gas purchases this year at the level of 2007 (the last pre-crisis year). The prices are not made public, but the discount as such is said to be 15 percent below the price stipulated in the long-term, take-or-pay agreements (Lietuvos Rytas, January 4). This discount is no special privilege, but rather a step forced on Gazprom toward many European customers, due to depressed demand and growing competition from LNG (which the Baltic States also plan to access).

However, Gazprom has refused a market-based discount to Lithuania, explicitly linking this refusal with criticism of Lithuania’s reform plans. Gazprom takes the position that the existing price formula for Lithuania is nothing but the “market price” (Interfax, January 25, 31). Due to its monopoly position, Gazprom can set its price in spite of market trends; and is charging far higher prices to Lithuania than it charges to Germany, for example. In effect, this procedure discriminates against Lithuania. In a broader sense it poses a challenge to the EU’s energy policy as such. Russia has scored a partial success in Poland, resisting the full application of EU gas market reform directives in that country in October 2010, with some cooperation from a “reset”-minded Polish government. The situation in Lithuania, however, is unprecedented as Gazprom penalizes a reform-willing EU member country for implementing EU legislation.

On January 24, Lithuania’s energy ministry officially complained to the European Commission about Gazprom’s abuse of its monopoly position in Lithuania and attempts to hinder market liberalization. The complaint asked the European Commission to investigate the situation; and to ask Gazprom to act transparently and in a non-discriminatory manner. It further petitioned the EU to support Lithuania’s gas sector reform in line with the EU’s Third Energy Package. On January 31 in Brussels, Prime Minister Kubilius received the commission’s endorsement for the government’s reform plan, including the “unbundling” of pipelines from the [Gazprom] supplier (BNS, January 24, 31).

The Russian government has invited the Lithuanian side to bilateral talks on these issues. The Lithuanian government is ready for talks in a trilateral format, to include the EU. The Lithuanian government intends to submit legislation on gas sector reform to the Parliament during this spring’s session (BNS, February 9).