Gazprom Takes on Lithuania in EU Policy Test Case

By Denis Pinchuk and Nerijus Adomaitis (March 1, 2012)
(Additional reporting by Vladimir Soldatkin in Moscow and Eric Holmberg in Brussels; Editing by Melissa Akin and Lisa Shumaker)

Gazprom on Thursday launched arbitration proceedings against Lithuania’s plans to strip the Russian gas giant of its pipeline ownership, a test case for an European law designed to prevent monopolies.

Russian analysts said Gazprom was worried it could be forced into a fire sale of pipelines in Europe if a radical interpretation of the EU’s so-called “third energy package” – aimed at preventing energy producers from monopolising transport – is enforced.

The others said that despite all twists and threats in negotiations, Gazprom would have eventually to find a solution outside the court.

“…it appears increasingly unlikely for the giant (Gazprom) to turn the tide of unbundling generated by the EU’s Third Energy Package,” Lilit Gevorgyan, Russia and CIS country analyst at IHS Global Insight in London said in an email to Reuters.

“In the most likely scenario the protracted talks are likely to continue where Gazprom and its partners will try to come to an agreement that minimizes their losses,” she added.

Lithuania wants to separate the ownership of gas supply and transportation assets as a part of the European Union efforts to make its energy market more competitive.

Gazprom has complained that unbundling requirement to leave gas transportation business violates the terms of the 2004 privatization deal for Lietuvos Dujos.

“Today, Gazprom was forced to apply to the international arbitration UNCITRAL with a lawsuit to the Lithuanian government in order to protect its investments in the Republic of Lithuania,” Gazprom said in a statement on Thursday.

Russia has suggested the third energy package also violates bilateral agreements with the EU and a Russian government source has said it could contest it at the World Trade Organisation when it becomes an active member by summer.

Gazprom, which holds 37.1 percent of Baltic neighbour Lithuania’s gas utility Lietuvos Dujos, would have to give up its ownership of the country’s pipelines under a law approved by the parliament last year.

The EU is seeking ways to wean itself of Russian energy supplies, which cover around a quarter of its natural gas needs.

E.ON Ruhrgas, the other strategic owner of Lietuvos Dujos with 38.9 percent, has not been vocal against the required split.

The government has said it was having “constructive” talks with E.ON, a contrast to Gazprom’s recent behavior.

Of political concern to Russia is continuous supply of gas to the Russian Baltic exclave of Kaliningrad, the former province of East Prussia, which receives its gas via Lithuania.

Lithuania has said it would address security of supply for Kaliningrad.

Earlier this week, Lithuanian Prime Minister Andrius Kubilius told Reuters that his government had told Gazprom it could keep a financial stake in the pipeline company provided it did not have a majority.


Lithuania’s government said the Gazprom arbitration suit came as a surprise just a few days after Gazprom Export held meetings in Vilnius, but it remained optimistic.

“I would not dramatize (Gazprom’s statement). It can be a certain negotiating move,” Kubilius told reporters in Brussels. “I believe the dialogue we started with Gazprom Export earlier this week is going to give positive results.”

“On Monday, we reached a very clear agreement, that separation of assets of the Lithuanian gas system will be implemented be the end of 2014, and Gazprom has agreed with that.”

Lithuania prime minister’s outlook was backed by Lietuvos Dujos board’s decision on Thursday’s afternoon to call an extraordinary shareholders meeting on March 23 and have a vote on unbundling.

The board, which also includes Gazprom’s representatives, has approved two draft resolutions suggesting spinning off Lietuvos Dujos gas transportation assets into a new company, and establishing a subsidiary to carry out gas distribution.

“It confirms our optimism for the dialogue with Gazprom, and is a step forward towards unbundling,” an advisor to Kubilius told Reuters speaking from Brussels on a phone.

“It is hard to say…. why the energy giant, despite the optimistic outlook, then made a dramatic turn and announced of its intention to take the Lithuanian government to court only later on to return to talks,” Gevorgyan said.

“Finding out of court settlement appears the best option for all parties right now,” she added.