IHS Gas Analysis Service Perspective | |
Significance | Lithuanian prime minister Andrius Kubilius has made a statement decrying the decision made by Gazprom to offer a discount on gas to Estonia and Latvia, but not Lithuania, as "an attack on the EU [European Union]". |
Implications | Gazprom's decision to cut prices for Estonia and Latvia will only materialise if the monopoly supplier can increase deliveries, to keep costs down; however, despite the economics, there are also politics involved, with considerable animosity between Russia and Lithuania over the latter's energy liberalisation plans. |
Outlook | Commercial decisions by suppliers do not represent an attack on the EU as such, but Lithuania's position highlights the problems associated with diversification of supply versus stability of supply; the situation also highlights Gazprom's "divide and rule" strategy for gas exports to Europe, with the difference being that this time the company is splitting eastern Europe, rather than the divide being between west and east. |
So far, Europe has not seen a repeat of the gas crises between Russia and Ukraine (and by extension Europe) that have marred festive seasons in the past. For the Baltic states of Lithuania, Estonia, and Latvia, however, Christmas Eve (24 December) saw a statement by monopoly gas supplier to the region, Gazprom, that the gas prices for Latvia and Estonia were to be reduced by 15%, but the price paid by Lithuania would not be lowered. The caveat was, according to deputy CEO of Gazprom and chairman of the board of Lithuanian gas utility Lietuvos Dujos, Valery Golubev, that Estonia and Latvia would make good on their promises to increase the quantity of purchased gas to the pre-economic crisis level. Although not specified in publicly available information, the implication is that Lithuania intends to lower or maintain the status quo in its volumes received from Gazprom in the long term.
Lithuanian prime minster Andrius Kubilius told reporters that the move by Gazprom was "economic blackmail" and added that he would refer the matter to the European Commission (EC). He made the connection between Gazprom's decision and the strategy pursued by his government of unbundling the gas grid from Lietuvos Dujos, in line with certain European Union (EU) directives under the third energy liberalisation package. He said that the EC would "punish" Lithuania for not implementing the directives, so therefore this "is an attack not against Lithuania, but against the entire EU".
Why Lithuania?
Both Estonia and Lithuania have gas supply contracts with Gazprom that end in 2015, while Latvia's contracts end in 2030. It has been Latvia that has been under the spotlight this year, however, as it renegotiated terms on pricing with Gazprom. The country is seeing import taxes for gas rise next year, as well as a value-added tax (VAT) increase. The lower price of gas received under contract from Gazprom could help offset the import tax hike, while consumers will probably not see a major lowering of their bills as the VAT increase takes effect. Latvijas Gaze, whose shareholders include Gazprom, therefore has a motive to secure a significant price reduction. As Gazprom is the monopoly supplier, economics of scale dictate that the Russian firm can provide more gas at a lower production cost, making a price reduction bearable. Estonia, meanwhile, has stated that it was considering a forced sale of the gas grid by Eesti Gaas by 2013, but the country is expected to import more gas supplies for domestic consumption requirements in the future as it shifts away from using oil shale in line with EU environmental regulations. This leaves Lithuania, whose government has loudly pursued a strategy of diversification, with pronouncements this year on nuclear and hydropower, as well the decision to take the gas grid back under state ownership, and the construction of an LNG terminal with Belarusian input. Given the troubled history between Russia and Lithuania for many reasons other than energy, the country was unlikely to be offered a discount on gas.
Outlook and Implications
Kubilius's declaration that Gazprom's move was "an attack on the EU" will certainly fan the flames of the gas fire, although it is not clear what the EC can do over a commercial decision that does not obviously break any rules. Nonetheless, Lithuania's position highlights the problems inherent in the European strategy of diversification of energy supply as a means to security. This strategy works best where more than one supply source can be secured, and Lithuania's isolated position as a gas market means that monopoly pricing and behaviour will continue to affect the country for the next few years. To pursue this diversification strategy Lithuania might have to expect higher prices for end-users unless it encourages a wholesale market to develop. Almost no consumers have switched supplier in the retail end-user segment since declared market opening in 2007, and there are only seven licensed gas suppliers, with Lietuvos Dujos dominating. For Gazprom, the outrage caused by its decision merely serves to underline its strength in the Baltic markets. For a discount to be offered to Lithuania, Gazprom would expect to supply increased volumes, meaning a loss of face for the Lithuanian government. Gazprom has different strategies for east and west Europe, with its approach to western Europe being along the lines of a market-share-grabbing competitor. For economic, political, and infrastructural reasons, Gazprom is not ready to be a competitor in Lithuania.