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Baltics to be hit hardest by natural gas price-hike

  • 2006-12-06
  • By Gary Peach
RIGA - Russia's Gazprom announced last week that it would raise the price of natural gas for European countries by an average 15 percent next year, though the Baltic states are likely to see their average gas rates jump 30 's 54 percent in 2007.

The announcement was followed by a decision by the Russian government to raise domestic prices to market levels over the next four years. At home Gazprom sells natural gas at $44 per 1,000 cubic meters, compared with the West European average of $257.

The decision to raise prices comes amid an impending supply crunch, as both domestic and foreign demand for natural gas soar and Gazprom's production remains flat. Old fields are being depleted.
According to preliminary reports, Estonia will pay approximately $260 per 1,000 cubic meters (up 36 percent), Latvia some $220 (up 54 percent), and Lithuania up to $210 (up 30 percent).

The news didn't come as a surprise to the Baltics, whose leaders for months now have been preparing regional gas consumers for painful increases. Most famously, Aigars Stokenbergs, Latvia's former economy minister, was quoted as saying last month, "There is no reason for any charity on Gazprom's part. We have to be prepared to pay for gas at the free market price," he said.

"Otherwise, we might end up in a situation where we will have problems with gas supply," he stressed.
Electricity rates in Latvia will jump 6 percent for households and 18 percent for corporate users beginning Jan. 1, while in Lithuania, households will see their gas bills rise 17 percent. Large consumers there will have to pay 19 percent more per 1,000 cubic meters.

The increases will deal a blow to the Baltic states' efforts to bring inflation under control in order to join the eurozone in 2010.
On the brighter side, after planned price hikes in 2007 's 8, subsequent price increases will be minimal as the Baltics will already be paying the average European level for natural gas.
While the price hikes are justified from a market standpoint, the Baltics and other gas importers are being forced to pay the bill for years of managerial incompetence on the Russian side.

For years Gazprom, a monopoly producer and distributor, has been poorly managed, while the country's leadership has refused to make the population swallow the bitter pill of higher natural gas prices.
Now, however, there are not enough hydrocarbons to produce the kilowatts Russia's rebounding industry needs, and energy officials and analysts are sounding the alarm bells that the long-awaited economy recovery is doomed if the country doesn't produce more natural gas.

"This is already a pre-crisis situation," former Prime Minister Mikhail Kasyanov was quoted as saying last week. "It is a serious situation when the authorities are saying we're a superpower in natural gas and simultaneously the president and prime minister are holding meeting devoted to this problem."
Kasyanov was sacked by President Vladimir Putin in 2004 and is now seen as a possible candidate for the democratic opposition in the 2008 presidential election.

To dispel growing doubts, Gazprom has repeatedly announced that it would increase deliveries of Central Asia gas, particularly from Turkmenistan, to meet Europe's rising demand.
Also, Russia's government last week approved a series of price rises for the domestic market over the next four years, breaking a long-held populist policy of cross-subsidizing domestic consumers with foreign receipts. Domestic prices will rise 15 percent next year to $50.6 per 1,000 cubic meters, then to $63.6 in 2008.

Anatoly Chubais, head of Unified Energy Systems, Russia's state-owned power company that consumes about 40 percent of Russia's natural gas output, criticized the plan, which includes higher electricity tariffs, as being "the softest and most cautious option."

In addition, Russia's government also decided last week to fully deregulate the domestic electricity market by 2011, a move that analysts lauded.