EU pressured by Gazprom monopoly

VILNIUS - Lithuania is seeking support from the European Union in carrying out its gas sector reform, as required by EU law, in the face of pressure building to block the reforms coming from Russian giant Gazprom, reports ELTA. The Russian company enjoys a supplier’s monopoly in Lithuania and controls the country’s Soviet-era gas pipeline system, the Georgian Daily Independent Voice reports.

The reform, based on EU directives, involves ending the gas supplier’s control over gas transport, and works toward connecting Lithuania with the evolving European energy market. Gazprom has resorted to price discrimination against Lithuania since January as a form of retaliation.

On Feb. 8-9, Lithuanian Prime Minister Andrius Kubilius and Energy Minister Arvydas Sekmokas called for Gazprom’s top representatives and the CEO to resign from Lithuania’s gas trading and operating company, Lietuvos Dujos.
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; Golubev is a Gazprom vice-chairman. Their dual status places them in a conflict-of-interest 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 consumer 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.

Golubev is involved in a similar situation as board chairman of the Gazprom-controlled MoldovaGaz, simultaneously with his vice-chairmanship at Gazprom. 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 1990s with Russia’s current Prime Minister Vladimir Putin, and was also a fellow KGB officer with Putin prior to that, according to his official biography at Gazprom.

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. Reform 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 its 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 get rid of. 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.

Effective from January 2011, Gazprom has granted a price discount to Estonia and Latvia, 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. This discount contains 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.” 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 Jan. 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 Jan. 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.

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