Latvian natural gas market to liberalize

RIGA - With accession to the European Union getting closer, Latvia's Ministry of Economy has adopted a plan to gradually liberalize the country's natural gas market.

While some gas consumers and the local distribution monopoly are wary of the process ahead, the ministry hopes to have the legal framework for liberalization in place by mid-2003.

But a truly liberal gas market - where consumers can choose between several gas providers - may be further off.

"The government can establish conditions for a free market, but it's up to market players to choose if they want to be in on the business," said Andris Liepins, deputy state secretary at the Economy Ministry.

Meanwhile Latvijas Gaze, which holds a monopoly on natural gas delivery, sale and storage, is nervously eyeing conditions on the Russian market rather than potential foreign competitors from Western Europe.

"Frankly speaking, taking into account our market size I don't think anyone will be particularly interested in the Latvian gas market," said Latvijas Gaze spokesman Vilnis Gailis.

The concern, he said, is that Gazprom - the Russian company which is the sole supplier of gas for Latvia, Lithuania and Estonia - will decide to muscle into the domestic market. As both supplier and distributor it could undercut Latvijas Gaze's prices, said Gailis.

"If the Latvian market isn't protected by the state then Latvijas Gaze stands no chance," he added. "We would simply like to ensure that such aspects of the issue are taken into account, acknowledged and respected."

Latvijas Gaze representatives are participating in a joint working group with the Economy Ministry, which is continuing to develop the country's liberalization scheme.

One problem with liberalizing the market is that Latvia's gas delivery network is connected to that of Russia's, but not the European Union, which limits the countries and companies gas can be bought from. Western gas cannot be imported via Estonia and Lithuania since they too only have access to the Russian network.

The Economy Ministry is planning not only to open the market to new gas suppliers but also to revamp how gas tariffs are regulated, Liepins said.

The ministry wants to end the capping of prices paid by consumers ahead of Latvijas Gaze's losing its monopoly as a supplier in 2002. But it wants to continue to cap charges for the transportation, distribution and storage of natural gas - areas in which Latvijas Gaze will retain a monopoly until 2017.

Liepins said the ministry was hoping the regulatory changes, which could be in place before liberalization, would make the process more palatable for Latvijas Gaze.

End consumers, however, fear liberalization will bring higher prices because Latvijas Gaze owns all of the country's gas network.

The heating company Rigas Siltums - one of the three largest consumers of gas in the country - is expecting price increases both for itself and its end consumers, said Rigas Siltums' spokesman Andris Sprogis.

Seventy percent of the company's operating costs stem from purchasing gas to create heat, meaning that if gas prices increase or the company is forced to switch to petroleum products, consumer heating prices will rise too.

But for now, predicting how prices will move is a guessing game.

"We can't predict prices in this situation," Sprogis said. "We don't know the rules of this game."