Gazprom makes Lietuvos Dujos privatization short list

With the submission and acceptance of its preliminary proposal, Gazprom is the sole gas supplier on the short list to procure a 34 percent stake in the Lithuanian gas company Lietuvos Dujos.

The privatization of Lithuanian gas began earlier this year when German Ruhrgas AG and E.ON Energie claimed 34 percent ownership of the state-owned gas company. Under the terms of the sale, shares in Lietuvos Dujos are to be sold to a strategic investor and to a gas supplier, both bidding for one-third interest in the company.

The German consortium laid claim to the strategic share in June of this year and now Gazprom seems likely to capture the remaining purse.

It comes as little surprise that the world's biggest gas exporter, Gazprom, is the only contender suggested Saulius Specius, adviser to the prime minister.

"All in the government, including the energy specialists, realize that the most viable and realistic buyer is Gazprom. But that doesn't mean that the government is keen to sell the shares away," said Specius.

Last week the Lithuanian parliament included Lietuvos Duvos in a list of enterprises that, while strategic to the national economy, may not be imposed with ownership restrictions.

In theory, it is possible that government officials might opt out of the sale, although it is unlikely. At this point the Gazprom proposal has passed on its technical merits alone and still needs to be thoroughly evaluated from a financial perspective.

Numerous local and Russian press reports have speculated that the Gazprom offer was far less than the final package agreed upon between Lietuvos Dujos and Ruhrgas AG and E.ON Energie for the same percentage share in the company.

The head of the privatization transaction division, Liutaras Radzevicius, was quick to point out that the initial price had not been disclosed, but that it met the minimal bid requirements established by the State Property Fund.

"The price is not announced," said Radzevicius "and the deadline for the final proposal is in November. In the final proposal the financial terms have to be better than in the initial offer. They can't be lower."

Assuming favorable pricing conditions are met, the deal could be finalized by the end of the year or, more likely, the start of 2003. After the final bid is accepted here in Lithuania, Gazprom will need to get formal permissions from the Central Bank of Russia and supervisory board approval.

Both Gazprom and the Lithuania stand to gain from acceptance of the deal.

Gazprom will secure the Baltic corridor for its high-pressure gas pipeline, further enabling transmission west into the EU. Lithuania plans to receive a sizable remuneration because the shares are owned by the state.

The Lithuanian economy should also receive a boost since natural gas is one of the country's main energy resources. A recent price rise in fuel oil triggered additional gas consumption, and Lietuvos Dujos estimates that gas imports by year-end will increase by nearly 10 percent.

Also, the privatization deal should yield an attractive future price for it. But signs of a successful transaction will not be immediately noticeable to the consumer, as Radzevicius explained.

"Lietuvos Dujos has a supply contract until 2005. That price formula is set. If this transaction is successful, there will be a 10-year contract put in place with a fixed price that meets the requirements of the Lithuanian government."

The next phase in the negotiation will take place on the Oct. 23 when the minister of economy presents a draft government decree for consideration. Then Gazprom has until Nov. 20 to submit a final offer.