Gazprom to buy Kaunas Electric

A consortium led by the Russian gas giant Gazprom has agreed to terms of purchase for Kauno Elektrine, the principal heating plant of Kaunas.

The consortium, which also includes the American firm Clement Power Venture and the Lithuanian gas importer Dujotekana, agreed on Oct. 31 to pay Kauno Energija, the local utilities authority, 116.5 million litas (29 million euros) for the plant.

The agreement must still be approved by the city council, which will begin to consider the proposal in three weeks. The board and shareholders of Kauno Energija, which is majority-controlled by the Kaunas city authority, must also agree to the proposal.

The conditions of the agreement will require Gazprom and its partners to invest significantly in Kaunas Electric while offering electricity at a lower price for a set period of time. The purchasers will also have to spend at least 135 million litas by 2005 and 400 million litas by 2018 on improvements in the plant.

At the same time, the consortium will be obliged to sell 80 percent of the electricity produced at the plant at the price of 6.23 centas (Lithuanian) per kWh, with the remaining 20 percent to be sold for 5.9 centas for a period of five years.

New customers would pay only 4.9 centas per kWh for seven years.

With the purchase, Gazprom is set to take a 51 percent stake in Kaunas Electric and will be responsible for the supply of natural gas to the plant.

Clement Power Venture, with a 25 percent share, will execute expansion and modernization at the site, while Dujotekana, with 24 percent, will oversee the effective operation of the plant.

Raimundas Paliukas, Gas Industry Association president, said that Dujotekana has signed an 11-year partnership agreement with Gazprom.

"Dujotekana and Gazprom are strategic partners, and we look forward to many more joint energy programs," Paliukas said.

Gazprom also plans to install at least six new gas turbines, which will increase production at Kaunas Electric from 180 to 640 megawatts. This would cause production at the plant to exceed that of its Vilnius counterpart by one and a half times.

If approved in November, the sale of Kaunas Electric would mark the second purchase of a key Lithuanian energy producer to a Russian company in as many months. In October, the Russian Yukos took control of Mazeikiu Nafta, the largest oil refinery in the Baltic states.

According to Krikotaponyte, bidding on the plant began in May of this year, with the Gazprom consortium beating out Fortum, a Finnish firm.

The rapid speed at which the agreement was met is apparently due to the desire of Kauno Energija's leadership to conclude a deal before local elections are held later this year.

In addition, Paliukas said that Kauno Energija was anxious to clear up its outstanding debt as soon as possible.

The consortium hopes to receive a full return of its investment within seven years.