Lietuvos Dujos: deadlock or delay tactics?

Lithuanian government's much delayed privatization of Lietuvos Dujos (Lithuanian Gas) has been described as both a high-wire balancing act and a drawn-out chess match. Kabuki theater has also been uttered.

Considering the latest turn of events, with Russia's Gazprom walking away from the bargaining table on Jan. 23, the descriptions seem all too appropriate.

Gazprom is seeking a 34 percent stake in the state-owned Lithuanian gas utility at a price of 80 million litas (23.2 million euros), while the Lithuanian governments is seeking to privatize the utility to make it more competitive and help fill a gaping budget deficit.

Final bids are to be submitted Feb. 28.

Several media outlets in Lithuania reported this week that negotiations are breaking down and that Economy Minister Petras Cesna has voiced serious doubts that a deal will be completed by the deadline date.

Lithuanian negotiators are seeking 116 million litas - the same amount paid in May, 2002 by a German consortium consisting of Ruhrgas and EON Energie for their 34 percent stake in the company.

The remaining shares are to stay in the hands of the Lithuanian government, which would provide for a carefully balanced, three-way ownership of the utility as required by the National Energy Strategy, a strategic document approved by the Seimas (Lithuania's parliament).

The strategy also prohibits a single foreign company from holding a majority stake in an energy company and simultaneously being its main supplier.

At first glance, the additional 26 million litas the Lithuanian government is seeking should seem a laughable sum to Gazprom. The company extracts 94 percent of Russia's gas (representing one-fourth of world output), is Russia's largest tax payer (one-fourth of state revenues) and generates some 8 percent of its GDP (over $12 billion in 2002).

The stakes are higher than they seem. Energy sector privatization in Lithuania, as witnessed in the Williams-Mazeiku Nafta-Yukos deal, consists of a perplexing mix of international geopolitical strategy as well as national, business and personal interests.

Gazprom wants to benefit from growing long-term market demand for natural gas in Lithuania.

The Lithuanian government, on the other hand, wants to protect large-scale industrial consumers (those who buy over 15 million cubic meters of gas per year) by capping 2003 gas prices at 105 percent of the import price.

This measure would reduce Gazprom's ability to profit twice by both selling the gas to Lithuania and then reaping the profits of its resale on the domestic market. Unfortunately, the move would also hurt the German Lietuvos Dujos investors as well as privately-owned Dujotekana, Lithuania's largest gas distributor.

According to Remigijus Simasius, a senior policy analyst at the Lithuanian Free Market Institute, Gazprom's position is unassailable.

"The Lithuanian government has painted itself into a corner," he told The Baltic Times. "Lithuania is almost obliged to say 'yes' to any offer made by Gazprom. The only possible way out for them is to call off the entire deal and start the process from zero."

Simasius said that the mistake was in choosing a political model for the privatization. Gazprom was the only possible Russian bidder right from the start and is the only possible supplier of natural gas given that Lithuania is not linked to a Western gas grid.

The Lithuanian news magazine Veidas ran a cover story on Jan. 23 reporting that the strong presence of Russian companies in the Baltic energy market is being directed from the Kremlin.

In today's world, said the article, tanks have been replaced by oil and gas pipelines as reflected in a cartoon showing a length of pipeline emanating from a tank.

Gediminas Vitkus, a well-known Lithuanian political scientist, said that Russian involvement in the energy sector represents a security threat to Lithuania. "It's a danger because they can close the taps whenever they want," he said.

"Maybe not today or tomorrow but the very fact that it [Russia] has this ability is a danger. Lithuanians haven't forgotten the three-month gas embargo that followed independence in 1990," he said.