Gazprom flounders on Lithuanian Gas purchase

Gazprom has failed to supply a final bid for a share in the Lithuanian state gas company Lietuvos Dujos (Lithuanian Gas), instead submitting a list of conditions it would like the government to meet before the sale is finalized.

On Feb. 28, the deadline for Gazprom's bid for a 34 percent stake in Lithuanian Gas, the Russian energy giant sent a set of documents to the committee overseeing the sale. While neither party has disclosed the contents of the documents, it is speculated that Gazprom, which was the sole bidder in the second phase of Lithuanian Gas' privatization, has demanded a lower price for the company than originally agreed upon and has requested a change in the legal conditions of Lithuanian Gas' operations.

Ricardas Jarmalavicius, press secretary for the gas importer Dujotekana, which represents Gazprom's interests in Lithuania, denied claims that the company was using strong-arm tactics.

"Gazprom is involved in negotiations with the government, and negotiations require that two sides talk to each other as equals," said Jarmalavicius.

"We have not set down any conditions that would compromise this balance," he assured.

Gazprom, which began negotiations for the purchase of Lithuanian Gas in June, had earlier agreed to pay 80 million litas (23.2 million euros) for the state gas supplier. Moreover, on Jan. 31, Gazprom deputy CEO Aleksandr Riazanov met with Prime Minister Algirdas Brazauskas in Vilnius, at which time both officials declared that most issues relating to the sale had been resolved.

Nonetheless, Gazprom officials have decided that changes in Lithuania's gas market and reported hold-ups in communication with the Baltic government have sufficiently altered the climate of negotiations such that their action on Feb. 28 was necessary.

"With the rise in the price of gas, Lithuanian Gas' position in the market has changed since the beginning of negotiations," said Jurmalavicius.

Analysts, however, are skeptical of the sincerity behind Gazprom's motives.

"The specific way the negotiations have been stalled might be unexpected, but the fact that talks aren't going smoothly is hardly a surprise," said Remigius Simasius, senior analyst at the Lithuanian Free Market Institute.

According to Simasius, the privatization process itself has played a large role in the difficulties of resolving the sale. Gazprom was the only entity to pass the first phase of the process, which required that the purchaser be a natural gas supplier, or consortium of suppliers, that could guarantee a supply of gas for at least 10 years.

"With only one bidder, it is impossible for the government to negotiate a price," said Simasius. "The price for a company isn't determined by profits or potential earnings - it's determined by the market, and when the market consists of one bidder the seller has no control," he warned.

Even the chairman of the government committee supervising the tender admitted that the government's interests were compromised by the absence of competition in bidding.

"It is difficult to say exactly how the process would have gone with more companies bidding," said Deputy Economy Minister Nerijus Eidukevicius. "However, any competitive process is helped by having more than one bidder," he stated.

In spite of the difficulties facing the government, it seems likely that eventually Gazprom will secure the stake in Lithuanian Gas.

"Our committee is reviewing the documents we received from Gazprom, and after analyzing their requests we will decide if the process will continue or come to an end," said Eidukevicius.

In spite of the government's position that it may begin the process anew, Simasius argued that another offering of Lithuanian Gas' shares was in no one's best interest.

"The government needs to get this company off its hands, and the situation is useful enough to Gazprom that it won't let this opportunity pass," said the analyst.

The tender committee has announced that it will make a decision on the continuation of the privatization process sometime in early March.

Lithuanian Gas is currently majority-controlled by the government, which owns 58.4 percent of the company's shares. A German consortium consisting of E.ON Energie and Ruhrgas owns another 34 percent, for which it paid 116 million litas with a guarantee of paying an additional 34 million litas if the government meets certain conditions.

Lithuanian Gas had an unaudited profit of 43.2 million litas in 2002.