Forecast through margin

Lithuania does not rule out a sharp increase in prices for Russian gas due to violation of agreements with Gazprom

Gas unrest began in the Lithuanian government. At the end of last week, Prime Minister Gediminas Kirkilas recalled Foreign Minister Petras Vaitiekūnas from vacation and authorized him to begin negotiations with Russia on the price of natural gas, the press service of the government of the republic reported. “Such negotiations need to begin because, according to preliminary data, Russia intends to significantly increase the price of gas supplied to Lithuania,” the head of government is quoted as saying in the message. A little later, Mr. Kirkilas told Reuters that he “has unofficial information that gas prices could rise to $312-$320 per thousand cubic meters of gas starting next year.” Gazprom says it does not comment on the progress of commercial negotiations. However, in informal conversations, representatives of the gas monopolist promised adequate measures if the Lithuanian authorities nevertheless violated their promise not to introduce regulation in gas supplies to large consumers. As is known, the government took this obligation as part of the deal to sell 34% of the shares of the gas distribution company Lietuvos Dujos to Gazprom. The representative of the Lietuvos dujos company, through which about 70% of Russian gas enters the Lithuanian market, Sigita Petrikonite-Yurkunene, declined to comment in detail. "All I can say is that prices will rise, but it's too early to say by how much," she was quoted as saying by Reuters.

Lithuania currently pays $190 per thousand cubic meters of Russian gas, which is significantly lower than prices for other Western countries. This price is calculated using a formula tied to the cost of a basket of petroleum products on the Rotterdam exchange, minus the transportation of Russian gas to Western European markets. In addition, it contains a discount that Gazprom provides to the Lithuanian government for a smooth transition to European pricing.

However, the noisy campaign for negotiations with Gazprom, which was launched by the Prime Minister, appears to have been provoked by internal political goals. Mr Kirkilas's position is not very strong, and he is trying to demonstrate a heightened level of concern for gas prices. And he has good reason: despite the prime minister's violent protests, the Lithuanian parliament passed a law on natural gas in the spring, which provides for the regulation of margins for enterprises that sell this type of energy raw material. Based on this law, the country's State Commission for Control of Prices and Energy in early August approved a new methodology for calculating the gas price ceiling for end consumers. Now the companies Lietuvos dujos and Dujotekana, selling gas in Lithuania, are prohibited from making a markup higher than 5-8% of the price they pay to the Russian company at the border. According to the state commission, in July-December 2006, the gas supply margin of Lietuvos Dujos was 12%, Dujotekana - up to 17%.

According to forecasts, at the beginning of next year, prices for Russian gas on the German border will fluctuate at the level of 260-280 dollars per thousand cubic meters. If we take into account the discount that Gazprom gives to Lithuania, we get 250-270 dollars per thousand cubic meters. Therefore, $310-$320 can only be achieved if margin regulation is abolished. So the Prime Minister's excitement is demonstrably exaggerated. However, it cannot be ruled out that the new price will include penalties for lost profits in the second half of 2006 (after all, the margin limit for Lietuvos dujos is already in effect). In addition, Gazprom was planning to cancel preferential prices for the Baltic states starting next year and finally move to the average European level of gas payments.

Alexey GRIVACHS