Gazprom's Public Statement on draft gas law consultations at the Ministry of Energy of the Republic of Lithuania

JSC Gazprom (“Gazprom”) as a shareholder in AB Lietuvos Dujos (“LD”) provides this statement in the context of the public consultation regarding the draft gas law on November 9, 2010 at the Ministry of Energy of the Republic of Lithuania (“Lithuania”). The Minister of Energy invited Gazprom to participate and we thank him for this opportunity to put on the public record our concerns, suggestions and unfortunately also our objections to the consultation and law-making process put in place by the Lithuanian government purportedly to implement the Third European Directive 2009/73/EC (the “Gas Directive”) into Lithuanian law.

We understand that Lithuania is legally permitted to derogate from the Gas Directive. In addition, the Gas Directive provides for a range of alternatives for its implementation, each of which is a valid and potentially appropriate alternative. Unfortunately Lithuanian government by approving the Concept of Law based on ownership unbundling has opted only in favour of the most severe option that has immense negative financial and operational impact on LD which is also to the detriment of Gazprom being shareholder of LD since 2004. Regrettably, Lithuanian government has not yet performed an analysis of the economic impact and consequences that will cause ownership unbundling once has been implemented.

It should be noted that according to a concept of ownership unbundling, LD will be apparently forced, among other things, to legally and functionally split off its gas transmission business into a new company, which will create significant additional costs and will eventually lead to higher gas prices. Once the proposed legislation based on the Concept of Law is implemented Gazprom – as shareholders in LD – will be compelled either to sell its shares in the new gas transmission business or relinquish its operational influence to the Lithuanian State, the minority shareholder. We would like to stress that since 2004 Gazprom has contributed (together with the other private shareholder E.ON Ruhrgas International GmbH) much to develop LD to become a very modern and efficient gas company which guarantees a secure gas supply for Lithuania and its consumers. Nowadays LD is one of the most successful Lithuanian companies. In either alternative, ownership unbundling will have a severe impact on our rights and unnecessarily damages a successfully operating company. Given these and other difficulties it raises it is no surprise that other European States choose to not implement ownership unbundling.

In taking its steps, the Government of Lithuania has misapplied and misused the Gas Directive, falsely asserting that the Gas Directive does not permit to postpone its implementation (“Derogation”) in order to allow the current ownership structure to remain in place until alternative gas supplies are available. The Government of Lithuania has taken these steps without providing the foreign shareholders with a meaningful opportunity to discuss the fundamental legal and factual issues. No explanation has been provided as to how the circumstances of Lithuania’s gas supply differ from those of Latvia or Estonia, two EU Member States that have derogated. Indeed, the Government has offered the explanation that Lithuania is interconnected with Latvia as a basis for unbundling. This explanation is false and misleading because no gas is supplied to Lithuania through this interconnection and the Directive acknowledges that none of Latvia, Estonia or Lithuania is part of an interconnected system.

In light of the damage to LD and Gazprom that will be caused by ownership unbundling, we have repeatedly and legitimately questioned why Lithuania is absolutely determined to opt for this particular alternative amongst all alternatives available to it for the implementation of the Gas Directive. There were and are no competition issues with respect to third party access to the gas grid owned by LD. As such, there is no reason for any urgent action. Especially there is no pressure from the Gas Directive because Derogation is the most reasonable solution if there is only one gas supplier (i.e. an isolated market) as it is the case in Lithuania so far. What we and the wider Lithuanian public should expect and must receive is a clear and substantiated explanation why ownership unbundling is needed now and will in fact further the goals of the Gas Directive, specifically to increase competition in the Lithuanian gas market, and why and on what basis the other options available under the Gas Directive have been dismissed out of hand. Thus far, no explanation has been provided to us by the Lithuanian government, despite our repeated requests.

It is important for the Lithuanian public to appreciate that there are equally valid and lawful alternatives for the implementation of the Gas Directive, including the Derogation option. In fact, the European Commission accepts that ownership unbundling is not an appropriate means to further the goals of the Gas Directive in isolated gas markets such as Lithuania. The Derogation option is therefore one option in place to address the Lithuanian situation. Today, Lithuania has only one natural gas supplier. We understand that the government now plans to have an LNG terminal in place in 2014. Similarly, Lithuania is not yet connected to the Western European gas grid and therefore cannot buy gas on the European spot markets. It is for the Lithuanian government to engage with Poland to build an interconnector to the Western European gas grid. Until the Lithuanian government has provided preconditions for access to alternative natural gas resources, there is no urgent need to push through ownership unbundling. Opting for a Derogation buys time for all involved to make informed choices and is therefore in the best interest of all.

The Government invited the foreign shareholders to participate in sessions of the Working Group representing that it was fully authorized to discuss and reconsider the choice of ownership unbundling and the availability of derogation. In reliance on this representation, the foreign shareholders attended two sessions of the Working Group but when they offered views and assistance with respect to these fundamental issues, their participation was characterized as “abusive” and “non-constructive”.

Under the present ownership structure, AB Lietuvos Dujos is professionally managed, heavily regulated and its costs and price structures are fully transparent. Since privatization of AB Lietuvos Dujos, the company has operated for the benefit of its customers without Lithuanian regulatory sanction.

We conclude that it is premature to approve the current draft legislation implementing the Gas Directive by choosing ownership unbundling. The drafting process must be re-opened if Lithuania is not to violate its international commitments (the Russian-Lithuanian Treaty on the Promotion and Mutual Protection of Investments) to investors such as ourselves, let alone Lithuanian constitutional requirements. If Derogation is chosen, the question of the other implementation alternatives can be postponed and addressed without any undue and unnecessary haste at such time when the Lithuanian government has provided the framework for access to alternative natural gas resources. This is a simple and legitimate request and we trust that the Lithuanian people understand our underlying rationale.

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