[NGW Magazine] Latvia puts pressure on Gazprom

Russian export monopoly Gazprom agreed two years ago to spin off its gas distribution and transmission business from its gas sales business in Latvia, in order to comply with the European Union competition rules.

But it remains the main stakeholder in Latvia‘s gas utility Latvijas Gaze and continues to influence both that, and its hived off transmission system operator (TSO), Conexus, which is responsible for gas storage, according to the European Commission and Latvia’s energy market regulator, the Public Utilities Commission (SPRK).

The EC has fully agreed with the conclusion of the regulator that the Russian company exercises “direct or indirect” control over Conexus, according to SPRK.

The EC also agreed that Conexus shareholder Marguerite Gas I is linked to Latvijas Gaze shareholder Marguerite Gas II through a parent company, Marguerite Holdings, which in the regulator's view creates a conflict of interest.

Gazprom owns 34.1%, Marguerite Gas I has 29.06%, Latvia‘s  Augstsprieguma Tikls holds 34.36% and other shareholders share 2.48% in Conexus. Gazprom also owns 34.1% of Latvijas Gaze.

If Conexus does not clear the certification process, a series of regulatory issues will inevitably emerge, SPRK  and energy experts claim. With a flare-up of the ever intense relationship looming, some analysts claim Latvian authorities are “fed up” with Gazprom and are seeking to hasten its exit from Latvian gas market by not certifying Conexus.

“Several major Western gas players are eyeing the Latvian and the Baltic gas market…. With the anticipated merger of the Baltic and Finnish gas markets following the start of the Balticconnector – the gas pipeline between Estonia and Finland – in 2020 as expected, interest (in the Baltic gas market) will only grow. Unable to agree with Gazprom on the sale of its stake in Latvijas Gaze and Conexus, the government is getting tougher. And the non-certifying of Conexus fits the plan,” a knowledgeable source in the Latvian government told NGW on condition of anonymity.

Conexus submitted a certification application to the SPRK January 10. Soon after, its head, Rolands Irklis, said the fact that Gazprom still remained a Conexus shareholder might prevent the operator’s certification. The regulator has concluded over the recent months that Conexus only partly satisfies the requirements for certification.

Аsked what would happen if the company fails certifation, Conexus told NGW that it was the EC that issued the opinion, not the ruling on the certification of Conexus Baltic Grid. “The ruling on certification will be done by the SPRK.... The decision on certification does not affect the licensing of the company,” the company said.

SPRK told NGW that failure to get Conexus certified could trigger “legal problems.”

If it fails, Conexus can continue providing transmission and storage services as the national gas transmission system operator, but problems could arise regarding the national implementation of the EU gas directive and the following implementation of Gas regulation package (secondary EC legislation) as well as other activities, involving EU partners,“ it said.

“There are specific provisions in EU and national law, addressing the relevant issue, however it would be far too early to contemplate the absolute negative scenario…. A feasible interim solution may be found in the adoption of a conditioned certification decision, laying down specific condition, addressing the existing concerns and potential risks, which the TSO is obliged to fulfill in order to be considered fully certified.”

According to Conexus, Latvia‘s main current concerns regarding Conexus’ compliance with the provisions laid down in the Gas Directive and national legislation derive from the established ownership structure of aid enterprise.

“In an ideal situation, Gazprom, as a producer and the regionally dominant supplier of natural gas, should sell its shares or in some other way exit, while Marguerite Gas I, as part of the Marguerite Fund investment group, should restructure its Latvian portfolio by retaining its de facto influence either in Conexus Baltic Grid or Latvijas Gaze, the SPRK official said.

WTO ruling goes against Gazprom

More disappointment for Gazprom came on August 11 from the World Trade Organization (WTO), which rejected most of Russia's challenge to EU energy sector rules barring a single company from controlling both transmission and supply assets.

Russia initiated the complex case in 2014, arguing that the EU's bid to create separation between energy producers and energy distributors was discriminatory.

But a WTO dispute panel dismissed Russia's claim, ruling that the measures were allowed under the 164-member organisation's rules. The EU has maintained that its “unbundling” rules were a legal attempt to prevent one company from acquiring too much control and blocking market competition.

Gazprom did secure a partial victory however, as the WTO panel agreed that certain caps imposed on Russian energy firms by Croatia, Hungary and Lithuania violated WTO rules. Both sides have up to 60 days to appeal.

Although it remains yet to be seen what legal aftermaths the non-certifying of Conexus would result in, nobody is rushing forward to propose solutions that could exacerbate the situation. “The regulator is obviously unhappy with Gazprom’s behaviour at Latvijas Gaze and Conexus. But it all boils down to the old story: Gazprom does not want to play by the rules set up by Latvia and the EC,” Reinis Aboltins, a Latvian energy expert, told NGW.

Nevertheless he agreed that failure to pass certification requirements would lead to “certain regulatory impediments.”

“If this happens, the Latvian authorities will likely put more pressure on the management of Latvijas Gaze and Conexus. Although, in theory, a replacement is always possible, I don’t see Gazprom being driven out now,” he said.

A former Latvian energy minister who went on to advise the EC on energy issues from 2005-2009, told NGW that it would not be possible to force Gazprom to leave Latvia “fully.“

Nor is there any need to, Juris Ozolins said. “I‘ve heard from Gazprom representatives themselves that they are negotiating the sale of Gazprom stakes in the Latvian companies. As the negotiations are underway, it does not make sense for Latvia to hinder the process. Sooner or later, Gazprom will leave the management of the Latvian gas companies, but it will be done on friendly, not hostile terms,” he said. “Gazprom is not disappearing. It remains and will be a major player in gas market.”

He said that if Conexus fails to pass muster, it could face a financial penalty. “According to the rules set by the SPRK, this can be up to 10% of its annual income. Yet the room for regulatory and legal flexibility is large. I don’t think Conexus will be stripped of its rights as the transmission operator if only because Latvia simply does not have any other alternative now,” he said.

“And if the regulator decides to have a go, the plan might backfire, as the EC will not be happy to see the limbo in Latvian gas sector,” the expert added.  SPRK has to decide whether Conexus meets the certification requirements in late September