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Latvia's forest gas storage to shape Baltics energy balance
May 15, 2015 / 1:01 PM / 3 years ago

Latvia's forest gas storage to shape Baltics energy balance

* Latvian parliament to start legislative debate in June

* Gas injection season begins late May, later than usual

* Marguerite Fund is sole bidder, government sources say

By Gederts Gelzis and Barbara Lewis

INCULKALNS, Latvia, May 15 (Reuters) - Buried under heavy clay deep in the Latvian birch forests, sit the giant Soviet era gas reservoirs whose fate draws together the main players in the tense energy power game of the Baltics.

A share in the site is for sale, which will dent Russia’s influence. The asking price from the German stake-seller deterred Latvia itself from stepping in, leaving a European Commission-linked fund as the only bidder, government sources say.

Looking on are Latvia’s Baltic neighbours, who are at least as keen to cut their reliance on Russian gas. The site’s capacity is enough to see Latvia and also Estonia through the winter, while Lithuania hopes to use it to hold some of its gas imports.

Beginning in June, the Latvian parliament will start debating its draft law to split Latvijas Gaze, the operator of its prize energy asset, into two, bringing it in line with EU liberalisation law.

The storage facility minimises the need for pipelines as gas is injected during the low demand summer season and withdrawn during the winter.

Latvijas Gaze’s main shareholders are Russia’s Gazprom , with 34 percent, which provides the gas and Germany’s E.ON, which has said it will sell its 47.2 percent stake. Gazprom has not disclosed any plans.

E.ON has been progressively selling assets. Last year, it sold a 38.9 percent stake in Lithuania’s gas company and also in its grid. The sale netted 113.2 million euros ($128.78 million), a discount of 15 percent to the market value on the Vilnius exchange.

For its stake in Latvijas Gaze, E.ON asked for 220 million euros, government officials said, after the Latvian government submitted a non-binding offer to buy it in September last year.

The government said that price was too high. Now government sources say the Marguerite Fund is the exclusive bidder. The equity fund and E.ON decline to comment.

“There is an uncertainty about the proposal for legislation and most probably the Marguerite Fund takes it into consideration, but I believe there won’t be anything to make Marguerite rethink its plans,” one government source, speaking on condition of anonymity, said.

He said it was hard to judge the price, but his impression was “lower than 220 million euros”.

Set up under Luxembourg law to invest in strategic EU energy projects, the Marguerite Fund has the backing of the European Investment Bank and the European Commission.

SPLIT

The details are unclear, but the government has said Latvijas Gaze will be divided into two: one company for sales and distribution, and another to hold the strategic infrastructure.

Latvijas Gaze says maintaining the existing monopoly is the best solution, but accepts it will have to conform to EU law once Latvia’s derogation ends early in April 2017.

Both sides have a point, analysts say.

Latvian gas demand has plunged with the collapse of industry, falling to around 1.3 bcm from nearly 3 bcm in 1991. Efficiency and renewable energy could cut demand further.

“If these member states physically connect their markets, the aggregate demand could be enough to spur investments and get some competition going,” said Tim Boersma of the Brookings Institution in Washington.

But he added the Baltic States could be an instance of a region that “cannot avoid paying some form of a premium to safeguard energy security”.

Lithuania has weakened Gazprom’s dominance by investing in a liquefied natural gas (LNG) terminal, which has allowed it to negotiate cheaper prices, but over time could augment them given the added costs of LNG versus pipeline gas, analysts say.

It wants Latvia to liberalise, as it has done, to fire up a regional market and Lithuania hopes that at some point its LNG will be among the gas pumped into the Incukalns storage.

This year’s injection season begins late in May, a month later than usual following a mild winter.

The ground shakes as gas, most of which has travelled 3,500 miles from Siberia, is injected to a maximum of 4.5 billion cubic metres. Around half is working gas and half technical gas that maintains pressure. ($1 = 0.8790 euros) (Additional reporting by Nerijus Adomaitis in Oslo and Andrius Sytas in Vilnius, editing by William Hardy)

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