The Lithuanian Energy Ministry (‘EnMin’) prepared a concept of a new law on natural gas (the ‘Concept’), which was approved by the government of the Republic of Lithuania on May 27th. In this context the EnMin, which is represented on the supervisory board of Lietuvos dujos (LD), widely distributed wrong accusations against LD and the LD management when it presented the Concept for approval and as part of an intensive campaign over several months both in Lithuania and also towards the international media. This campaign started simultaneously with the government’s announcement at the end of March to implement ownership unbundling, which is one of the Concept’s key features. These accusations were presented as the reasons for the decision in favour of ownership unbundling. Therefore Gazprom and E.ON Ruhrgas as major shareholders of LD see the need to correct these statements in public in order to protect LD and its management.

AB Lietuvos dujos (LD), a Lithuanian Gas Company, was privatized in 2002 and 2004 on an open international tender basis with E.ON Ruhrgas as the strategic investor and OAO Gazprom as the gas supplier. After privatisation, LD became a highly efficient and transparent company. It introduced international corporate governance standards, implemented structural changes and clearly separated accounts for different activities. It increased the annual investment in new infrastructure by a factor exceeding four, both newly creating and enhancing cross-border interconnection capacities and implementing projects envisaged in the National Energy Strategy. This helped to improve security of supply and lay the foundations for a future pipeline connection with mainland Europe. Over the last five years, LD invested nearly LTL 700 million. The shareholders supported the high level of investment both by a significant cash injection and by reinvestments from profits. They fulfilled all conditions of the privatisation contracts, and the state never expressed any discomfort.

On 27 May 2010, a decision by the Lithuanian government on a “Concept” for a new Gas Law was published, which calls for ownership unbundling, the most interfering option envisaged under the Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas (the ‘Directive’). According to this decision, the transmission business including the transmission system is to be separated. Despite the fact that we, as major shareholders of LD, together hold 76.0% of the company’s shares, decision-making rights regarding this core business would be shifted to the Lithuanian state, which holds 17.7%. In this context it is important to note that only recently, based on a government proposal, the Gas Law was amended, sharply devaluating the infrastructure business by capping the investors’ return to a level much below the range that is common in the European gas industry. Moreover, state price regulation of the commodity natural gas, effective since early 2008, was extended even to the biggest consumers, despite the fact that LD operates in a competitive energy market. In the Lithuanian context, ownership unbundling would just lower efficiency and increase costs – at the consumers’ expense. Unbundling and full-scale regulation of sales are contradicting concepts referring to competitive and monopolistic markets, respectively.

Both according to the trilateral Shareholders’ Agreement between the Lithuanian state, E.ON Ruhrgas and OAO Gazprom and according to the Directive, shareholders should be consulted prior to any decisions affecting the company. However, we learned about the intentions of the government from the mass media on 22 March 2010. On 31 March 2010 we wrote a letter to the government suggesting consultations. However, our request was ignored, as were the opinions of independent experts.

We can neither accept the Concept, which fails to take account of the situation in Lithuania, nor the way it was prepared. We also reject the accusations circulated by the Lithuanian Prime Minister and the Energy Minister to the mass media claiming that LD would neither ensure free access to the grid nor build new interconnections and a link to a proposed LNG terminal. These accusations were presented as the reasons for the decision in favour of ownership unbundling. We support the more comprehensive comments made by the LD management in a letter dated 27 May 2010.

Gazprom and E.ON Ruhrgas demand that the Shareholders’ Agreement, which was the basis on which they became LD shareholders, and the bilateral and multilateral international investment protection agreements be fully observed.

Once again we ask the government of the Republic of Lithuania to enter into discussions taking into account all possible options available under the Directive. We also appeal to the President and the Parliament of the Republic of Lithuania to pay attention to this issue. We expect to find the best common solution that will enhance competition while at the same time protecting both consumer and investor interest.