Latvia considers options for Baltics' only gas storage facility

10/21/2016

(Reuters) A number of companies, including Germany's Open Grid Europe (OGE), are considering buying a stake in Latvia's future gas grid and storage operator Conexus Baltic Grid, the country's economy minister said.

Latvia's gas utility Latvijas Gaze is set to transfer part of its assets - including one of Europe's largest underground gas storage facilities, Incukalns - to Conexus ahead of a planned market liberalization next April.

The current owners of Latvijas Gaze - Russia's Gazprom , Germany's Uniper and Latvia's Itera Latvija - which have a combined stake of slightly over 68%, will have to divest shares in Conexus by the end of 2017 due to legal requirements.

Latvijas Gaze's restructuring is a part of wider gas market reforms approved by the Latvian parliament in February. They are aimed at meeting EU regulations and reducing dependence on energy supplies from Russia, Latvia's Soviet-era overlord.

Latvia's government, which is first in line to buy shares in Conexus, has hired Deloitte, a New York-based consulting company, to advise on whether it should buy the stakes itself or stay out.

"The potential investors are trying to find out whether the government would not object to them becoming shareholders of the new company," Latvia's Minister of Economics Arvils Aseradens told Reuters in an interview last week.

"(OGE) is among the companies which have shown interest," Asaradens said. He did not name any other companies.

A spokesman for OGE, formerly the gas transportation arm of Germany's E.ON, declined to comment.

The European infrastructure fund Marguerite, which holds a 28.97% stake in Latvijas Gaze, plans to stay in Conexus after the restructuring, it told Reuters in an email.

The fund declined to say whether it might want to increase its stake in Conexus.

Latvijas Gaze has said its gas transportation and storage assets were worth $384.19 MM at the end of 2015.

Incukalns, which has a storage capacity of 2.3 Bcm, could meet Latvia's gas needs for almost two years, and until now it has also been supplying neighboring Estonia and northwestern Russia.

As Incukalns ownership is set to change, however, the outlook for its utilization is becoming uncertain.

The storage facility, built during Soviet times to meet the needs of the wider region, including northwestern Russia, is entering this winter season one-third empty.

Gazprom and Estonian utility Eesti Gaas have not injected any new gas at Incukalns this year. Total injections have dropped to 1.25 Bcm from 1.6 Bcm a year ago and 1.9 Bcm in 2014.

At the end of the injection season, which runs from April until October, it had 1.53 Bcm of gas in storage, the lowest level since at least 2000.

This includes 0.2 Bcm of gas Gazprom injected for Russia's needs during the previous year.

Estonian customers told Latvijas Gaze they could meet their needs by direct imports from Russia, while Gazprom said it also had no need to store more gas.

While the drop in injections coincides with the Latvian parliament's decision to end Gazprom's supply monopoly, both Latvian officials and the Russian supplier said the reasons were economic.

Russia has spare capacity to deliver gas to its St Petersburg region, previously also supplied from the Latvian storage facility, as it prepares to build the Nord Stream 2 pipeline to Germany across the Baltic Sea, Ivars Scerbickis, head of Incukalns gas storage, said.

"As a result, an additional corridor of natural gas transportation and supply has emerged, affecting the region," he told Reuters.

Gazprom and its partners aim to launch Nord Stream II by the end of 2019, despite concerns that it will increase the European Union's dependence on Russian supplies.

Latvian officials have said they expect Gazprom to use Incukalns after market liberalisation to ensure security of supplies, especially during cold winters when demand spikes.

In the future the storage facility could also seek customers in Finland and Poland when new gas links are built from Estonia and Lithuania by around 2020, Scerbickis said.

"Historically, Incukalns' role has been indisputable in the region," he said. "Now it's a challenge for us to keep it the same."

Reporting by Gederts Gelzis and Nerijus Adomaitis; Additional reporting by Christoph Steitz in Frankfurt; Editing by Gareth Jones