On February 27, the Council of the Public Utility Commission resolved that as of April 1 the previous order of application of heavy fuel oil quotation takes effect, thus an increase of the natural gas tariffs is expected. The changes have been made because the global prices of oil and its products, to which the natural gas price is pegged, are growing rapidly and also because from April the JSC “Latvijas Gāze” will receive gas directly from the Russian transmission system and pay the European average price, which is much higher. In the next few weeks it is also planned to submit a new tariff project, which concerns tariff changes in the summer of 2008.

Till April 1 it is possible to apply lower tariffs, as in the autumn of 2007 the JSC “Latvijas Gāze” purchased natural gas reserves at the Inčukalns Underground Gas Storage Facility for the prices of the previous season, thus on January 1 the tariffs for the first two consumer groups increased by 13% (instead of the planned 31%), while for the major consumers they even decreased by 10-13% (instead of the planned increase by 4-5%).

As of April 1, the tariffs at heavy fuel oil quotation up to 400 USD/t (in March – up to 330 USD) will be applied, thus for consumers of groups 3 to 8 (annual consumption over 25 000 m3) there will be an increase by 17-21%. For the first two consumer groups (annual consumption up to 25 000 m3), including households, the tariffs will remain unchanged.

Currently, including February, the average heavy fuel oil quotation of the previous six months is approximately 460 USD/t, whereas the highest quotation envisaged by the methods of tariff application is 400 USD/t, which means that from April 1 thru approval of new tariffs the JSC “Latvijas Gāze” will purchase natural gas for much higher price than it will be sold in Latvia and therefore operate with losses.

In February 2007 the average heavy fuel oil price of the previous six months was around 260 USD/t, whereas in February 2008 it will be about 460 USD/t (increase by 75%). The oil price at the beginning of 2007 was approximately 50 USD/barrel, whereas at the beginning of this year the price exceeded 100 USD/barrel for the first time in the history. In December 2007 the oil exporting countries OPEC announced a decision not to increase the amount of oil production, which will have no positive impact upon the further development of the oil price. One should also take into account the growing demand for energy resources in China and India.

If the value of oil products falls, the tariffs correspondingly decrease. Such process went on from July 2006 thru March 2007. Perhaps it was not so influential for households, for which the tariffs fell by about 3.5%, but for industrial customers the decrease was noticeable – 8 to 10%.

Within the next few weeks the JSC “Latvijas Gāze” will prepare a new tariff project and submit it to the PUC. It is yet unknown what changes of the tariffs will occur, as the project is not completed and it is difficult to predict the prices of oil products. However, if there remain high prices of oil and oil products, the requested tariff increase is likely to reach 50% on average in comparison to 2007. It should be borne in mind that already now about 80% of the tariff of one cubic metre of natural gas is its purchase price.

Commercial Proxy of the JSC “Latvijas Gāze” Vinsents Makaris