BIDDING FOR YUKOS ASSETS IN LITHUANIA

The bidding is officially on for the Yukos company’s last remaining major asset — the Mazeikiai oil refinery and associated enterprises in Lithuania. Those enterprises, including the Butinge oil loading maritime terminal and Birzai supply pipeline, together form the largest business entity in Lithuania. On March 15, the Lithuanian government announced that it has made an official bid for Yukos’ 53.7% stake and operating rights in the Mazeikiai complex.

The Lithuanian government already owns a 40.66% stake. Should it acquire the Yukos stake, the government intends to re-sell it to an investor of its choice through a bidding process, along with at least half of the government’s stake, in a single package totaling 75% or more of the Mazeikiai shares. Under Lithuanian law, the government must retain at least 10% of the shares and blocking rights.

The government has yet to disclose the value of its bid for the Yukos stake. The other short-listed bidders are Kazakhstan’s state company KazMunayGaz, which recently offered $1.2 billion; and Poland’s refiner and trader PKN Orlen, which is said to have bid $1.5 billion. Earlier, the Russian-British company TNK-BP and a Lukoil-ConocoPhillips partnership were said to have offered $600 million to $700 million each for the Yukos stake in Mazeikiai.

It is assumed that TK-BP and Lukoil-ConocoPhillips bid less than the others because, along with the cash, they can also offer to guarantee oil supplies to Mazeikiai from operations in Russia. By contrast, PKN Orlen is not an oil producer, and KazMunayGaz depends on Russian transit or, alternatively, bypassing Russia through swap arrangements to supply oil to the refinery in Lithuania. According to Prime Minister Algirdas Brazauskas, some Russian companies (which he would not name) have explicitly warned Lithuania that they would not supply crude oil to Mazeikiai if Yukos or Lithuania chooses Orlen (Kurier Wilenski, March 10).

Yukos is said to expect at least $1 billion as a starting bid for its stake in Mazeikiai. The all-but-destroyed Russian company is under pressure to pay ostensible back taxes to the Russian government and also debts to Western creditor banks as well. Under its 2002 shareholder agreement with Yukos, the Lithuanian government has priority rights of first offer and first refusal. Thus, Yukos must first offer to sell its shares in Mazeikiai to the Lithuanian government, before it can offer them to another entity; the government has also the right to reject Yukos’ first choice of another entity; and the government can buy Yukos shares by matching another bidder’s offer.

The Lithuanian parliament has authorized a litas-denominated credit line worth $1 billion from the national budget for the government to buy the Yukos stake. This sum will almost certainly be insufficient, but the government expects to receive up to $700 million from the sale of half of its own shares to the winner of the Yukos stake, if Lithuania is not the winner. According to some Lithuanian press reports, the optimal scenario might be KazMunayGaz winning the bid for the Yukos stake and buying half or more of the Lithuanian stake in Mazeikiai.

The bidding for Mazeikiai is more than a commercial issue for Lithuania. It is a national security issue requiring that the country’s most valuable economic asset not fall under the control of a Russian company controlled or influenced by the Russian government and prone — as Lukoil proved to be in 1999-2002 — to use Russia’s supply monopoly as an instrument of pressure on Lithuania.

The Mazeikiai refinery processed 9.25 million tons of crude oil in 2005, up from 8.66 million tons in 2004. The figures were well below the refinery’s design capacity of 13 million tons annually, as Yukos was no longer in a position to fill that capacity from its production units in Russia. Even so, market trends consistently ensured high profit margins for the refinery’s European-standard products, on the strength of the equipment upgrade by Yukos shortly before its demise in Russia. Mazeikiai is the sole refinery in this Baltic region and uses the Klaipeda oil-products terminal on favored terms to export its products to EU markets. These factors make Mazeikiai a highly attractive business proposition to foreign buyers.

(BNS, Interfax, March 6-16)