LITHUANIA BRACES FOR RUSSIAN MOVE ON MAZEIKIAI OIL COMPLEX

The Russian government’s ongoing seizure of the private Yukos oil company threatens to extend into Lithuania . There, a Yukos subsidiary is the majority-owner and operator of the oil-processing and oil-transport industry, Lithuania ‘s largest industrial asset. The country seeks to prevent, or limit the adverse consequences of, a takeover by the Russian government or government-connected companies.

President Islam Karimov, delivering a key speech on the eve of Army Day in Uzbekistan , declared that the Uzbek army must be prepared to launch pre-emptive strikes against international terrorists and the centers that direct them. Alluding to the attacks within Uzbekistan in 2004, Karimov used the opportunity of addressing the military to focus on the country’s security threats and pointedly raised the prospect of taking pre-emptive action .

President Islam Karimov, delivering a key speech on the eve of Army Day in Uzbekistan , declared that the Uzbek army must be prepared to launch pre-emptive strikes against international terrorists and the centers that direct them. Alluding to the attacks within Uzbekistan in 2004, Karimov used the opportunity of addressing the military to focus on the country’s security threats and pointedly raised the prospect of taking pre-emptive action .

The Dutch-registered Yukos Finance holds a 53.7% stake and operating rights in Lithuania ‘s Mazeikiu Nafta complex. This consists of the eponymous oil refinery, a supply pipeline, the Butinge oil-loading maritime terminal, and some distribution outlets. Yukos is the main supplier of crude oil from its Russian extractive operations to the Lithuanian refinery and terminal. The Lithuanian government holds a 40.66% stake in the complex.

Mazeikiai is the only refinery in the three Baltic states , and the only major non-Russian refinery in the eastern Baltic basin. It processed almost 9 million tons of crude oil in 2004, up 21% on 2003, earning record profits of more than $200 million (by GAAP criteria) in 2004. The Butinge terminal exported more than 7 million tons of crude oil in 2004 (almost the same amount as in 2003 when the rival Primorsk terminal became operational in Russia ).

Yukos acquired the majority stake and operating rights in 2002. Within one year it upgraded the refinery’s equipment and product quality, enabling it to meet European Union standards and compete in EU markets. It also expanded the operation of the maritime terminal, originally built by the American company Williams International in the late 1990s. The Butinge terminal possesses both export and import capability, thus giving Lithuania the option to import North Sea or other non-Russian oil, as a hedge against possible disruptions in Russian supply.

Yukos came to Lithuania during the heyday of the company’s overall performance as a model for Russia ‘s energy industry. The privately owned Yukos rescued Mazeikiai from the stranglehold of the Russian government-connected company Lukoil. Using its government-awarded position as coordinator of Russian oil supplies to Lithuania , Lukoil reduced those supplies to a trickle, pushing Mazeikiai toward bankruptcy, in order to force Williams out and acquire the majority stake at a fraction of its value. It was at that point that Lithuania made the agreement with the privately owned Yukos, which then turned Mazeikiai into a thriving enterprise as well as top taxpayer to the country’s budget. Yukos guaranteed stable supplies of crude oil — the key to that success.

The destruction of Yukos in Russia is now forcing the Lithuanian government to consider precautionary measures, in anticipation of possible takeover attempts by Russian government-connected companies. One precautionary step is to ensure a Lithuanian majority stake and operating rights in Mazeikiai and the associated enterprises. Under arrangements dating back to the 1999 Williams contract, Yukos has a preemptive right to increase its stake by 9.72% to 63.4%, for a price of $75 million. Should it decline to exercise that option — or should it be prevented by the Russian government-organized bankruptcy — Lithuania can acquire that additional stake, thus raising the total Lithuanian stake to 50.48% and obtaining the operating rights.

Economics Minister Viktor Uspaskikh has initiated that move, and he discussed it in early January in Israel with senior Yukos managers who had found refuge in that country. According to Lithuanian press reports, Uspaskikh did not clear this initiative with Prime Minister Algirdas Brazauskas. The latter agrees in principle with the proposal, on the strict condition that Lithuania should not pay for that additional stake in cash, but rather through capitalization of debt. Under the 1999 Williams contract, Lithuania had loaned $288 million to Mazeikiai. The $75 million price of the 9.72% stake can come off that debt.

However, Brazauskas argues that ensuring stable supplies of crude oil is more important than acquiring a majority stake and operating rights. Brazauskas says that he would favor — if necessary — selling Lithuania ‘s shares, “even at half-price,” to any [i.e., most probably Russian] oil company that would guarantee the long-term continuity of supplies. Ensuring that Mazeikiai operates at capacity and profitably, without disruption of fuel supplies on the market, is the overriding consideration.

How much longer Yukos and its Russian subsidiaries, primarily Samaraneftegaz, may be able to continue supplying Mazeikiai with crude oil is far from certain. Local analysts suggest that the predicament of Yukos will open the way for an as-yet-unidentified Russian oil company to take over a large ownership stake in Mazeikiai; and that Lithuania should retain a substantial stake as well as bringing in a major Western investor. Such a three-sided arrangement could guarantee crude oil supplies, ensure product access to markets, and avoid any disproportionate Russian influence.

(BNS, ELTA, delfi.lt, January 10-18).