Publication: Monitor Volume: 7 Issue: 92

Russia’s Lukoil threatens Lithuania’s oil-processing industry with strangulation or capture. Lukoil and, behind it, the Russian government seem unreconciled to the role of the American company Williams International as sole strategic investor in, and operator of, that Lithuanian industry. Lukoil wants a large equity share and operating rights in Lithuania’s oil industry. Beyond that economic stake, Lukoil’s game has obvious political implications in terms of creating a Russian capability for leverage on Lithuania. Although a publicly traded company, Lukoil is enmeshed with Russian state structures, and is officially authorized by the Russian government to “coordinate” all Russian crude oil supplies to the Baltic region.

The strangulation tactics consist of reducing crude oil supplies to a trickle, so as to force the Williams-operated Mazeikiai Refinery into costly slowdowns and shutdowns. The refinery’s losses, in turn, deprive the Lithuanian government of critically needed tax revenue. The government, moreover, does not want to assume the risk of guaranteeing the international loans that Williams seeks for technological modernization of Mazeikiai. Exploiting the government’s concerns, Lukoil and Moscow now hope to blackmail or induce the government into turning against Williams and demanding of it to accept Lukoil’s terms.

The Russian company offers to conclude long-term supply contracts for some 6 million tons of crude annually, in return for control of the industry. Until recently, it demanded a position equal to that of Williams–that is, a stake of 33 percent and “joint” operatorship. Now, however, Lukoil demands 51 percent. Last month, the company’s chairman Vakhit Alekperov presented that demand to President Valdas Adamkus, Lithuanian ministers and Williams officials during the Russian-Lithuanian summit meeting in Moscow. Alekperov is now due to descend on Vilnius next week for negotiations on that basis.

On May 7-8, the Vilnius-based head of Lukoil-Baltija, Ivan Paleichik, publicly attacked the Williams management for allegedly lacking the will to rescue Mazeikiai, which rescue Lukoil offers on its own terms. Paleichik timed the attack to the release of first-quarter figures, which showed the refinery’s losses growing on a year-on-year basis, due to operations below capacity. Lukoil-Baltija owns some 120 filling stations in the three Baltic states, including some seventy in Lithuania.

With its enormous processing capacity of 16 million tons of crude annually, Mazeikiai is the sole large refinery in the three Baltic states. The company includes also the Butinge large-capacity maritime terminal for oil loading–with both export and import capability–and the Naftotiekis supply pipeline. The three-tiered company is the largest by far in Lithuania, the single largest taxpayer in the country, and also the single largest enterprise privatized with Western capital.

The terminal and the supply pipeline are operating near capacity on Russian oil, much of that from the Yukos company. The refinery, however, needs to operate at the very least at half capacity to break even financially. Currently it needs some US$400 million worth of credits in order to overhaul the Soviet-era plant and upgrade product quality for export to Central and Western Europe. In the absence of long-term supply contracts for crude, Williams is unable to obtain that international financing.

Lukoil’s bid for a controlling stake and the operatorship was turned down in 1999 by Lithuania’s Conservative-led government. For clearly stated economic and political reasons, the government preferred the American strategic investor. Williams International acquired a 33-percent stake and the operating rights, along with the option to increase its stake by up to another 33 percent in a follow-up stage. Prime Minister Rolandas Paksas and the economics and finance ministers opposed some of the financial aspects of that deal, were overruled by a Conservative majority, and resigned their cabinet posts. One year and an election later, the trio returned to government as representatives of the right-of-center Liberal Union, the party of Lithuanian business.

As prime minister in the recently formed government, Paksas has initiated an across-the-board, critical review of privatization projects, holding up some of them. Last month, he endorsed the privatization of Lithuania’s maritime shipping company LISCO by the Danish strategic investor Tor Line, and fought hard to push that through parliament by the narrowest of margins. However, Paksas and his Economics Minister Eugenijus Gentvilas have adopted an entirely different attitude toward Williams. The stalemate seems set to continue, and Lithuanian politicians could only prolong it if they blame the American partner for Lukoil’s blackmail (BNS, ELTA, May 7-9).