Publication: Monitor Volume: 7 Issue: 119

There is some light now at the end of the tunnel for Lithuania’s Mazeikiai Oil, the largest oil-processing complex in the Baltics, coveted by Russia’s Lukoil. The American company Williams International, operator and one-third owner of Mazeikiai, has succeeded in concluding a long-term supply agreement with Russia’s second-largest oil producing company, Yukos. If implemented, the agreement should enable Mazeikiai, and Lithuania itself, to counter Lukoil’s slow-asphyxiation tactics. For almost two years now, Lukoil has held crude oil supplies to the refinery down to a trickle, threatening to force Mazeikiai and Williams either out of business or into accepting a takeover by Lukoil.

Under the preliminary agreement of June 15, Yukos will supply 4.8 million tons of crude oil annually to the Mazeikiai refinery and export another 4 million annually through the Butinge maritime terminal, which forms part of the Mazeikiai complex. The agreement is valid for ten years, and goes into effect immediately upon approval by the Lithuanian government and Mazeikiai’s shareholders. Pending that approval, crude oil deliveries by Yukos are set to begin on July 1 of this year at 300,000 tons per month. Williams retains its position as the operating company of Mazeikiai. That position Lukoil had demanded ostensibly to share, in fact to take over.

Yukos is acquiring a 26.85 percent stake in Mazeikiai for US$75 million in investments and another US$75 million in credits to the company. Both sums equal those paid by Williams for its original 33-percent stake in 1999. Williams’ stake now goes down to match Yukos’ at 26.85 percent. The Lithuanian government retains 46.7 percent. Under the 1999 agreement between the Lithuanian government and Williams, the latter has the option of acquiring another 33 percent at a later date.

Lukoil is expected to continue supplying small amounts of oil to Mazeikiai, as does the Russian company Tyumen Oil through a Cyprus-registered affiliate. Yukos itself had already been supplying small amounts. Cumulatively, those deliveries were keeping Mazeikiai alive, but only barely, operating at a loss and unable to obtain credits.

The agreement with Yukos should enable Williams to obtain the US$400 million it seeks on financial markets to modernize Mazeikiai’s equipment and upgrade product quality for export to European markets. Banks have been unwilling to offer credit as long as Mazeikiai did not have a long-term supply agreement with a Russian company.

Lithuania’s President Valdas Adamkus, Parliament Chairman Arturas Paulauskas and opposition leader/ex-president Algirdas Brazauskas have welcomed the agreement in statements to the media. The government’s review of the terms of the agreement may, however, be delayed by the unraveling of the ruling coalition. Six ministers, representing Paulauskas’ left-of-center New Union/Social Liberals, resigned on June 18 as part of a move to form a new coalition with Brazauskas’ Social-Democratic Party. Prime Minister Rolandas Paksas was forced to resign on June 20, but seven ministers representing Paksas’ party, the right-of-center Liberal Union, remain at their posts for now, hoping either to reconstitute the coalition or to form a minority government. These include Economics Minister Eugenijus Gentvilas—who now doubles as acting prime minister–and Finance Minister Jonas Lionginas, on whom approval of the Mazeikiai-Yukos agreement depends. They have signaled that they favor the specific terms of agreement. Mazeikiai’s depressed stock surged on the Vilnius stock exchange.

The Mazeikiai complex includes the eponymous refinery, the Butinge terminal and the Birzai supply pipeline. Mazeikiai is the sole large refinery in the three Baltic states, with an enormous processing capacity of up to 16 million tons of crude annually. Butinge, with both import and export capability, has an annual handling capacity of 8 million tons. Yukos had agreed last October to export 4 million tons annually via Butinge for five years, but that did not affect the refinery’s fate. The three-tiered complex is Lithuania’s largest enterprise and number one taxpayer. The Tulsa, Oklahoma-based Williams International is the top Western investor in Lithuania. A statement by the U.S. State Department welcomed the signing of the supply agreement with Yukos.

Lukoil has been threatening the refinery with strangulation or capture by using its role as “coordinator” or “dispatcher” of Russian crude oil supplies to the Baltic region. That role is awarded by the Russian government, with which Lukoil is enmeshed despite its status as a publicly traded company. Lukoil’s chairman Vakhit Alekperov was set to descend on Vilnius last month when the Lithuanian government seemed on the verge of breaking ranks publicly with Williams and coming to terms with Lukoil. That did not come to pass, and Alekperov canceled the visit.

Lukoil may yet attempt to thwart the Mazeikiai-Yukos agreement. The question is whether the Russian government will continue encouraging Lukoil’s tactics. That will throw some light on the Russian government’s political intentions with respect to Lithuania and the Baltic states overall (Williams International press releases, Financial Times, Reuters, BNS, June 15-20; see the Monitor, January 25, May 11).