MOSCOW PREPARES UNFRIENDLY TAKEOVER OF LITHUANIA’S OIL COMPLEX

The Russian government is moving to seize control of Lithuania’s largest economic asset, the Mazeikiai oil complex, from the majority-owner Yukos and the Lithuanian state. Moscow seeks to preempt acquisition by international oil companies that have recently shown interest in Mazeikiai. It also seeks to devalue Mazeikiai’s stock, preparatory to a Russian takeover on the cheap.

On June 29, Russia’s Justice Minister Yuri Chaika announced that he had officially asked the governments of Lithuania and the Netherlands to prohibit any transactions with assets of Yukos affiliates in the two countries. “This is the first step toward sequestration and takeover of those assets,” Chaika explained, citing the Russian state’s tax claims against Yukos. Russia’s Bailiff Service addressed a parallel request to Lithuania and the Netherlands. The Netherlands-registered Yukos Finance owns 53.7% of Mazeikiai’s stock; the Lithuanian government owns 40.6%, and Lithuanian minority shareholders hold the rest.

The Mazeikiai complex includes the sole refinery in the Baltic states (12 million tons annual processing capacity), the Butinge oil maritime terminal (8 million tons of two-way loading capacity annually), the Birzai pipeline (17 million tons annual throughput capacity), and a number of retail outlets. This complex accounts for at least 10% of Lithuania’s GDP, is the country’s top taxpayer, and is earning high profits on regional markets following the equipment upgrade carried out by Yukos, prior to its destruction in Russia by the government.

The Yukos stake in Mazeikiai was valued at nearly $1.5 billion dollars on the stock exchange most recently (amid high oil product prices), with the potential to earn $2 billion at an auction that Yukos was contemplating. Moscow’s publicized request for a freeze caused the share prices to drop, however. The Russian government can either continue driving down the share price so as to force Yukos to sell to one or several Kremlin-friendly companies, or, alternatively can try to seize the Yukos stake under the guise of debt-collection and then transfer that stake to one or several of those favored companies.

Apparently anticipating such a debacle, Lithuania’s government is seeking a buyer for part of the government’s stake in Mazeikiai while its market value is high. Several international oil companies have recently demonstrated interest in acquiring the Yukos stake and/or part of Lithuania’s stake.

Thus, ConocoPhillips President and CEO James Mulva discussed the matter with President Valdas Adamkus and Prime Minister Algirdas Brazauskas in Vilnius on June 28-29. The Houston-based company ranks as the third-largest integrated oil company in the United States, the largest refiner there, and the fifth-largest refiner worldwide. ConocoPhillips recently acquired an 11% stake in Russia’s Lukoil, proposes to increase that to 20%, and considers the possibility of partnering with Lukoil at Mazeikiai.

Kazakhstan’s state oil and gas company KazMunayGaz First Vice-President Timur Kulibayev held talks with Adamkus and Brazauskas in Vilnius on June 22-23. Kazakhstan has long been interested in supplying oil for refining at Mazeikiai and for shipping out of Butinge, but its access there depends on transit through Russia. While in Vilnius, Kulibayev expressed interest in a possible acquisition of Yukos and/or Lithuanian shares by KazMunayGaz. The latter is involved in joint extraction and transport operations with several U.S. companies, including ExxonMobil, which has also recently signaled that has considered acquiring Yukos or Lithuanian shares in Mazeikiai. The Swiss-based oil trading and refining company Vitol has also announced its intention to do so. So has BP, albeit through its Russian affiliate TNK-BP.

The surge of international interest in Mazeikiai has spurred the Russian government into taking those preemptive steps, hoping to keep international buyers out of Lithuania. Meanwhile, Russian buyers — or, rather, claimants — look set to pounce. On June 21, Lukoil Vice-President Leonid Fedun publicly suggested that Lukoil is prepared to buy the Yukos stake in the Mazeikiai complex. Fedun made no reference to ConocoPhillips. On June 24, Gazprom chief Alexei Miller officially declared Gazprom’s interest in acquiring control of Mazeikiai. On June 28, a Gazprombank delegation proposed to Lithuanian leaders in Vilnius to sell the controlling stake to a Gazprombank-led consortium that would also include three Austria-based companies associated with Gazprom.

The Lithuanian government’s annual 2004 report on national security issues, and a follow-up report to parliament in spring 2005, note that a takeover of Mazeikiai by Kremlin-friendly companies would jeopardize Lithuania’s national security, and that the destruction of Yukos in Russia has increased that probability. In this situation, it would be prudent for Lithuania to examine this issue not simply as a commercial one (Moscow evidently does not handle it as merely commercial), but as a national security issue, properly to be discussed by the State Defense Council and the parliament.

(BNS, ELTA, Interfax, June 21-30; see EDM, January 20, February 3, April 1)