TALKS ON YUKOS ASSETS IN LITHUANIA MOVE INTO HIGH GEAR

During his September 16 visit to Washington, Russian President Vladimir Putin held a three-way meeting with ConocoPhillips president James Mulva and Lukoil chairman Vagit Alekperov to discuss, inter alia, a possible partnership of these oil companies with Lithuania. ConocoPhillips and Lukoil are interested in acquiring major stakes in Lithuania’s oil-processing and oil-transport sector, which is currently owned 54% by Yukos and 41% by the Lithuanian government.

Those assets include the Mazeikiai refinery (the country’s most lucrative business entity), the Butinge maritime terminal for crude oil, and the Birzai pipeline. In addition, it seems possible that the Klaipeda maritime terminal for oil products (an export outlet for the refinery) could be included in a comprehensive transaction. The Yukos-controlled portfolio is currently valued at €1.2 billion (approximately $1.5 billion) on the market.

The discussion moved from Washington to Vilnius on September 19, when senior managers of ConocoPhillips and Lukoil arrived for more detailed talks with the Lithuanian government. The latter has had a thriving business partnership with Yukos, but that company’s destruction in Russia has ultimately forced it to seek a buyer for its Lithuanian assets. Lithuania has a contractual right to approve or veto Yukos’ choice of buyer. It also has the preemptive right to buy any Yukos stock that is put up for sale; but Lithuania lacks the funds and would have to go into heavy debt in order to exercise that preemption.

Wary of the possibility of Yukos’ stake falling prey to corrupt Russian interests, the Lithuanian government has set stringent qualifications for investors in the oil complex. Requirements include: any Russian strategic investor to team up with a reputable Western one; international (not just Russian) management of these enterprises; compliance with international environmental standards; investment commitments to development and modernization; and — ultimately the key to any deal — guaranteed supplies of crude oil. Realistically, only Russian companies can meet that requirement. This is why Lithuania seeks a balance of Russian and Western interests.

ConocoPhillips and Lukoil are currently partnering in some Siberian projects. ConocoPhillips owns an 11% stake in Lukoil and both companies consider the possibility of raising that stake to 20%. Other companies that have officially expressed interest in acquiring portions of Yukos’ stake in Lithuania include Russia’s Gazprom, the Russo-British TNK-BP, Kazakhstan’s Kazmunaigaz, Poland’s Orlen, and the Swiss-based oil trader Vitol. Of these interested parties, Gazprom is unacceptable to Lithuania because this company already holds a monopoly on the country’s gas supply.

Given the current level of oil product prices, acquisition of Mazeikiai is a particularly attractive business proposition. The company’s products meet European Union quality standards and are competitive on EU markets, following the upgrade of its equipment by Yukos. Mazeikiai posted €210 million (approximately $250 million) in net profits in 2004, although it was operating well below capacity during the assault against Yukos in Russia.

At the moment, the Lithuanian government seeks parliamentary approval for taking €870 million (approximately $1.2 billion) in syndicated bank loans to acquire Yukos’ stock. The government is understood to plan to resell that stock, along with most of the government’s interest, to the strategic investors yet to be chosen. The government intends to keep an interest of at least 10% with blocking rights. Ultimately, national security considerations should weigh no less than commercial ones in the decision on the choice of investors.

(ELTA, BNS, September 16-21; Kommersant Daily, September 19)