Publication: Monitor Volume: 7 Issue: 150

On July 30-August 3, a special parliamentary session debated and approved the oil supply agreement recently signed by Williams International–the American operator of Lithuania’s Mazeikiai oil complex–with Russia’s Yukos company. The parliamentary action should lay to rest one of the most contentious political issues in Lithuania in the last few years. More important, it should reduce Lithuania’s vulnerability to political manipulation of oil supplies by the Russian government.

In the short term, the agreement with the privately owned Yukos should preserve Lithuania’s large oil industry from capture by Russia’s state-controlled Lukoil company. With the Russian government’s approval, Lukoil had since 1999 reduced oil deliveries to a trickle, threatened to bankrupt the Mazeikiai refinery and demanded operating rights as a precondition to restoring normal supplies. Williams succeeded in signing the agreement with Yukos–a competitor to Lukoil–on June 15 of this year. Clearly expressed political support from the U.S. government made a difference in securing undelayed approval of the agreement by the Lithuanian government and parliament.

Unlike Lukoil, Yukos does not demand operating rights to Lithuania’s oil complex. Under the ten-year agreement, 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. Yukos acquires a 26.85-percent stake in the entire complex through new share issues for US$75 million and another US$75 million in credits to the company. The two sums equal those paid in 1999 by Williams for its original 33-percent stake. Williams’ stake now goes down to match that of Yukos at 26.85 percent. The Lithuanian government retains 40 percent. Williams retains its position as the operating company of the entire complex, though Yukos takes two seats on the board.

The agreement required amending the 1999 laws on Mazeikiai’s reorganization and privatization and, also, some provisions of tax legislation in order to guarantee certain tax breaks to Mazeikiai for ten years. The parliament approved the legislative package by ninety-seven votes in favor, none against and forty-four not voting or abstaining. This tally suggests that Prime Minister Algirdas Brazauskas used his authority in order to neutralize the resistance of leftists and Lukoil allies within his own Social-Democrat Party.

The predecessor government (November 2000-July 2001) had been divided on the issue, as had been the right-of-center Liberal Union that led that government. LU’s leader, Prime Minister Rolandas Paksas, opposed both Williams’ privatization of Mazeikiai and the Williams-Yukos agreement. However, LU’s Eugenijus Gentvilas, as finance minister and ultimately acting prime minister, prevailed and secured government approval before the Brazauskas government took office. The New Union/Social Liberals, left-of-center partner in both of these governments, for the most part supported the agreements. Its leader and parliamentary chairman, Arturas Paulauskas, played an important role in lining up political support. Fatherland Union/Lithuanian Conservatives (FU/LC) had pushed through the Williams privatization agreement in 1999 while in government, and went on to support the Williams-Yukos agreement. The FU/LC leader, former parliament chairman Vytautas Landsbergis, argued that parliamentary approval of the Williams-Yukos deal should “stop Lukoil’s blackmail.”

Mazeikiai and Yukos shareholders’ meetings are scheduled to review the entire package within the next few weeks in order to close the deal by September 15. The agreement should enable Williams to obtain the US$400 million credits it needs to modernize the refinery’s equipment and upgrade product quality for export to European markets. Banks had been reluctant to offer credit in the absence of a long-term agreement on crude oil supplies to the refinery.

Mazeikiai is the sole large refinery in the three Baltic states, with an enormous annual processing capacity of up to 16 million tons of crude. Butinge, completed by Williams last year, has both import and export capability, with an annual handling capacity of 8 million tons. 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.

Yukos, and the Russian company Tyumen Oil, had already been supplying small amounts of crude to Mazeikiai. Following the approval of the Yukos agreement in Vilnius, Tyumen Oil expressed interest in increasing its own crude deliveries to Mazeikiai. The main remaining question is whether the Kremlin will allow Lukoil to thwart the private-sector agreement by using its prerogative as “coordinator” of Russian oil supplies to the Baltic region (BNS, LTK Television, July 30-August 4; see the Monitor, January 25, May 11, June 21).

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