IT LOOKS, SOUNDS, FEELS LIKE A BLOCKADE: RUSSIAN OIL BLOCKADE OF LITHUANIA

The Jamestown Foundation

Eurasia Daily Monitor
August 18, 2006

Ignored by Western believers in Russia’s reliability as an energy supplier, the Russian government is attempting to either bankrupt or capture the oil concern Mazeikiai in Lithuania. The holding’s centerpiece, the Mazeikiai refinery, is the only refinery in the three Baltic states and largest economic entity there. It is also Lithuania’s top taxpayer.

Moscow seeks to stop the oil holding’s purchase by Poland’s PKN Orlen company from Yukos International and the Lithuanian government — a three-cornered agreement sealed recently (see EDM, June 1, August 3). Thus, Moscow has cut off the supplies of Russian oil by pipeline to Mazeikiai with the apparent intention of depreciating the holding’s market value, force PKN Orlen to withdraw from the deal, and clear the way for Russian state-connected companies to acquire the holding, probably at a fraction of its market value. Lukoil tried this method in 2001-2002, but was thwarted by Yukos’s purchase of Mazeikiai, before the Kremlin destroyed Yukos.

Russia’s state pipeline monopoly Transneft, has completely halted crude oil deliveries to the Mazeikiai refinery since July 29, following an oil leak in Russian territory from the pipeline that runs via Belarus to Lithuania. That northbound line branches off from the Druzhba westbound pipeline to central Europe. But the northbound halt affects only Lithuania, as the pipeline continues delivering the pre-scheduled volumes of oil to Belarus.

Russian authorities have not provided any information to Lithuania regarding the duration of the cutoff or the possibility of resuming deliveries. Instead, Moscow orchestrates media leaks to foster political uncertainty and market nervousness. According to Transneft chairman Semyon Vainshtok, his company is awaiting the results of an expert study before deciding what to do with that section of the pipeline: repair it, reconstruct a 140-kilometer stretch, or build an entirely new line. During this entire process, the existing line would operate at low pressure or may have to be shut off altogether, although apparently not affecting Belarus.

By Vainshtok’s smug account, Russia has little use for that line anyway and may in a few years’ time not need it at all. Transneft plans to reroute Lithuania-bound oil volumes toward Black Sea ports at an annual rate of 5 million tons and has begun doing so. Moreover, Russia might switch up to 31 million tons of oil annually from the Europe-bound Druzhba pipeline to the Pacific Ocean-bound line that Transneft plans to complete “at an accelerated rate,” again according to Vainshtok’s calculated leak (Moscow Times, Reuters, August 16).

Ostensibly, Russia’s environmental agency, RosPrirodNadzor [Natural Resources Oversight Agency] has “ordered” Transneft to sharply lower the pressure in the pipeline to Lithuania, pending repairs or replacement of the line on Russia territory. RosPrirodNadzor anticipates a delay of one year and nine months before the line becomes fully operational.

Lithuania regards Moscow’s decisions as a test of Russia’s reliability as an energy supplier. According to Prime Minister Gediminas Kirkilas, “We don’t wish to believe that Russia is again behaving like an unreliable partner, jeopardizing its international image. We don’t wish to believe that the stoppage of deliveries is a political decision, although there are growing indications that it is” (BNS, August 17).

As a result, the refinery now operates at a fraction of its capacity. This month, it is processing only 13,000 to 14,000 tons of oil per day, thanks to a few tanker shipments received from the TNK-BP company at the Butinge maritime terminal. However, the terminal is scheduled to close on September 15 for at least three weeks of maintenance work.

That tanker-delivered oil is in any case more expensive to buy, compared to the oil hitherto delivered by pipeline. Thus, the refinery’s profit margins are being slashed, and the value of Mazeikiai shares is eroding on the stock market. For now, the Lithuanian company and government as well as PKN Orlen are confident that the company “would not go bankrupt.” The Polish government — owner of a 25.5% stake in PKN Orlen — and the company itself are declaring that they would not pull out of the deal to purchase Mazeikiai from Lithuania and Yukos International.

Under that three-cornered deal, the Polish company shall pay a total of $2.344 billion for an aggregate 84.4% stake in Mazeikiai. That total price includes $1.492 for the Yukos stake of 53.7% and $852 million for the Lithuanian government’s 30.66% stake. In addition, PKN Orlen has an option to buy the Lithuanian government’s 10% stake. But is also has the option to withdraw from the deal altogether prior to its completion.

Speculation that PKN Orlen may pull out of the deal is exactly what Moscow intended to trigger through the oil cutoff. Moscow seems set to attempt pushing Mazeikiai’s market value steadily lower in order to discourage investor confidence, set the stage for a Russian takeover, and in the meantime erode Lithuania’s GDP and tax base, to which Mazeikiai is the single largest contributor. PKN Orlen has until early 2007 to complete the purchase.

(BNS, August 4 – 17)

–Vladimir Socor