By Igor Torbakov

The Jamestown Foundation
Eurasia Daily Monitor
August 18, 2006

Russia’s state-run monopoly Transneft has warned that it might indefinitely shut down the pipeline feeding Lithuania’s largest oil refinery, Mazeikiai Nafta. At the end of July, Transneft stopped providing crude to Mazeikiai, citing damage in the section of the Druzhba-1 pipeline (see EDM, August 3). Mazeikiai officials had said they would be able to continue operations even if they had to switch to receiving supplies exclusively by sea.

On August 16, Transneft President Semyon Vainshtok said that Russia might be “forced” to close down the Druzhba pipeline’s ruptured spur from Russia to Lithuania. The reason for the shutdown, Vainshtok argues, is purely technical: the normal life of a pipeline is 30 years, whereas the Druzhba-1 line is 42 years old, and it was made with metals that are now prohibited. He has denied that the Kremlin is motivated by politics and using Transneft as its weapon of choice. “We are an apolitical company,” Vainshtok asserted. But, he added, “The oversight agencies, which are becoming stricter and stricter every year, have forbidden us to work [on the pipeline] under high pressure.”

The Transneft boss did not say when Russia could resume pumping oil along the route. If the Russian monopoly chooses to maintain the limits currently imposed on the volume of oil shipped through the pipe while it builds a new pipeline parallel to the existing one — the scenario that Vainshtok advocates — Mazeikiai could be left without supplies for years to come, some experts say.

Despite the Transneft officials’ claims that the Russian pipeline operator’s move is not politically motivated, most independent analysts believe that the Kremlin is seeking to exert pressure on Lithuania and punish it for making a deal with Poland rather than Russia. It has already been noted that the pipeline rupture that disrupted the crude deliveries to Lithuania suspiciously occurred just weeks after the deal had been struck between Vilnius, the embattled oil company Yukos, and PKN Orlen, a leading Polish oil refining firm. (Last May, Orlen agreed to pay $1.49 billion to Yukos International U.K., based in the Netherlands, for its 53.7% in the Mazeikiai Nafta refinery. The Lithuanian government also agreed to sell its 30.7% share in the refinery to Orlen for $851.8 million, once the deal is approved by the European Commission and by the Lithuanian Parliament.)

When Orlen said it was interested in buying the Lithuanian refinery from Yukos, a Russian court-appointed bankruptcy manager tried to block the sale. It is widely believed that Russia’s state-controlled oil company Rosneft, which is one of Yukos’s largest creditors, wants to incorporate Mazeikiai into its fast growing business empire. A well-informed source recently told the Moscow Times that the Russian government had indicated it would only give the go-ahead for supplies if Mazeikiai went to an approved buyer.

The cutoff of oil deliveries more than two weeks ago forced Mazeikiai to operate below capacity and rely on supplies by sea. But the firm’s management appears to be putting on a brave face in defiance of the Transneft warnings. “Mazeikiu Nafta is again operating at full capacity,” a refinery spokesman contended. If Russia does not resume oil flows in the near future, “The refinery can be supplied with oil for at least another year by tankers via the Butinge oil terminal” on the Baltic Sea, he said. An Orlen spokesman sounded equally confident, saying the Polish company does not expect the shutdown of supplies to affect the transactions to complete the purchase of the refinery: “We made provisions in the contract in case of such scenarios.”

But the markets have already reacted. Mazeikiai shares closed down 7.43% Wednesday, following the Vainshtok statement. Earlier, Morgan Stanley sold its 2.6 million Orlen shares, which led to a 2% fall in Orlen’s market price. According to some energy analysts, if Orlen had to obtain its crude by ship it would cost an additional $1.50 a barrel. For its part, Fitch Ratings said recently that significant risks remain for Central Europe’s refineries regarding oil supplies due to their heavy dependence on Russian crude. If the fuel shipments to Mazeikiai are not resumed within next several weeks, Fitch says, it would give more ground to regard the Transneft behavior as politically motivated.

Some Western experts believe that Transneft could clear up suspicions by inviting independent monitors to inspect the damaged pipeline and make recommendations. In the meantime, Orlen said it reserved the right to pull out of the sale if Mazeikiai fell in value this year, Polish media reported August 16.