By Vladimir Socor

The Jamestown Foundation
Eurasia Daily Monitor
August 3, 2006

Since July 29, Russia’s oil pipeline monopoly Transneft has stopped deliveries to Lithuania’s Mazeikiai refinery, the largest economic entity in that country and sole refinery in the Baltic states. Transneft’s move seems designed to block the consummation of the three-way deal whereby Poland’s PKN Orlen company is acquiring the majority stake in Mazeikiai from Yukos International and a minority stake from the Lithuanian government.

Russian companies — first Lukoil, and ultimately the state-owned Rosneft — had sought to take over Mazeikiai from Yukos and Lithuania. But that intention was thwarted on May 26 when Yukos sold its stake to PKN Orlen with Lithuania’s approval, opening the way for the Lithuanian government to follow suit. However, Mazeikiai is fully dependent on Russian oil supplies.

Russian authorities are citing technical reasons for the stoppage of deliveries. On July 29, an oil spill occurred in Russia’s Bryansk oblast on the Druzhba pipeline system. The accident occurred near the point where a line to Belarus and Lithuania branches off the main export pipeline that continues westward to Europe. The scare on European markets subsided on July 31 when Transneft announced that the accident would not affect exports to Europe; “only” Lithuania would be affected.

The Russian government is using its environmental and conservation agency, Rosprirodnadzor [Natural Resources Oversight Agency], as the main public-relations voice regarding oil supplies to Lithuania. According to Rosprirodnadzor First Deputy Director, Oleg Mitvol, the damaged section of the branch-off line to Lithuania can no longer be patched up, but must be replaced entirely. That section, running for 70 kilometers from Russian into Belarusian territory, has been shut down. That section actually consists of two parallel pipelines, thus making possible small-scale deliveries if Moscow decides to replace those two lines one with one. Transneft would need “one year and nine months” to replace that entire section, according to Mitvol.

For its part, Transneft has instructed Russian oil-exporting companies to divert their planned deliveries from Lithuania toward Black Sea ports during the month of August.

These tactics are reminiscent of Lukoil’s and Transneft’s hostile-takeover attempts in 1999-2002 against the Mazeikiai refinery and Latvia’s Ventspils oil-export terminal, respectively. In both cases, those Russian companies reduced and ultimately discontinued altogether the oil deliveries, so as to drive Mazeikiai and Ventspils into bankruptcy, sink their market value and buy them on the cheap. The supply cutoffs were imposed gradually over a period of many months — a procedure designed to maintain uncertainty and confusion in the West about Moscow’s ultimate goals there. In the event, Mazeikiai survived and indeed prospered thanks to a friendly takeover by Yukos in 2002, before the Kremlin moved to destroy Yukos. Ventspils continues to operate thanks to oil deliveries by railroad, a mode of delivery outside Transneft’s jurisdiction.

Following the destruction of Yukos in Russia, the Mazeikiai refinery operates at half capacity or less, on small-scale deliveries by pipeline mainly from Rosneft and Lukoil (former claimants to the Yukos stake in Mazeikiai) as well as from TNK BP. The refinery processed 500,000 tons of oil in July, and has not confirmed any supply contracts for August by pipeline. TNK BP delivered 100,000 tons of oil by tanker to the Butinge maritime terminal — which is part of the Mazeikiai holding — at the end of July and is expected to deliver three such shipments in August.

PKN Orlen, along with Polish and Lithuanian government representatives, is seeking talks with the Russian government and companies toward resumption of deliveries in August and beyond. This situation casts additional doubt on the Kremlin’s assurances — most recently reiterated during the G-8 summit — that Russia is a fully reliable energy supplier to European Union countries.

By the same token, the situation would seem to require the EU to uphold its own credibility and make clear that it would not tolerate manipulation of energy deliveries to a EU member country, whether for political purposes or for hostile takeovers of assets. It was in Lithuania’s capital Vilnius that U.S. Vice-President Richard Cheney warned against Moscow’s manipulation of energy supplies. Thus, U.S. credibility will be at stake as well, should Moscow persist with the cutoff to Lithuania.