LUKoil and Mazeikiu Nafta pick out the rings

  • 2000-05-25
  • By Peter J. Mladineo
VILNIUS - At first they claimed ignorance, but now it's a fact:
Mazeikiu Nafta and Russian LUKoil are going to form a joint venture
which would solve Mazeikiu Nafta's nagging supply problems and create
distribution solutions for oil pumped through Lithuania.

On May 18, the two parties signed a protocol of intent outlining
general principles of cooperation between the two companies. They
intend to establish joint supply and marketing companies. Mazeikiu
Nafta, at long last, will receive 6 million tons of crude from Lukoil.
The oil will be pumped into Lithuania from a jointly owned supply
company. Mazeikiu Nafta also has the right to purchase extra oil
independently of the joint supply company. In other words, they'll
still be able to import oil from Russian Yukos or from Kazakhstan - two
sources with which Mazeikiu Nafta has been working on separate supply

This development could mark the engagement of two unlikely partners.
The Russian monopolistic oil giant LUKoil was the spurned swain who
initially cut off the supply to Mazeikiu Nafta when the Lithuanian
government decided in 1998 to sell the controlling share of the company
to Williams International, the ultra-ambitious U.S. firm that thought
it would be a snap to move from South American to Eastern European oil
markets. The Williams/Mazeikiu team was born out of perhaps the
country's most controversial privatization - economic crisis-stricken
Lithuania would have to pay out long-term loans to Williams, so that
the American firm could modernize Lithuania's Soviet-built oil complex.

Then came more than a year of contretemps between the Russians and
their one-time partners. In essence, the Russians wanted a chunk of the
company while the Lithu-anian government, still run by stolid
Conservative ministers, said no way.

The Russians played hardball: No share, no long-term supply deal. Then
came repeated supply shortages and Mazeikiu Nafta found itself losing
money and getting desperate for a suitor - the most geographically
suited, of course, being LUKoil.

Mazeikiu Nafta had also been seeking out other oil exports - the
Russian Yukos company, and suppliers from oil-rich Kazakhstan.
Lithu-anian President Valdas Adamkus recently went on a mission to
Kazakhstan and reached a supply deal with the Kazakhs. Yukos and
Mazeikiu Nafta are currently chin-deep in documentation outlining a
possible deal of smaller supplies of crude.

Then came a series of meetings this spring between Mazeikiu Nafta and
Lukoil in London, where the language started to change. What once
sounded like the beginnings of post-Cold War economic warfare was
starting to take on sweeter, more conciliatory overtones. The issues on
the table in London included supply, distribution, and communication.

More hidden than the rest of the items on the agenda: the Joint
Venture. In mid-April, media reports circulated that the tone of the
talks had improved considerably. The reports mentioned a possible joint
venture, which both LUKoil and Mazeikiu Nafta denied.

Now, with the protocol of intent inked, it's starting to sound like
business again. A May 18 press release quoted Yuri Storozhev, LUKoil
board member and head of LUKoil's negotiating team, as saying, "This
challenge is now behind us. What remains are technical issues, and we
are determined not to let them stand in the way of implementing our

While the companies hint that joint operations could begin in August or
September, the official language still lacks finality. Said Alan
Henderson, Mazeikiu's head of communication:

"This protocol we have signed is not an agreement. Still 90 percent of
the work needs to be done. We've agreed to agree."