Uspaskich gets Yukos' nod for refinery takeover

  • 2005-02-02
  • By TBT staff
VILNIUS - Economy Minister Viktor Uspaskich revealed last week that he met with two Yukos' owners in Israel on New Year's Eve in an effort to resolve the ownership dilemma at Mazeikiu Nafta, the industrial linchpin of Lithuania's economy that has once again become tenuous due to the imminent demise of its core Russian shareholder.

Uspaskich told a Cabinet meeting that he met with Mikhail Brudno and Leonid Nevzlin, both of whom are wanted by Russian prosecutors, and agreed to allow the Lithuanian government to become a majority holder in Mazeikiu Nafta, a refinery and terminal complex.

"Mazeikiu Nafta is important for them," the minister told the Lietuvos Rytas daily. "However, on the other hand, they are powerless in the fight with the Kremlin."

As a Cabinet source told the paper, "Brudno and Nevzlin admitted that Mazeikiu Nafta had remained one of several remaining sources of income for [Yukos]."

Uspaskich also said that the government had proposed that Yukos, which has been under attack by Russia's prosecutors and tax inspectors for over a year now, terminate the existing management contract and waive the right to a second share option that it received upon becoming core shareholder several years ago. The government instead would buy the 9.72 percent stake and become majority owner, though Yukos would remain operator.

The state said it would purchase the Mazeikiu Nafta stake for some 200 million litas (57.97 million) by capitalizing loans it had previously extended to the company.

A second proposal would initially proceed the same way, but it would eventually allow Yukos to purchase an additional 11 percent in several years' time and thus regain its majority status at the company. The option is curious in that it presumes Yukos would still be a viable company down the road, something most Moscow analysts say is highly unlikely.

A third alternative would be for the Russian oil company to sell its entire stake, an option that Uspaskich didn't deny.

The Economy Ministry said it expected an answer by mid-February.

The ownership issue is extremely crucial for the government since Mazeikiu Nafta, the country's largest taxpayer, finally turned the corner last year and managed to post a profit after years of losses due to supply and ownership problems. The government is no less eager to procure over 1 billion litas in financial aid from the European Union for a major technological upgrading at the refinery, but with the ownership issue unresolved, assistance will have to be placed on hold.

Paul Nelson English, CEO at the complex, told Lietuvos Rytas last week that all upgrading works were aimed to help the company adapt to the EU's fuel quality standards. "The majority of measures are meant to make the company's products compliant with forthcoming EU clean-fuel requirements," he said, adding that the company was also trying to reduce the output of heavy fuel oil 's or even remove it 's from the product range. Heavy fuel oil is a low value-added product that increases wear-and-tear on refinery equipment.

Mazeikiu Nafta has been working on upgrade projects that factor in environmental requirements. These investments are to reach some 334 million litas in 2005, compared with 62 million litas allocated over the past five years.

In the meantime, the company is already bracing itself for a tough year financially. Last week officials admitted that net earnings would decrease some 65 percent from 600 million litas last year.

"We expect that Mazeikiu Nafta will earn a net profit of around 200 million litas this year," Nerijus Eidukevicius, deputy economy minister and Mazeikiu Nafta's chairman, was quoted as saying. He explained the forecast was based on expectations that Mazeikiu Nafta would refine about 9 million tons of crude and that its Butinge terminal would handle some 5 million tons of crude.

Giedrius Karsokas, Mazeikiu Nafta's communications director, told the Baltic News Service that earnings should amount to 244 million litas for the year. "The earning forecasts are lower than last year, as we expect the margins to deteriorate."

Meanwhile, the situation around Yukos looks increasingly dire. Interior Ministry officials in the Russian region of Samara, where another production subsidiary is located, have opened a new criminal case. Considering that Yukos still has a $10 billion outstanding tax bill, this could spell the beginning of the end of another upstream asset.

Also, Yukos managers met in London last week in an effort to salvage the holding company's remaining subsidiaries.