Talks with Yukos come up short, but set to continue this week in Vilnius

  • 2006-02-08
  • Staff and wire reports
VILNIUS - Last week's negotiations between the government and Russia's Yukos failed to produce results, while a Netherlands court of appeals threw out a case by a former Yukos subsidiary that would have effectively blocked a sale of the company's 53.7 percent stake in Mazeikiu Nafta.

Lithuania's top negotiator with the embattled Russian company said that, although the London talks broke down, the two sides would continue at the negotiating table this week in Vilnius.

"The problems that we have with this transaction remain unsolved," said Nerijus Eidukevicius, deputy economy minister. He said Yukos officials had informed the Lithuanian side of its ongoing sale of Mazeikiu Nafta, the Baltics' only refinery and Lithuania's largest corporation, but he would neither disclose the names of bidders nor say how much they had bid.

Still, other sources confirmed that only two companies, Kazakhstan's KazMunayGaz and Poland's PKN Orlen submitted bids for the stake. During a previous round, Russia's Lukoil and TNK-BP bid as well, and there were questions whether the companies, which have enormous production potential, would participate this time around.

KazMunayGaz, which is state-owned, said it offered $1.2 billion, while according to unconfirmed reports PKN Orlen, which is 73 percent privately held, bid some $1.5 billion. PKN Orlen's bid, however, is reportedly conditional.

For Lithuania, the importance of the deal cannot be overstated. Mazeikiu Nafta accounts for some 10 percent of GDP, so the government first and foremost wants assurances that any potential investor can guarantee deliveries of crude. What's more, the government of Prime Minister Algirdas Brazauskas is hoping to sell an additional 20 percent stake to an investor in order to sweeten the deal and fill state coffers by an extra 250 's 300 million euros.

In order to pull it off, the government, which owns 40.66 percent of the refinery and oil export terminal at Butinge, has proposed to buy the 53.7 percent stake from Yukos for up to 3 billion litas (870 million euros). First, however, it needs to cancel two Yukos-held options to buy 21.22 percent in the refinery and other provisions of its agreements with the Russian company signed some five years ago.

But reports indicate that Yukos wants to sell its 53.7 percent stake for the highest price possible and exercise its options to buy the additional shares cheaply, or for some 490 million litas.

The battle lines appear to have been drawn. Kazakhstan desperately wants the refinery both as a means to boost its downstream potential and to gain exposure to a growing retail fuel market.

KazMunayGaz is holding talks with the Russians over the transit of crude to the Baltic state. Talgat Aldybergenov, the company's representative in Lithuania, has confirmed that talks in Moscow were underway. Currently, Kazakhstan does not tax crude oil exports, whereas Russia charges $180 per ton for every ton exported.

Last year Transneft, Russia's monopoly oil pipeline operator, suddenly terminated an agreement with KazMunayGaz for no apparent reason. However, now that Kazakh President Nursultan Nazarbayev has been re-elected, it would appear relations between Moscow and Astana are on firm footing and the Kremlin will give its blessing to the Kazakh's ambitions in Lithuania.

PKN Orlen, Poland's largest refinery of crude, is also lobbying Vilnius actively and has promised massive investments in the Mazeikiu refinery and surrounding infrastructure.

Analysts say that, ounce for ounce, KazMunayGaz has the upper hand in the competition.

Eduardas Vilkas, director of the Lithuanian Economics Institute, said that even though Russia had cancelled an agreement on Kazakh oil deliveries to Lithuania, it was a temporary measure. "The Russians wouldn't want to be at odds with Kazakhstan because they wouldn't want to lose such a serious partner," Vilkas was quoted as saying by the Lietuvos Rytas. "Also, KazMunayGaz can get Lithuania into the oil production business. That would generate huge profits," he said.

Vilkas said that PKN Orlen could not guarantee crude deliveries to Mazeikiu Nafta, though he did not rule out that the Poles might agree with Russia on oil supplies. But with the recent chill in Polish-Russian relations after Poland's new, right-wing government was formed, that too could boil down to a political decision.

Still, for now it would appear that price, and not economic rationale, will carry the day. Yukos, which still has some $7 billion in outstanding tax debts, wants cash and is likely to sell to the highest bidder.

Finally, an Amsterdam court of appeal rejected an appeal by Yugaskneftegaz to prohibit the sale of Yukos' non-core foreign assets. The court's decision effectively lifts all restrictions on Yukos to sell its non-core assets and subsidiaries shares outside the Netherlands, including Yukos Finance BV and Yukos International UK BV, two UK-based Yukos-owned subsidiaries in the Netherlands that own the Lithuanian refinery directly.