VILNIUS - Russian crude oil deliveries to Mazeikiu Nafta, the Baltics' only refinery, have apparently ceased for the next 9 's 12 months due to pipeline damage somewhere in Belarus, though Lithuanian politicians and analysts were quick to decry the development as a ploy by Russia, which is still angered at being shut out of the refinery's recent sale. One of the two spurs of the giant Druzhba-1 (friendship) pipeline to Europe apparently leaked over the weekend, according to Transneft, Russia's monopoly pipeline operator.
Company officials sought to calm oil traders by saying that they would divert crude exports (Russia is the world's second largest exporter of crude) via the other Druzhba pipeline and the Black Sea port of Sochi. They declined to say when crude deliveries to Lithuania could start again.
Mazeikiu Nafta is the largest enterprise in the Baltics and accounts for some 10 percent of Lithuania's gross domestic product.
Lithuania's new prime minister, Gediminas Kirkilas, tried to downplay the development, saying it was not unexpected and that a contingency plan was ready for implementation.
"This [situation] has been foreseen 's it has not come as a surpriseâ€¦ I am sure that with all formal issues solved, Mazeikiu Nafta will operate at full capacities," Kirkilas told reporters on Aug. 2.
"We do not consider the current circumstances as a blockade. We are not dramatizing the situation. The reasons are said to be technical, and this seems to be true," the prime minister said.
He added that Poland, whose PKN Orlen signed agreements for the purchase of some 85 percent of Mazeikiu Nafta, was prepared to offer its assistance. "Lithuania and Poland's government will help as much as they can, since successful operation of the company concerns our taxpayers and all of us," Kirkilas added.
With pipeline supplies all but ruled out in the short-term, the Mazeikiai-based refinery will increase supplies via its terminal in Butinge, on the Baltic Sea. Economy Minister Vytas Navickas said last week, "The number of tankers is being raised. Moreover, we are searching for additional possibilities to deliver by sea the quantity for all of August from Primorsk. The management is eager to prevent any stoppage of the refinery and has achieved a lot in order to secure sufficient supplies by sea."
He stressed that "even if the pipeline does not work at full capacity for a long time, we are ready for that."
Mazeikiu Nafta will attempt to receive 730,000 tons of crude in August instead of the planned 830,000 tons, which it had scheduled prior to the supposed pipeline damage. Some eight tankers will deliver the crude, Navickas told reporters.
Kirkilas also said supplies would resume to normal once PKN Orlen, which awaits EU approval for its purchase of Mazeikiu Nafta, completed talks with Russian exporters.
However, reports from Russia suggest the contrary, with an official from Russia's Natural Resources Ministry saying it could take up to one year to repair the damaged pipe. Curiously, Belarus' Nafta chemical refinery, which is located on the same spur as Lithuania's Mazeikiu Nafta, was still receiving its scheduled supplies. A spokesman for state energy holding Belneftekhim, which controls Naftan, was quoted by Reuters as saying, "Naftan is working as normal and will meet all its targets."
Meanwhile, Mazeikiu Nafta's CEO was preparing for the worst. "We are preparing as if [the pipeline] may not return to operation over an extended period," he told reporters. "We can import all the crude we need through the terminal to run the refinery."
Though importing crude by barge at Butinge is considerably more expensive than via pipeline, he said the company could still turn a profit.
Still, it was unclear how planned repairs at the Butinge terminal next month would affect the refinery's operations.
Meanwhile, politicians and analysts speculated as to whether the pipeline damage was a smoke screen and Russia wanted to punish Lithuania, much as it did Ukraine in January this year, for the recent sale of the refinery. The Kremlin did not hide its dissatisfaction with the results of the sale.
"It seems that the process has political implications alongside technical ones. Numerous statements and signals show that Russia is dissatisfied with the outcome of talks over Mazeikiu Nafta and the new strategic investor's identity. So talks over the supply of crude may be quite complicated," Gitanas Nauseda, an adviser to the president of SEB Vilniaus Bankas, was quoted as saying on Aug. 4.
He warned that the Mazeikiai complex would be forced to close if the supply of crude by pipeline was not resumed by mid-September, when repairs at Butinge began. "If we receive no crude by pipeline in September, similar to August, the Mazeikiai refinery might have to suspend production, that would be the worst scenario," the analyst said.
"As we know, [the sale of Mazeikiu Nafta] was followed by visits of some Kremlin representatives to Lithuania. They made it plain that Lithuania had made a mistake by deciding to sell Mazeikiu Nafta to a Polish company when all crude was Russia's. Several strong Russian oil companies, including Rosneft and Gazprom, were vying to buy Mazeikiu Nafta both openly and backstage. I think all these events are the result of their influence and voice," the analyst said.
"It seems that the best days of Mazeikiu Nafta in financial terms are already a thing of the past," he said.
Economy Minister Navickas did not rule out that there might be some political factors behind the disruption in oil supplies to Lithuania, but said that it seemed to be solely a technical issue.
Officials from PKN Orlen, the largest fuel retailer in Eastern Europe, said Mazeikiu Nafta's difficulties would have no bearing on their decision to take over the refinery.
"The current problems at Mazeikiu Nafta have no impact on the transaction," PKN Orlen spokesman Pavel Poreba was quoted as saying on Aug. 4.
President Valdas Adamkus said he hoped that matters over crude supplies would be settled in a business-like manner, without political games.
"I hope that Mazeikiu Nafta will not turn into political football, that the decisions will be made on commercial grounds. And even if we happen to face some curbs, we will definitely have alternative routes and Mazeikiu Nafta will work," he told journalists on Aug. 7.
Transneft also turned off the tap to Mazeikiai several years ago, after Lithuania opted to sell the plant to Williams International, a U.S.-based company.
Kirkilas said he would discuss the crude problem with his Russian counterpart, Mikhail Fradkov.
"I have received a welcoming letter from Russia's prime minister, and now we are drafting a letter addressed to him. I believe that we will seek possibilities to hold a meeting. Perhaps a ministerial-level meeting would be held beforehand," Kirkilas