RIGA - The sale of Lithuania's supply starved, fire damaged refinery, Mazeikiu Oil, to Poland's oil-less oil company PKN Orlen has once again occupied the Polish and Lithuanian business press during the past week. The refinery is the biggest company in Lithuania, the largest single taxpayer to the Lithuanian government, and a piece of the larger puzzle of the Baltics' energy security.
The history
The current controversy around the refinery is the nexus of the interplay of oil interests between Russia and the "West". Here is a simplified history of how things have got to this point.
Once upon a time Lithuania had a refinery that was connected to the Soviet oil pipeline network. In 1999 they sold a 26.9 percent of it to an American company, who then sold it to the western oriented Russian oil company Yukos, which was consequently shut down by the Russian tax authorities. The bankrupted Yukos ended up with a 53.7 percent stake.
In 2006 Lithuania tried to sell it again, but this time to a Polish company with no oil. Russia who has all the oil, had a convienient accident on the pipeline shortly after the sale which effectively turned off the pipeline in June of this year. However, Lithuania was prepared and had earlier constructed a crude oil import terminal at Butinge in the Baltic sea. Via Butinge and rail, the refinery began making other arrangements, accepting crude from as far away as Venezuela and Kazakhstan.
While the deal with the Polish company was being examined by the EU, there was a mysterious fire at the refinery. And the deal between the Lithuanian government, the oil-less Poles, and the bankrupt Russian company Yukos (just like the refinery's vacuum distillation unit) got lost in the smoke.
The newest scandal
The latest controversy is a proposed coup against Mazeikiu's current director, the American born Paul Nelson English, by four members of the board from Yukos. The proposed no-confidence vote in English started by the four members from Yukos comes amidst allegations of behind the scenes dealings between English and Poland's PKN Orlen. The two parties are accused of conspiring to intentionally slow down fire renovations and keep the price low until the sale is done.
Indeed, despite rumors that the refinery is looking to import vacuum distillate from as far away as Belarus and Russia to keep the plant operating, plans to restore the refinery to full capacity within two months are behind schedule.
In addition, the revised post-fire evaluation of the company's finances showed that the fire caused 130 million litas (37.7 million euros) worth of damage resulting in the company's profit forecast for this year almost cut in half, from 507.8 to 245 million litas.
A combination of lower global oil prices lowering the profits of Mazeikiu's already processed product reserves were also a factor in the company's recent lowering of profits, but blocked crude and slow repairs have the Yukos board members concerned about Mazeikiu's management's ability to maintain the company's profitability.
However, if the price remains low in the short term, the banks will be more likely to finance the PKN Orlen deal thus keeping the refinery in Western hands.
American intrigue
The Polish newspaper, /Gazeta Wyborcza/, quoted unnamed finance ministry officials who claimed that PKN Orlen is in talks with undisclosed American companies to try to create an Odessa-Brody-Plock-Mazeikai pipeline which would effectively create a future where Caspian oil would flow into the gas tanks of automobiles in the west without touching Russian territory.
PKN Orlen denied such talk. "PKN Orlen categorically denies that it is holding any negotiations to gain a strategic investor, or proceeding with any other issue regarding the shares owned by the Polish State Treasury," the company said in an Oct. 26 statement. The Polish state treasury owns 10.2 percent of PKN Orlen.
Government also in on the deal
The Lithuanian daily/ Lietuvos Rytas /reported on Oct. 30 that the management is in turmoil, and claimed that English was in secret talks with Poland's PKN Orlen to conspire how to keep the refinery from working at full capacity which would increase its value and potentially jeopardize PKN Orlen's bid for the refinery.
The paper also claimed that attempts were under way by Mazeikiu and the Lithuanian government to block the delivery of crude from Kazakhstan.
Economy Minister Vytas Navickas was reported to have said that the Kazakhs failed to submit a schedule for oil deliveries by the Oct. 16 deadline thus breaking their part of the deal.
However, representatives from the Kazakh oil company had another story.
"We have not only submitted a supply schedule, but we have also paid almost 11 million US dollars (8.7 million euros) for transportation," Bibigul Balpyk, head of the Kazakh Cooperative Fund's National Center for Chemical Protection and Waste Management, told the daily noting that, "A much higher amount has already been paid for a shipment of crude that was to be delivered to Lithuania during the first weeks of November."
But the Lithuanian government has no plans to let English go, even claiming that Yukos has sent letters in support of English's work as managing director. The director himself denied that he will be leaving his post.
"This no-confidence is completely unfounded," the managing director said, after a meeting with Lithuanian Economy Minister Vytas Navickas that lasted more than an hour and a half.
English said that, to his knowledge, Poland's PKN Orlen, which is buying Mazeikiu Nafta, does not want to replace the company's management, although there is no agreement on this issue with the Poles yet. "But they have made it clear to me that they are more than satisfied with my management of the company in the past and expect to work with me in the future," he said.
English also said he acquainted himself with the arguments set out by the four unhappy Yukos representatives, but he declined to comment on them.
Russia still interested
In the background of all this infighting at Mazeikiu, representatives from Russia's state owned Rosneft have been making it known that they are interested in purchasing a refinery in Europe.
According to analysts from the Russian business press, the most likely target for Rosneft's European refinery would be Mazeikiu due to the fact that other possible refineries are too expensive. With the originally agreed upon deal between PKN Orlen and Yukos stuck in the haze of the fire, Russian analysts see a possible purchase of Yukos's shares if PKN Orlen's banks back out.
Russian RBK-Daily reminded its readers that Rosneft was one of the losers in the most recent privatization by the Lithuanian government, and the business daily Vedomosti claimed that a "close source" at Rosneft confirmed the state-owned company's continued interest in the Lithuanian refinery.
RBK-Daily analysts also predicted that Russia owning a refinery in Europe was inevitable saying that, "Crude oil is considerably less profitable than oil products."
The end of the story?
So the saga continues, with the hopes of Lithuania keeping the refinery in Western hands seeming a bit dashed for the moment.
Following the recent press, one can make the assumption that the Lithuanian government, together with the help of Mazeikiu's English and the Polish government is trying to keep the value of the fire damaged facility low to keep the sale to the Poles going as planned, while at the same time, trying to get American companies to promise to invest in a new future pipeline to eventually restore a meaningful future supply of oil to the refinery. (Something that PKN Orlen's skeptical banks would love to hear at the moment.)
Meanwhile, the Russians are ready to restore the refinery back to business as usual circa 1986, where the oil and the profits from its processing, flow eastward rather than westward.
Stuck in the middle are the Baltic states and their shaky energy security. In spite of a noble attempt by the Lithuanians, Mazeikiu Nafta may go the fate of Latvia's Ventspils Nafta where Russia, reluctant to give up its Soviet-era oil holdings, will do all it can to keep the vertically integrated oil system created by the Soviet Union intact.
However, the supervisory board currently has eight members, of which five represent Yukos and three the Lithuanian government. Three of the Yukos representatives are Russians and two are Americans. If the Americans on the board and the Lithuanian government representatives vote against English's dismissal, he would retain his job and end the Yukos attempt to disrupt the management at the company would be foiled.
Today the government announced that it needs more time to complete the investigation of the fire. Two weeks ago the deadline was for Dec. 1, now the end of the investigation is unclear. Also, a "minor production incident" the refinery at the unit which makes high octane gasoline was shut down and restarted in Wednesday reminding that technical problems are still a potential problem for the refinery.
Continuing technical issues and insecurity about the fire, combined with management shakeups are beginning to look like bad news for the proposed sale, but the saga continues..... More to come.
