Lithuania accountable for refinery

  • 2010-10-27
  • Staff and wire reports

VILNIUS - The flagging Lithuanian oil refinery formerly known as Mazeikiu Nafta– owned by Polish company PKN Orlen, could soon be back in Russian hands. At least seven, mostly Russian companies, are showing an interest in acquiring the struggling refinery, reports LETA.
Orlen has said it would consider any scenario for the unit, ranging from a full exit to keeping it in the group as long as the refinery could become profitable.

Earlier Orlen had stated the sale of the refinery would be done based only on financial considerations. Lithuania is concerned that its refinery could be sold once again to Russian owners, which would weaken the country even more in its quest for energy independence.
Orlen’s adviser, International investment bank Nomura, will complete recommendations on investment prospects in Lithuania for the Polish company in the fourth quarter of this year. “We are giving ourselves time, until the end of this year for Nomura to give a recommendation on Mazeikiu which we could announce to the market,” Orlen’s CFO, Slawomir Jedrzejczyk told reporters.

“PKN Orlen is a listed company, hence the economic criteria is decisive. It is premature to speak about which companies have the best chances to acquire this crude oil refinery. Any discussions about its future and the sale to Russian companies are pure speculation. Nevertheless, a possibility to solve logistics problems faced by PKN Orlen in Lithuania is a separate issue. My honorable colleague from Warsaw, the new Lithuanian ambassador to Poland Loreta Zakareviciene has spoken about it also,” the Polish ambassador said in an interview with Lietuvos Zinios daily.
The Polish government is appealing to Lithuania to try to save the Mazeikiu oil refinery. Poland’s Senate Speaker Bogdan Borusewicz has urged Lithuania to share the financial burden of the troubled Mazeikiu Nafta oil refinery which was bought by the Polish PKN Orlen in 2006, The Lithuania Tribune writes.

“When it comes to oil and refining, Orlen’s investment in Mazeikiai has brought major losses to the company, and the losses are really substantial. We should think together on ways to solve the situation. We cannot allow the losses to be generated to infinity. We must come up with a solution, and we have to cooperate with Lithuania in this area,” the Speaker said during the 3rd session of Lithuanian, Polish and Ukrainian parliaments in Vilnius on October 8.

The new Lithuanian ambassador-designate to Poland, Loreta Zakareviciene said that the Polish PKN Orlen’s withdrawal from Lithuania would not have a negative effect on the relationship between the two countries. “I hope that the problems will be solved. As far as I know, PKN Orlen would not consider pull-out options if the investment were profitable. I think that it is in the interest of Lithuania to maintain this project in its current form. On the other hand, I do not think that the group’s withdrawal would have any negative effect on bilateral relations,’ she said to the business daily Verslo Zinios.
Both Poland, PKN’s controlling shareholder, and the company’s management have pressured Lithuania to take steps to cut oil transportation costs that would increase the refinery’s profitability, but talks have stalled.

PKN Orlen, Poland’s largest state-controlled oil company, spent $2.3 billion (1.8 billion euros) to buy the Lithuanian Mazeikiu refinery in 2006. The deal was backed by then Polish President Lech Kaczynski, who was killed in an airplane crash in April. The refinery was owned at the time by Yukos, the troubled Russian oil company.  Russia was demanding the sale of any shares in the refinery owned by Yukos to be transferred to Rosneft, the state-owned oil company. Finally Yukos International agreed to sell its majority stake in Mazeikiu Nafta to Orlen for nearly $1.5 billion. As part of the agreement, Lithuania’s government sold an additional 30.66 percent to the company for $851 million.

From the very beginning the venture went terribly wrong. Even before the ink was dry on the deal, a fire devastated the refinery. The blaze not only destroyed equipment, but also threatened the sale. With the sale finalized the company then spent a further billion on upgrading technology. The investment never generated expected earnings due to troubles with oil supplies. The Russian Druzhba pipeline supplying the refinery conveniently broke down — and has not yet re-opened. Mazeikiu, built to process Russian crude and export it via a port on the Baltic Sea, now had to modify its modus operandi. Mazeikiu had to process crude delivered by sea and rail and send it back by the same route, an expensive exercise.

In 2008 Orlen had plans to build a 96 kilometer pipeline to Klaipeda’s oil terminal to gain access to the Baltic Sea and cut transportation costs. “We had contacts with the Latvian ports of Liepaja and Ventspils, and the answers were more than positive,” Mazeikiu CEO Marek Mroczkowski had told a news conference. PKN’s CEO Piotr Kownacki said he hoped a compromise could be reached with the Lithuanian government. “We are interested in getting a controlling stake, but we understand that this might not be possible because of Lithuanian laws, therefore we are looking at a smaller stake with a certain shareholders agreement,” Kownacki said. The Lithuanian Government refused the sale, citing national security concerns.

The Lithuanians are also stalling on repairing a 19 kilometer stretch of railway that allows Orlen to export oil to neighboring Latvia. The Poles wanted the line fixed this year, but the repairs will only happen in 2012, once the Lithuanian government gets EU funding.