Mazeikiu deal could up ante for Ventspils Nafta

  • 2002-08-29
  • Steven C. Johnson

Competition in oil transit is likely to get stiffer now that Russia's second largest oil concern has secured a spot in the Baltic neighborhood with its acquisition of the Lithuanian oil complex Mazeikiu Nafta.

Yukos last week bought 26.85 percent of Mazeikiu, which includes a refinery, a pipeline and an import-export terminal at Butinge, from cash-strapped U.S. energy firm Williams International.

The acquisition gives it a total holding of 53.7 percent and management rights in the concern and could be a blow for Latvian oil terminal Ventspils Nafta, long the pre-eminent Baltic terminal for handling Russian crude and oil products.

"Yukos now has a strong foothold in the Baltic states, and it makes it possible to develop it further, perhaps by increasing output by increasing supply through Butinge," said oil analyst Uldis Osis, president of Riga-based Consort Consulting. "In the long term, that will increase competition for Ventspils."

Unlike Mazeikiu, which reported second-quarter net losses of $349 million, Ventpils Nafta remains profitable; turnover in the first half of 2002 amounted to 19.5 million lats (34.8 million euros), generating a net profit of 2 million lats.

But cargo handling and turnover have been on the decline, largely a result of Russia's decision to begin shipping more oil to its Baltic port of Primorsk, bypassing Latvia.

In the first seven months of 2002, the terminal handled 10.1 million tons of oil and oil products, a 26.3 percent decrease from the same period last year.

The Mazeikiu deal - and a possible turnaround for the Butinge terminal, already regarded as a chief competitor to Ventspils - could cut into profits further.

Though Yukos accounted in 2001 for just 5.9 percent of the crude shipped through Ventspils Nafta, the presence of another competitor just across the Lithuanian/Latvian border further displaces the terminal as the top transit route for Russian oil.

"This is an additional threat in the long run. In the short run, the effect won't be that big because Yukos isn't such a huge supplier to Ventspils, but it increases overall competition and puts additional pressure on Ventspils," said Roberts Idelsons, an analyst at the Suprema brokerage's Riga branch.

The deal may prompt speculation about bringing in another Russian oil company as a minority shareholder in Ventspils Nafta, thus guaranteeing a certain transit volume as a hedge against competition.

Idelsons said that - coupled with further decreases in Ventspils Nafta's tariffs - that might be the only way to remain competitive.

The state owns 43.62 percent in Ventspils Nafta but has floated plans to sell a 38.62 percent stake, but these have been shelved until after parliamentary elections in October.

The joint stock company Latvijas Naftas Tranzits owns 47.06 percent in the terminal.

"Interest from Russian firms has been there, but so far Latvijas Naftas Tranzits hasn't agreed to make concessions," Idelsons said. "But it could turn into a question of securing some strategic partner because otherwise I presume (Ventspils Nafta) wouldn't be able to compete."

Not everyone agrees, though. Ventspils Mayor Aivars Lembergs, told the Latvian independent television LNT recently that should Yukos focus on Mazeikiu's refinery, Ventspils could come out a winner.

"If Mazeikiu is loaded for refining, the oil pipeline owned by LatRosTrans, a subsidiary of Ventspils Nafta, will be loaded too, so Latvia will gain from it," he said, referring to the pipeline that traverses Latvian territory en route to Lithuania.

Russian oil analysts have suggested that Mazeikiu gives Yukos a new opening onto the European oil market, since most of its refineries are in Siberia.

Latvia has long resisted the sale of controlling stakes in strategic industries to Russians for fear of becoming economically dependent on Moscow.

The fear was shared by neighbor Lithuania and was one reason why in 1999, the country's center-right government aggressively wooed Williams, eventually agreeing to sell a one-third stake in Mazeikiu to the U.S. energy company.

Politicians at the time openly said that the deal would enhance Lithuanian security and improve the country's chances of joining the U.S.-led NATO alliance.

But the company was never able to turn the refinery around. The mounting costs of upgrading Soviet-built equipment coupled with supply problems brought on by a disagreement with LUKoil put it further in the red.

When Yukos agreed early this year to buy its first 26.85 percent stake in Mazeikiu for $75 million and a 10-year supply deal, the writing was on the wall.

"Some people are still worried, sure, but as far as we have seen, Yukos is quite a modern company and comparatively transparent, " said Aidas Galubickas, head of Suprema's Lithuanian operations.

"It's more of a psychological fear," said Osis, of Latvia's Consort Consulting. "I understand why Lithuanians might not feel comfortable, but on the other hand, they get a stable oil supply from a growing, well-managed company. If they are losing something, they are gaining quite a lot, too."

Should Yukos prove successful at pushing Mazeikiu back into the black, the company may be well placed to expand in the Baltics.

"It will take them some time to get comfortable with managing Mazeikiu, and they have an interest in refining oil for customers, so they will essentially use Mazeikiu as part of their own vertically-integrated company," Galubickas said. "But if they're successful, sure, they could potentially expand."

Yukos has already announced plans to buy an operating chain of service stations in Latvia and Estonia.