Lembergs desperate to cut deal with Russians

With each passing month, Aivars Lembergs finds himself staring down the wrong end of a pipe running dry.

As Russian oil suppliers gradually close the spigot to the Ventspils Nafta oil terminal, the Ventspils mayor has been forced to acknowledge his erroneous judgment and to shuttle back and forth to Moscow to get the oil flowing again.

Lembergs is considered to be one of Latvia's elite businessmen - to many, an oligarch. His interests include an ownership stake in Ventbunkers, which owns a majority of LNT, the main shareholder of Ventspils Nafta, and a 3 percent stake in Latvia's Krajbanka.

But with Russia twisting the pipe, Lembergs is likely to be forced to correct his strategic business plan not only for his own portfolio of business interests but for the nifty seaside town of Ventspils.

Crude oil deliveries to the Ventspils terminal have fallen some 42 percent to 7.1 million tons over the first 10 months of the year and could even bottom off at 100,000 tons in December, according to a recent statement by Lembergs.

The steep cutback in oil shipments is being done "on purpose," Lembergs said last month, obviously implying that Russia was applying pressure on the Ventspils terminal.

This is in sharp contrast to statements made in the beginning of the year, when Lembergs stated the opening of the Primorsk oil terminal in Russia's Leningrad Oblast posed no threat to Ventspils.

Apparently the mayor has realized how wrong he was. After a much-anticipated visit by Russia's energy minister to Riga was canceled last month, Lembergs rushed off to Moscow on a moment's notice in what appears to have been a desperate mission to get oil flowing again.

Like Lembergs, many in Latvia believed that Russia's oil production was rising so fast that there would be plenty of crude for everyone - pipes and ports, trains and ships. Transneft, Russia's oil pipeline monopoly, has seen crude deliveries rise 10 percent yearly.

Ventspils, however, is running dry. Last year the company handled 22.3 million tons of oil and oil products, earning 24.7 million lats (41.7 million euros) on revenue of 46.6 million lats. This year, by contrast, nine-month earnings dropped 88 percent to 1.9 million lats.

No longer content with just piping the oil to Lembergs, Russia's oil companies, reaping the rewards of high oil prices and political stability, want a stake in the terminal.

"If Ventspils port wants its nice, advanced terminal not to stand idle, it will have to sell shares in the terminal for a price determined by the buyer and share the profits," a Russian oil man told the daily Diena.

No Russian company currently owns shares in Ventspils Nafta, a situation that the oil majors, infamous for their obsession with controlling all upstream and downstream activities, apparently will no longer tolerate.

In fact, Latvia's refusal to allow even partial Russian ownership of Ventspils Nafta influenced the decision to build the Primorsk terminal, west of St. Petersburg on the Gulf of Finland.

Haim Kogan, head of Lukoil's Baltic subsidiary, told the magazine Kommersant Baltic that the previous Latvian government made an enormous mistake by not developing the privatization model that would have given one-third ownership to a Russian company.

"If this option had been chosen, then there would have not been any need to build Primorsk. But, unfortunately, we turned out to be good tacticians but bad strategists, and now I see no possibilities for further oil transit development in Latvia," said Kogan.

Just slightly over one year in operation, Primorsk has become an economic exercise, as handling capacity must remain at maximum levels if port construction is to recover start-up costs and earn a profit. The terminal presently has a throughput capacity of 12 million tons, though there are plans to increase it to 18 million tons.

The launching of a new oil products terminal at Vysotsky, further west of Primorsk, will intensify the pressure on Lembergs and the new government of Prime Minister Einars Repse.

What's more, Russia's alternative export routes will only increase. Last week Russia's four largest oil companies agreed to begin financing the construction of a $3.5 billion pipeline and port to the city of Murmansk in order to boost direct export to the United States.

So far, it is unclear what the new government will do to convince the Russians to open up the spigot again. The Latvian Privatization Agency has met with Economy Minister Juris Lujans to discuss selling the state's 38.6 percent stake in Ventspils Nafta, but no decision has been made.

Lujans stated last month that he believed the state-held stake should be sold to an "eastern investor."

On the other hand, Ventspils Nafta's problems could be temporary. Arnis Malbergs, financial markets analyst with Latvia's Unibanka, said that "in the nearest future Russia will need the port because the amount of oil it exports exceeds the capabilities of its domestic ports."

The analyst also pointed out that Primorsk is frozen five months per year, often with a half-meter thick ice, and requires additional servicing costs. However, said Malbergs, as Russia begins to upgrade its existing ports, the industry will be able to "live without Ventspils."

Liene Kule, markets analyst at Hansabank said that Russia clearly had interests in bypassing the competitively priced Ventspils port.

With its back to the wall, either the government or Ventspils Nafta's existing shareholders - in the guise of Latvijas Naftas Tranzits, which owns 47 percent and has an option to buy 5 percent more - may be forced to sell to a strategic investor from Russia.

LNT, however, has reportedly refused to sell any of its own stock, leaving the ultimate decision up to the government.