Viewing cable 05VILNIUS380

05VILNIUS3802005-04-11 14:36:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000380 
E.O. 12958: DECL: 04/10/2015 
     ¶B. EUR/RUS/MORENSKI EMAIL 3/31/05 
     ¶C. VILNIUS 1439 
     ¶D. VILNIUS 1160 
     ¶E. VILNIUS 1521 
Classified By: Economic Officer Miguel Rodrigues for reasons 1.4(b) and 
¶1. (C) Russian oil giant Yukos is losing hold of its 
controlling interest in Lithuania's Mazeikiu Nafta oil 
refinery, as the company can no longer guarantee oil flows to 
Lithuania.  The GOL has entered into negotiations with 
London-based Yukos management regarding control of the 
refinery.  Russian oil companies Lukoil, TNK-BP, and Rosneft, 
as well as ConocoPhillips, all appear interested in Mazeikiu, 
the region's sole refinery.  Lukoil, promising the GOL 
uninterrupted crude supplies and retail outlets for its 
finished products, is the rumored frontrunner, but it's not a 
done deal.  Sale of Yukos' interest in Mazeikiu Nafta to any 
of these potential buyers will stabilize Lithuania's oil 
supply.  End Summary. 
Running on Fumes 
¶2. (C) Yukos, the majority stockholder of Lithuania's 
Mazeikiu Nafta (MN) oil refinery, edges closer to breach of 
its contract with the Government of Lithuania and loss of its 
53.7 percent share in the company because of its inability to 
supply crude oil to the refinery.  Despite the company's LTL 
721 million (USD 271 million) profit in 2004 (nearly tripling 
the preceding year's take), Yukos representative in Lithuania 
Tomas Gizas told us that he has only agreements, not 
assurances, of crude supply for the second quarter.  From 
April 1-4, Transneft stopped the flow of crude through the 
pipeline because of a reputed "technical problem."  In 
February, an "accounting" problem stopped the flow for six 
days, and forced the refinery to use reserves to keep 
production going (ref A).  This time, pumping resumed on 
April 5, but MN General Manager Nelson English said that he 
is confident of delivery of crude only until the end of 
April.  If Yukos is unable to guarantee crude supplies, it 
will lose its status as a strategic investor. 
GOL looks for new strategic partner 
¶3. (C) MFA Economic Department Counselor Nijole Zambaite told 
us that the GOL has been racheting up the pressure on Yukos 
to sell.  On March 30, Minister of Economy Viktor Uspaskich 
announced that the Government had begun negotiations with 
Yukos "regarding the further governance of the company," 
having a few days earlier told the press that Yukos 
"basically no longer exists."  Zambaite acknowledged that the 
GOL is already soliciting and talking with potential buyers. 
English shared with us that the GOL is in preliminary 
discussions with top London-based Yukos management about a 
possible sale. 
¶4. (C) Yukos has the sole authority to decide whether to sell 
its 53.7 percent holding in Mazeikiu Nafta.  The GOL has 
first right of refusal to purchase the Yukos-owned shares, 
but lacks the funds, according to Vice Minister of Economy 
Nerijus Eidukevicius.  GOL officials have indicated that they 
favor Yukos's buyout by an oil producer that can guarantee 
crude flows.  The GOL has publicly maintained an interest in 
purchasing an additional ten percent stake in Mazeikiu Nafta 
if the Mazeikiu Board of Directors authorizes a new share 
issue, allowing the GOL to gain control over the refinery. 
Under Yukos's contract, Yukos has the first option to buy 
this new share issue, and the two parties are currently 
negotiating the matter.  English told us that freelancers 
have inserted themselves in the process, with local Yukos 
managers at Mazeikiu Nafta making money on the side by 
brokering the sale of refinery shares or oil without 
LUKOIL: Anointed in Oil? 
¶5. (C) GOL energy advisor Gediminas Vaiciunas told us that 
the Russian company Lukoil leads the pack of potential buyers 
of Yukos's Mazeikiu Nafta shares and that Rosneft is also 
still in the race.  (Note: Rosneft is also in merger talks 
with Gazprom, which holds a 37.1 percent interest in 
Lithuania's principal supplier of natural gas.)  English 
added ConocoPhillips to the list of interested parties, and 
said that TNK-BP had not bowed out, although the local press 
March 30 quoted company Chairman Robert Dudley's denial of 
purchase plans. 
Pitching the Minister 
¶6. (C) Lukoil country representative Ivan Paleichik told us 
Lukoil had made a formal acquisition proposal by letter to 
Yukos on March 31, and had contracted Citigroup to appraise 
Yukos's MN assets.  Paleichik expects Lukoil to complete a 
Yukos buyout by June 2005 and to be able to guarantee annual 
delivery to MN of five million tons of crude.  (MN imported 
8.7 million tons last year.)  At a meeting with Minister of 
Economy Viktor Uspaskich April 1, he said, Lukoil Strategic 
Director Gajdamaka Andriej focused on Lukoil's ability to 
offer Mazeikiu Nafta a well-developed retail network for its 
gasoline products in the three Baltic countries and Finland. 
He underscored that Lukoil had come to the rescue during the 
interrupted crude deliveries, providing MN a quarter of its 
monthly supply. 
Terms of Agreement 
¶7. (C) Yukos currently has the Mazeikiu Nafta management 
contract.  Paleichik affirmed that Lukoil would like to 
acquire this contract as part of the agreement, as Yukos did 
from Williams, but he indicated that this was a subject of 
negotiations with the GOL.  The Prime Minister's Energy 
Advisor Saulius Specius told us that the GOL intends to seek 
management rights itself and may impose new requirements on 
the new owner of Yukos's holdings. 
¶8. (C) We suspect that the Government's talk of acquiring a 
greater stake in Mazeikiu Nafta or wresting control of the 
management contract from Yukos' buyer is wishful thinking or 
posturing.  Government control of the company will make a 
less attractive deal for interested buyers.  It is in the 
GOL's interest to keep the competitors circling in order to 
get a deal that benefits Lithuania and Yukos.  Many 
Lithuanians fear takeover by a Russian company with close 
ties to the Kremlin would lead to a loss of sovereignty over 
critical decisions affecting one of Lithuania's most valuable 
assets and increased vulnerability to the use of oil as an 
instrument of control.  In fact, as the recent oil 
disruptions this winter made clear, Russian interests already 
open and close the tap at will.