Viewing cable 06VILNIUS1008
Title: EU DECISION HELPS REFINERY DEAL BUT SIGNIFICANT

IdentifierCreatedReleasedClassificationOrigin
06VILNIUS10082006-11-09 13:14:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
VZCZCXRO5867
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVL #1008/01 3131314
ZNY CCCCC ZZH
P 091314Z NOV 06 ZDK
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 0747
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 001008 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NB, EUR/NCE, EB/ESC 
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/BOHIGIAN 
NSC FOR GRAHAM, MCKIBBEN AND COEN 
TREASURY FOR LOWERY, LEE AND COX 
 
E.O. 12958: DECL: 11/08/2016 
TAGS: ENRG EPET PREL LH RS PL
SUBJECT: EU DECISION HELPS REFINERY DEAL BUT SIGNIFICANT 
OBSTACLES REMAIN 
 
REF: VILNIUS 962 AND PREVIOUS 
 
VILNIUS 00001008  001.2 OF 002 
 
 
Classified By: POL/ECON Section Chief Rebecca Dunham for reasons 1.4 (b 
) and (d) 
 
¶1. (C) Summary:  Poland's PKN Orlen has overcome the main 
legal obstacle hindering its purchase of Lithuania's Mazeikiu 
Nafta oil refinery (MN) -- approval of the EU's competition 
authority -- but other hurdles remain.  The investigation 
into the October 12 fire will not conclude before February 1, 
and it is unlikely that the deal will close before then. 
This time lag creates additional opportunities for other 
problems to arise and still potentially spoil the deal.  The 
banks financing the deal are reportedly increasingly nervous 
about their support for this transaction -- support which is 
critical for the purchase.  Problems in MN's boardroom appear 
manageable, but do not help the situation.  End Summary. 
 
Good news . . . 
--------------- 
 
¶2. (C) Emboff was in the room when MN's leadership heard the 
news that the European Commission's competition authority 
(DG-COMP) had approved on November 7 the sale of MN to PKN. 
One of MN's lawyers read the details of the decision, whooped 
with joy, and exclaimed:  "this is exactly what we wanted!" 
The others present expressed similar sentiment, with lots of 
mutual back-slapping and congratulatory handshakes. 
 
 . . . But it's not over yet 
---------------------------- 
 
¶3. (C) The GOL has announced that its investigation into the 
October 12 fire will not conclude before February 1.  PM 
adviser Saulius Specius told us November 7 that the experts 
charged with examining and analyzing the physical evidence 
would complete their work only in late December, delaying the 
GOL's investigation into the fire. 
 
¶3. (C) PKN announced on November 8 that it expects to close 
the deal "no later than February 28," but reiterated the 
company's desire to complete the takeover "as soon as 
possible," possibly by the end of the year.  Specius told us 
that PKN, MN's majority shareholder Yukos International (a 
Dutch-registered company), and the GOL would all like to 
close the deal by the end of the year, but admitted that the 
delay in the GOL's fire investigation made this timeframe 
unlikely.  He also said that PKN was having some problems 
with the three-bank consortium that had agreed to finance the 
purchase.  One member of the consortium -- Deutsche Bank -- 
had already pulled out of the deal, he said, but the other 
two have agreed to cover the full amount of the loan.  He 
said he was unsure how the banks would react if the refinery 
experienced any more "accidents" prior to closing. 
 
Boardroom antics an irritant, not a deal-stopper 
--------------------------------------------- --- 
 
¶4. (C) MN's Amcit General Director, Nelson English, told us 
on November 6 that an attempt to fire him at a November 5 MN 
board meeting failed when one of the board members, due to 
participate by telephone from Latvia, did not answer his 
phone.  English said that the board's chair (one of the three 
GOL-appointed board members) then refused to call for a vote 
on the motion to fire English -- a motion initiated by the 
four Yukos-appointed members of the board, including the one 
who didn't answer the phone.  English said that he would have 
preferred that the chair call for the vote, which would have 
resulted in the three GOL-appointees voting against the 
motion and the three Yukos appointees voting in favor, 
effectively rejecting the motion.  Instead, however, the 
chair postponed the vote until the next board meeting, slated 
to take place November 9 at 1800 hrs local.  English said 
that he hoped that the GOL would instruct its appointees to 
avoid the meeting, preventing the quorum necessary to have 
the vote. 
 
¶5. (C) Specius told us November 9 that the GOL had indeed 
instructed its appointees to stay away from the meeting.  He 
also said that even if the management board voted to fire 
English, the supervisory board was unlikely to confirm this 
 
VILNIUS 00001008  002.2 OF 002 
 
 
decision, which would also spare English's job. 
 
¶6. (C) English received public votes of support from both the 
PM and Minister of Economy this week.  Foreign Minister 
Vaitiekunas told the Ambassador November 9 that he also 
advocated strongly at a cabinet meeting in favor of keeping 
English at the helm of MN. 
 
¶7. (C) English, Specius, and Yukos executives have told us 
that the Yukos-appointed board members are "out of control." 
Yukos International has announced a shareholders' meeting on 
December 4 or 14.  Both English and Specius said that the 
main purpose of the meeting will be to appoint new directors 
to MN's management board. 
 
Another problem on the horizon? 
------------------------------- 
 
¶8. (C) Specius said that a new problem with the PKN purchase 
had just surfaced involving a power plant adjacent to the 
refinery.  MN purchased the plant last year and operates it 
as a subsidiary.  Unfortunately, said Specius, the plant runs 
on heavy fuel oil produced by the refinery, resulting in 
emissions that violate environmental standards.  To bring the 
plant into compliance, MN devised a corporate restructuring 
plan that would make the plant an integral part of the 
refinery.  Calculated as a single corporate unit, the 
refinery/power plant's emissions would not exceed allowed 
polluting limits.  MN's board has approved this plan, which 
shareholders need to approve at the next meeting. 
 
¶9. (C) The problem, Specius said, is that PKN opposes this 
restructuring plan because it will increase the number of MN 
shares.  PKN's lawyers believe that this will give Eduard 
Rebgun, the bankruptcy trustee appointed by a Russian 
bankruptcy court to administer the assets still held by 
Russia-based Yukos Oil, legal grounds to re-open the Chapter 
15 bankruptcy case Rebgun filed in New York in April.  (That 
case resulted in a temporary restraining order preventing 
Yukos International executives from signing any deal 
involving the transfer of MN shares.  The judge lifted the 
restraining order on May 25.)  Specius said that he needed to 
learn more about the potential problems associated with this 
restructuring plan, but emphasized that the GOL had made a 
mistake in approving it. 
 
Comment 
------- 
 
¶10. (C) The EU's approval of PKN's purchase of MN was a rare 
bit of unambiguous good news for the refinery in recent 
weeks, and the GOL's apparent rallying around English is also 
helpful in bringing the deal to closure.  Unfortunately, this 
deal is still far from complete.  Every additional delay and 
problem contribute to the complexity of this deal and hinder 
its closure, and the fact that the deal is unlikely to close 
until February gives plenty of opportunities for additional 
problems to arise. 
CLOUD