Viewing cable 06VILNIUS618
Title: TWO RUSSIAN OIL SUPPLIERS CANCEL JULY CRUDE

IdentifierCreatedReleasedClassificationOrigin
06VILNIUS6182006-07-03 13:46:00 2011-08-30 01:44:00 SECRET Embassy Vilnius
VZCZCXRO8187
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV
DE RUEHVL #0618/01 1841346
ZNY SSSSS ZZH
O 031346Z JUL 06
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0343
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0012
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEKJCS/SECDEF WASHINGTON DC PRIORITY
S E C R E T SECTION 01 OF 02 VILNIUS 000618 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR U/S SHINER, EUR/FRIED AND EB/WAYNE/SULLIVAN 
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: 07/02/2021 
TAGS: PREL EPET ECON LH RU VE
SUBJECT: TWO RUSSIAN OIL SUPPLIERS CANCEL JULY CRUDE 
SHIPMENTS TO LITHUANIAN REFINERY 
 
REF: A. VILNIUS 609 
     ¶B. VILNIUS 512 AND PREVIOUS 
     ¶C. VILNIUS 285 
     ¶D. WARSAW 1336 
     ¶E. KELLY-PEKALA 01 JUL 06 E-MAIL 
 
Classified By: Economic Officer Scott Woodard for reasons 1.4 b and d 
 
¶1. (C) SUMMARY:  RosNeft and Vitol have cancelled their crude 
shipments to Lithuania's Mazeikiu Nafta oil refinery (MN) for 
July, leaving the refinery with only half of the crude it 
expected to process this month.  The shortfall will affect 
Latvia and Estonia as well as Lithuania.  MN, which currently 
brings in all of its crude via pipeline from Russia, has the 
technical capability to use its Baltic Sea terminal to 
offload crude from tankers and transport it by pipeline to 
the refinery.  Arranging the supply and transportation 
contracts for this change, according to MN's general manager, 
would probably take at least a month, and the refinery only 
maintains stocks sufficient for about six days of operations. 
 GOL officials will consult with PKN Orlen this week to 
discuss the situation.  END SUMMARY. 
 
------------------------------------------ 
SOME RUSSIAN SUPPLIERS CUT CRUDE SHIPMENTS 
------------------------------------------ 
 
¶2. (C) MN General Manager Nelson English (protect) told us on 
June 30 that Vitol had abruptly and inexplicably cancelled 
its contract June 29 to supply 200,000 tons of crude to MN in 
July.  English, an Amcit who has always shared the latest MN 
information with this Mission, told us on July 3 that RosNeft 
cancelled its July contract on June 30 to supply 200,000 tons 
of crude.  This, English explained, left MN with only half of 
the crude supply it expected for July: 409,000 tons. (English 
explained that the vast majority of MN's supply agreements 
are spot or spot-like contracts that do not have penalty 
clauses for non-performance, which gives suppliers the 
ability to break the contracts relatively cost-free.) 
English said that Transneft told him that it might be able to 
find an additional 200,000 tons for MN. 
 
¶3. (C) This turn of events was a surprise for English.  As of 
June 28, he said, MN was completely booked for July; it had 
contracts to process 800,000 tons of crude during a month 
with traditionally high margins.  During our June 30 
conversation, he said that MN already had contracts for the 
third quarter amounting to 90 percent of the refinery's 
capacity.  He said that MN's main suppliers were Lukoil, 
Vitol, TNK-BP, and RosNeft. 
 
------------------ 
MANAGING A CUT-OFF 
------------------ 
 
¶4. (C) English told us on June 30 that using the Butinge 
terminal to bring crude to MN posed no technical challenges. 
He said that it would take a maximum of 24 hours to make the 
engineering changes necessary to reverse the flow and pump 
oil from tankers to the refinery.  The difficult part, he 
said, would involve the commercial arrangements, including 
negotiating new supply and transportation contracts.  He 
explained that these arrangements would take a month or more 
to finalize.  He emphasized that reaching agreements with 
suppliers would be especially difficult and costly in a 
situation where Russia had cut off supply, because suppliers 
will know that MN is in a tough situation and will therefore 
drive a harder (i.e., more expensive for MN) bargain. 
 
¶5. (C) English said that his most immediate concern in a 
cut-off situation would be securing supply for the Baltic 
market.  Forty percent of MN's production stays in the 
Baltics, he said, and MN only maintains an inventory of crude 
that would allow it to keep refining for about six days.  He 
added that there is probably not enough supply (of crude and 
refined product) in the local market at present to supply the 
Baltic market for a month.  Company officials told us in May 
that MN supplies approximately 95 percent of the Lithuanian 
market and 70 percent of the Latvian and Estonian markets. 
 
VILNIUS 00000618  002 OF 002 
 
 
 
------------------------------------- 
INTERPRETING LUKOIL'S RECENT COMMENTS 
------------------------------------- 
 
¶6. (C) Asked to comment on Lukoil VP Leonid Fedun's June 28 
statement that Lukoil planned to cease shipping crude to 
Lithunia (ref A), English said that he thought that Lukoil 
was irritated that MN had increased the number of (Russian) 
suppliers it contracted with, reducing Lukoil's importance as 
a supplier.  English told us that Lukoil supplied about 26 
percent of MN's crude in 2005, but that this figure had 
dropped to 14 percent at present.  Fedun's statement was 
especially surprising, English said, because Lukoil had 
recently told MN that it would like to double the amount of 
crude it supplies to the Lithuanian refinery. 
 
-------------------------------------- 
STILL WORKING ON NEW SOURCES OF SUPPLY 
-------------------------------------- 
 
¶7. (C) English told us that he would be traveling soon to 
Venezuela to continue negotiating with PDVSA as a possible 
crude supplier (ref c).  The Venzuelans, he said, were "not 
much easier to work with than the Russians." 
 
------------------------- 
GOL REP WILL VISIT WARSAW 
------------------------- 
 
¶8. (C) Saulius Specius, adviser to the Prime Minister and one 
of the GOL's main negotiators on the sale of MN to PKN Orlen, 
told us on July 3 that he was rushing to Warsaw later that 
day to consult with PKN Orlen officials.  We will contact him 
for a readout when he returns to Vilnius later this week. 
 
------- 
COMMENT 
------- 
 
¶9. (S) The worst-case scenario for Lithuania -- a complete 
cutoff of Russian oil starting July 1 -- did not occur, but 
the canceling of half of the refinery's July supply contracts 
does not bode well for MN or for the energy security of the 
three Baltic republics.  Neither MN nor we know why RosNeft 
and Vitol canceled their contracts, but the timing, soon 
after Fedun's statements and the information received by the 
GOL (ref a), is striking, to say the least.  So too is the 
fact that Lukoil, despite Fedun's comments, has not canceled 
its July contract.  Perhaps that shoe is yet to drop. 
KELLY