ADAMKUS UPSET ABOUT CONOCOPHILLIPS-LUKOIL BID ON

S E C R E T SECTION 01 OF 03 VILNIUS 001007

SIPDIS

STATE FOR EUR/NB, L, EB/CBA
COMMERCE FOR ITA/ADVOCACY CENTER

E.O. 12958: DECL: 09/22/2015
TAGS: EINV ECON PREL PGOV ENRG LH
SUBJECT: ADAMKUS UPSET ABOUT CONOCOPHILLIPS-LUKOIL BID ON
THE BALTICS' ONLY OIL REFINERY

REF: A. VILNIUS 781

B. VILNIUS 380

C. VILNIUS 326

Classified By: Economic Officer Scott Woodard for reasons 1.4 (b) and (
d)


1. (S) SUMMARY: ConocoPhillips (CP) and Lukoil's plan to
submit a joint bid to buy a controlling share of Mazeikiu
Nafta (MN) has met with strong expressions of concern from
some elements of the GOL, including President Adamkus.
Representatives of the two firms visited Vilnius September 19
to pitch their interest in MN, the only oil refinery in the
Baltics and Lithuania's largest economic asset, which the
Russian company Yukos currently owns. If CP, in partnership
with Lukoil, asks us to advocate on behalf of its bid, we
will have a dilemma. While the promise of Lukoil's ability
to assure a supply of Russian crude oil is seductive to many
here, others (including Adamkus) see Lukoil as beholden to
the Kremlin and guilty of a long history of dirty tricks in
Lithuanian domestic politics. That belief, coupled with many
Lithuanians' perception that the former (American) owner of
the refinery underhandedly transferred ownership of MN to the
Russians in 2002, makes this situation particularly sensitive
for us. In addition, a high-level MFA official told the
Ambassador that Lukoil has established a USD 15 million slush
fund to smear and/or blackmail President Adamkus, whom the
company (correctly) believes is a strong opponent of MN's
sale to Lukoil. If we vigorously assist a CP-Lukoil
consortium in purchasing MN, even many of our friends here
will accuse us of naively serving Russian interests. END
SUMMARY.

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MAZEIKIU NAFTA: LITHUANIA'S BIGGEST ECONOMIC ASSET
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2. (U) Mazeikiu Nafta (MN) is the only oil refinery complex
in the Baltics. MN is Lithuania's biggest industrial
facility and, according to some estimates, generates as much
as 10 percent of the country's GDP. It produced revenue in
2004 of approximately LTL 7.7 billion (USD 2.7 billion),more
than double the revenues of Lithuania's next largest company.
Its pre-tax profits last year were more than LTL 900 million
(USD 310 million). Yukos is the majority shareholder of MN,
holding 53.7 percent of shares through a company registered
in the Netherlands. The GOL is the other major shareholder,
with a 40.6 percent stake. The remaining 5.7 percent of
shares trade actively on the Vilnius bourse.


3. (U) We reported earlier (refs A and B) that Yukos wants to
sell its stake in MN. According to the legal agreements
governing MN, however, the GOL must approve the sale.

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A PLETHORA OF POTENTIAL BUYERS, INCLUDING U.S. COMPANIES
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4. (C) High-level executives from several of the world's
major oil companies, including TNK-BP, Gazprom, KazMunayGaz,
PKN Orlen, Lukoil, and ConocoPhillips have visited Lithuania
since April. TNK-BP's Vice President for International
Affairs Shawn McCormick told us in May that his company was
interested in MN and that he was briefing both the British
and U.S. Embassies on the progress of TNK-BP,s talks with
the GOL. (He cited BP,s presence in the United States to
explain why he was keeping us in the loop.)


5. (C) ConocoPhillips's President of International Downstream
Operations, Mike Fretwell, and Lukoil's Director of Strategic
Development, Andrei Gaidamaka, told us on September 19 that
their companies were seriously considering a joint bid for
MN. They explained that their firms had not yet decided on
the two firms' relative participation in the bid, but did not
rule out the creation of a new company, held 50-50 between
the two, that would serve as the bidding entity. CP-Lukoil's
representatives contacted us on September 14 asking us to
help set up meetings with GOL officials for September 19. We
did so. The company has not explicitly asked for any
additional advocacy on its behalf. However, in his meeting
with the Ambassador September 19, Fretwell clearly hoped for
further assistance from us in emphasizing the "American"
provenance of the bid.


6. (C) Fretwell and Gaidamaka told us at the end of their day
in Vilnius that meetings with the Minister of Economy, an
adviser to the Prime Minister, and three parliamentary
leaders did little to clarify the situation regarding the
sale of MN's shares. Fretwell and Gaidamaka said that their
GOL interlocutors explained that the GOL might be willing to
sell some of its holdings in MN to complement the shares
Yukos would sell. However, Fretwell and Gaidamaka said that
they were unable to pin down exactly how many of its shares
the GOL might be willing to divest, when, or at what price.
This, said the executives, made it difficult for their
companies to figure out how to proceed.

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NOT EVERYBODY LOVES LUKOIL
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7. (C) Lukoil's ability to secure a steady supply of crude
oil for MN is seductive to many here, especially the Social
Democrats (successors to the Lithuanian Communist Party),who
head the governing coalition. Critics, especially members of
the conservative opposition, allege that Social Democrat
Prime Minister Algirdas Brazauskas has received kickbacks
from this Russian company, which they see as a wholly owned
subsidiary of the Kremlin.


8. (C) Other critics of Lukoil include people close to
President Adamkus. We understand that Adamkus himself
strongly shares this view. In their view, Lukoil's ownership
of MN, because of what they consider to be an inexorable tie
to the Kremlin, could lead to a loss of sovereignty over
critical decisions affecting one of Lithuania's most valuable
assets and to increased vulnerability to Russia's use of oil
as an instrument of influence over Lithuania. Even more
troubling to many is Lukoil's alleged history of manipulating
internal Lithuanian politics to advance its commercial
interests. Foreign Minister Valionis told the Ambassador on
September 22 that he has it on good authority that Lukoil was
a major contributor to campaign funds for former President
Rolandas Paksas, whom the Parliament impeached in April 2004
for, among other things, having too close ties to Russian
interests.

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LUKOIL PREPARED TO PLAY DIRTY?
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9. (S) The Director of the MFA's Americas Department, Jonas
Paslauskas, told the Ambassador on September 21 that his
ministry had information that Lukoil was not going to let MN
"slip through its fingers again." (NOTE: Lukoil has long had
a strategic aim to acquire the refinery. It lost out to
Williams in the 90's and was a potential buyer again when
Williams sold the refinery to Yukos in 2002. END NOTE.) He
said that Lukoil considers President Adamkus to be its
biggest obstacle to buying MN. He indicated that the GOL has
intelligence that the company has budgeted USD 15 million for
a smear campaign designed to discredit Lithuania's president.
The campaign, he said, will allege that during a trip to the
USSR that Adamkus took as a U.S. EPA official, Adamkus
slipped away from his planned itinerary to meet a KGB
handler. Paslauskas said that intelligence sources indicate
that Lukoil is already constructing an incriminating story
about Adamkus by sending employees to the former Soviet
cities Adamkus visited while working as an EPA official.
(NOTE: Adamkus, who was born in Lithuania but emigrated to
the United States and then returned to Lithuania in the late
1990s, began visiting Soviet Union in 1972 and made annual
trips there, bringing emigre literature to and organizing
study visits in the Lithuanian SSR. He retired from the EPA
in 1997, and became President of Lithuania in 1998. END
NOTE.) Alternatively, Paslauskas said that Lukoil might
simply use the allegations to blackmail Adamkus, seeking to
force him to avoid opposing Lukoil's bid for MN.

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COMMENT: A SERIOUS DILEMMA
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10. (C) Our insertion into this process on CP's -- and, by
extension, Lukoil's -- behalf will expose the USG on an issue
that is already uniquely neuralgic for us here because of the
circumstances surrounding the sale of MN by the U.S. firm
Williams to Yukos. That story has only started to fade from
the collective memory in the last year. Rightly or wrongly,
many Lithuanians blame us for delivering Lithuania's single
largest economic asset to the Russians in the first place.
If we advocate aggressively on CP-Lukoil's behalf, many of
those same people (many of whom are our friends) would say
that we are naively serving Russian interests here again,
allowing them to use CP as a figleaf for their objectives
here.


11. (C) Given the risks, we believe that this is one of those
rare cases in which the Embassy should not assume an advocacy
role on an American firm's behalf. We will be happy to meet
with CP and its partner as the bid process proceeds.
However, given our broader interests here, we would prefer to
forego a direct role in the competition for MN, especially if
CP-Lukoil remains the only "American" contestant.
MULL