CONOCOPHILLIPS SET TO REQUEST USG ADVOCACY ON BID

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 001186

SIPDIS

STATE FOR EUR/NB, EB/CBA, L, P (DBAME)
COMMERCE FOR ITA/ADVOCACY CENTER (PNUGENT)

E.O. 12958: DECL: 11/02/2015
TAGS: ECON ENRG EINV PREL PGOV LH
SUBJECT: CONOCOPHILLIPS SET TO REQUEST USG ADVOCACY ON BID
WITH LUKOIL FOR REFINERY

REF: A. VILNIUS 1007


B. VILNIUS 781

C. VILNIUS 380

D. VILNIUS 326

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


1. This cable contains confidential proprietary business
information. Please handle accordingly.


2. (C) SUMMARY: ConocoPhillips Chairman and CEO James Mulva
told the Ambassador October 27 that CP will likely bid with
the Russian oil giant Lukoil on a controlling share of
Lithuania's Mazeikiu Nafta oil refinery. Mulva said he
expects former Secretary of State and former Phillips board
member Lawrence Eagleburger to contact the State Department
to seek USG support of the ConocoPhillips/Lukoil bid. The
Ambassador noted that allegations of Lukoil's corrupt
business practices and influence in Lithuanian politics
soured many Lithuanians to a Lukoil-Mazeikiu Nafta deal.
Mulva said that he assumed such allegations about Lukoil are
factual. CP appears prepared to ask the USG to advocate
formally and actively for its bid on MN. To do so will put
us in the position of advocating what many here see as
promoting Kremlin control of Lithuania's oil and, perhaps,
its political/economic agenda. END SUMMARY.

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BUYING/SELLING MAZEIKIU NAFTA: THE STATE OF PLAY
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3. (U) Wrangling over the only oil refinery in the Baltics
continues, with the GOL announcing its intention to start
negotiations with TNK-BP on the company's plan to bid on a
controlling interest in Mazeikiu Nafta (MN). The GOL plan,
at this point, is to reacquire from embattled Yukos their
53.7 percent share in MN as well as bargain-priced options
the company holds on government shares and a new stock
issuance. The GOL will then resell the Yukos shares and
options under more favorable terms. The plan will also
enable the GOL to negotiate a better shareholder and
management arrangement for the country's largest industrial
asset. Against opposition from the Conservative Party,
President Adamkus signed legislation, November 2, enabling
the government to borrow more than USD 1 billion to pave the
way for the purchase/sale.


4. (U) Presenting a possible monkey wrench in the works, a
Dutch court decision, October 12, froze for 90 days the
disposition of Yukos-owned shares. The freeze came in
consideration of a debt recovery action that Rozneft and
Yukansneftegaz initiated in the Netherlands, alleging that
Yukos owes them USD 2.8 billion for crude supplies previously
delivered. Although the case could conceivably result in the
Dutch courts auctioning off Yukos's shares of MN to satisfy
the creditors, our interlocutors (including a representative
of a potential purchaser of MN) say this is unlikely, since
both Rozneft and Yukansneftegaz stand to profit more from a
negotiated sale of MN than from a debt recovery settlement.
A quick trip to the Netherlands apparently satisfied
Brazauskas that the freeze does not preclude the GOL from
opening talks with potential buyers, and he publicly
reiterated his intention to open negotiations with TNK-BP.

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CONOCOPHILLIPS COMES A-CALLING
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5. (C) The announcement of the PM's plan to begin
negotiations with TNK-BP drew other serious bidders back to
Lithuania to stake their claims, including ConocoPhillips
(CP). James Mulva, CP's Chairman and CEO, and Mike Fretwell,
President of International Downstream Operations, met with
Minister of Economy Dauksys on October 27 to discuss the
company's interest in the Mazeikiu Nafta oil refinery (MN).
After this meeting, Mulva and Fretwell told the Ambassador
that Dauksys had assured them that the GOL had neither begun
negotiations over MN with any one company, nor closed the
bidding to others, despite Prime Minister Brazauskas's
publicly-declared preference for TNK-BP.


6. (C) Mulva told the Ambassador that CP and Lukoil will
likely participate 50-50 in a bidding entity to purchase MN.
He said that Lukoil would prefer to name the "figurehead"
president of this entity, while CP hopes to name the
operational managers -- an arrangement that Mulva said will
give CP the control over operations. He noted, however, that
the GOL appears to want an American at the helm. Mulva said
that CP will not consider making a solo bid for MN, and he
doubts that Lukoil will attempt to do so, either.

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OMINOUS RUSSIAN VIEWS OF CP'S COMPETITION
--------------

7. (C) Mulva, requesting business confidentiality, said that,
in an October 25 conversation in Houston, Russian Industry
and Energy Minister Viktor Khristenko told him that Russia
does not view TNK-BP as a "Russian company." Khristenko
further implied that the Kremlin may not be happy if TNK-BP
buys MN. Khristenko reportedly added that if Lithuania does
not "handle things properly," Russian oil could easily bypass
Lithuania, and Lithuania would become "a spinster without a
dowry."


8. (C) The Ambassador told Mulva that many Lithuanians are
aghast at the idea of Lukoil in control of the country's
largest industrial asset, and he suggested that this aversion
may hamper a CP-Lukoil bid. The Ambassador noted that
persistent rumors of Lukoil's attempts to bribe, blackmail,
and engage in all manner of unseemly and illicit political
intrigue in Lithuania go back at least a decade. Mulva
reflected on the Ambassador's remarks, and then quietly
acknowledged that the rumors were probably well founded.
Mulva underlined the fact that Lukoil is now a privately held
company. In his opinion, nonetheless, Lukoil's good
relationship with the Russian Government is a selling point,
because it will ensure a CP-Lukoil-owned MN's ability to
secure supplies of crude.

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CP SEEKING USG ADVOCACY
--------------


9. (C) Mulva told the Ambassador that he had asked former
Secretary of State Lawrence Eagleburger (a member of the

SIPDIS
Board of Directors of Phillips before it merged with Conoco)
for help in securing USG support CP's bid, and that Amb.
Eagleburger indicated that he will call Undersecretary Burns.
(Note: Lithuania's Minister of Economy, briefing the press
after his meeting with Mulva, said CP enjoys the support of
President Bush and the U.S. Government. In response to press
inquiries, we made clear that the USG at this time is not
officially supporting any company's bid for MN. End note.)
The Ambassador explained the role of the Department of
Commerce in ensuring that the USG advocates fairly on behalf
of U.S. businesses. He advised Mulva that CP should apply to
the Department of Commerce's Advocacy Center to set the
process in motion.


10. (C) E-mails we received from CP employees strongly
suggest that Mulva visited Lithuania at Lukoil's request.
These employees also complained that Lukoil tried to add
several additional meetings with GOL officials onto the
schedules of Mulva and Fretwell the day before the meetings
were to occur.

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COMMENT
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11. (C) We emphasized in ref A that we risk our much broader
relationship with Lithuania if we advocate strongly on behalf
of CP-Lukoil. As long as CP and Lukoil pursue this bid
together, even our Lithuanian friends would see our advocacy
on behalf of CP as advocacy for Lukoil, a company that many
here see as a Kremlin tool that has mucked around in domestic
politics for a decade. Mulva's acknowledgement of Lukoil's
likely involvement in dirty deeds in Lithuania inspires
little confidence in transparency under a Lukoil-CP
operation. Given our broader interests here, we recommend
not assuming a direct role in the competition for Mazeikiu
Nafta, even if CP-Lukoil is the only "American" contestant.
MULL