YUKOS LOSING ITS GRIP ON LITHUANIAN OIL REFINERY

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000380 SIPDIS STATE FOR EUR/NB AND EB/EPC E.O. 12958: DECL: 04/10/2015 TAGS: PREL EPET ECON ENRG LH RS SUBJECT: YUKOS LOSING ITS GRIP ON LITHUANIAN OIL REFINERY REF: A. VILNIUS 300 ¶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 (d) -------------- SUMMARY -------------- ¶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 authorization. -------------- 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. -------------- COMMENT -------------- ¶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. Mull