WHO WILL WALK OFF WITH THE BALTICS' ONLY OIL REFINERY?

C O N F I D E N T I A L SECTION 01 OF 03 VILNIUS 000781



SIPDIS



DEPT FOR EUR/NB, EUR/RUS, EB/ESC, INR



E.O. 12958: DECL: 07/27/2015

TAGS: ECON, ETRD, PREL, PGOV, EPET, ENRG, RS, LH, HT25

SUBJECT: WHO WILL WALK OFF WITH THE BALTICS' ONLY OIL

REFINERY?



REF: A. VILNIUS 380

B. 02 VILNIUS 1879



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

d)



1. (U) This cable contains an action request. Please refer

to paragraph 13.



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SUMMARY

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2. (C) Yukos is likely to sell its majority share in the only

oil refinery in the Baltic countries in the near future.

Several of the world's largest oil companies have expressed

interest in purchasing Yukos's portion of Mazeikiu Nafta. A

consortium controlled by Gazprom appears to be in the

strongest position to buy the refinery. Other companies with

a strong Russian connection, like TNK-BP or a

ConocoPhillips/Lukoil consortium, are still in the running.

According to the shareholder agreement, the GOL can veto a

prospective buyer. The GOL would like to sell Lithuania's

largest corporate asset to a Western-owned or at least

Western-oriented company, but Russia's control of the crude

oil that supplies the refinery gives it the ability to tilt

the playing field in favor of firms favored by the Kremlin.

END SUMMARY.



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MAZEIKIU NAFTA: THE BASICS

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3. (U) Mazeikiu Nafta (MN) is the only oil refinery complex

in the Baltics. In addition to the actual refinery, the

corporation also owns the oil terminal port facility at

Butinge on the Baltic coast and the Birzai pipeline, which

connects the refinery to a pipeline in Belarus that delivers

the refinery's supply of Russian crude oil. MN is

Lithuania's biggest industrial facility and generates some 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 are actively traded on the Vilnius bourse and are held

by various individuals and institutions.



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YUKOS APPEARS READY TO SELL . . .

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4. (U) Yukos International UK BV bought MN from Williams

International (a U.S.-based company) in 2002 (ref B). Last

March, Yukos's tax and legal problems in Russia began

hampering its ability to provide MN with the amount of oil

stipulated in its agreement with the GOL (ref A). Sensing

that MN would soon be put up for sale, high-level executives

from several of the world's major oil companies, including

TNK-BP, Gazprom, KazMunayGaz, PKN Orlen, Lukoil, and

ConocoPhillips visited Lithuania in May and June. Neither

Yukos nor the GOL has announced a date for the sale.



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. . . BUT NOT WITHOUT THE GOL'S CONSENT

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5. (C) Yukos cannot simply sell MN to whomever it wishes,

even though it is the majority shareholder. Vice Minister of

Economy Nerijus Eidukevicius, who is also a member of MN's

management board, told us that MN's shareholder agreement

gives the GOL's representatives on the board authority on par

with the majority shareholder for all major decisions.

Specifically, this means that Yukos must seek GOL consent for

any deal worth more than LTL 10 million (USD 3.4 million),

giving the GOL an effective veto on the sale of Yukos's

majority holding.



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WHAT DOES YUKOS WANT?

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6. (C) Jurgis Vilemas, who directed the Lithuanian Energy

Institute for more than 20 years and informally advises Prime

Minister Algirdas Brazauskas on energy matters, told us that

what Yukos wants is simple: as much money as possible. Some

press articles have speculated that Yukos may also be in a

hurry to sell its shares before legal action in the

Netherlands or Lithuania (see para 10) possibly freezes its

assets or otherwise hinders its room to maneuver.



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WHAT DOES THE GOL WANT?

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7. (C) Vice Minister Edukevicius told us that the GOL will

want to renegotiate with a potential buyer some of the

technical agreements that tie the GOL, MN, and a new majority

shareholder together. He implied that the GOL would prefer a

company willing to operate MN in a manner that respected the

GOL's interests -- most notably, ensuring a constant supply

of crude oil for the refinery.



8. (C) Vilemas echoed this point, saying that the GOL needs a

buyer who can ensure a steady supply of oil, but stressed

that it also wanted a company with a "Western style" of

management. He said that MN had done well under Yukos's

leadership, which had increased MN's abilities to produce

different types of refined products and opened new markets.

He also said that TNK-BP would be the GOL's first choice as a

buyer of MN because it offered the best combination of

Western management and guarantee of supply.



9. (C) The head of the Social Democratic parliamentary group,

Juozas Olekas, told us that the Prime Minister (also a Social

Democrat) would put economic considerations first. He said

that the PM believed that the economic realities of

globalization would strongly influence any buyer of MN and

prevent it from becoming a tool to be used for political

ends. In his view, this means that the PM would be looking

for a company that will continue MN's development and

increase its ability to create new products and find new

markets.



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THE RUSSIA FACTOR

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10. (C) Dr. Gitaras Nauseda, an industry analyst and adviser

to the CEO of one of Lithuania's most prominent banks, told

us that the Russian government has significant leverage in

determining who will buy MN. He stressed that since Russia

controls the supply of oil, any buyer not to the Kremlin's

liking faces the very real prospect of being cut off.



11. (C) Nauseda also told us that the Russian government's

recent letter to the Netherlands and Lithuania asking the

governments of those countries to freeze Yukos's assets

because of the company's tax liabilities in Russia is most

likely a lightly veiled threat intended to scare off any

non-Russian buyers. The legal status of these requests is

not clear at present, but the GOL stated last week that it

had received the letter and that its lawyers were examining

the possible legal implications. He said that it was

probably not a coincidence that the letters to the Dutch and

Lithuanian governments came soon after Gazprom's announcement

that it wished to expand its oil interests.



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GOL STILL WILLING TO CONSIDER AMERICANS

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12. (C) Olekas told us that potential buyers still have an

opportunity to influence the GOL's decision. He mentioned

that ConocoPhillips did not manage to convince Prime Minister

Brazauskas that it was a serious contender when its officials

visited Lithuania in June. He said that the company still

had time to make a stronger pitch.



13. (C) Vice Minister Eidukevicius expressed some interest in

a ConocoPhillips bid, but said that he would like to

understand the company's partnership with Lukoil better. He

asked specifically if the USG could provide information

clarifying the relationship between these two companies.

(ACTION REQUEST: While we will work our own sources, we

would appreciate any information from the Department on this

relationship, especially if ConocoPhillips decides to bid on

Yukos's shares. END ACTION REQUEST.)



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POTENTIAL BUYERS KEEPING QUIET

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14. (C) The visits of oil company executives to date have

been generally quick and quiet, with brief reports appearing

in the press only the day after. (A lobbyist working for

ConocoPhillips advised us of that company's visit just before

it occurred.) Only one potential buyer has requested a

meeting with emboffs. Shawn McCormick, Vice President of

International Affairs for TNK-BP, met with us twice during

visits to Lithuania. During his second visit on May 26 he

told us that TNK-BP officials had again met with Prime

Minister Brazauskas, who gave the officials the clear

impression that TNK-BP was his primary choice as a buyer of

MN. McCormick told us that TNK-BP was definitely interested

in acquiring MN, but said that his company "would not

overpay," noting that anything more than USD 600 million to

USD 800 million probably would be too much.



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DON'T BELIEVE EVERYTHING YOU READ (IN THE PRESS)

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15. (SBU) Many articles in the local media recently have

contained incorrect information about Mazeikiu Nafta, the

number of shares potentially for sale, the various technical

agreements governing MN's management, and the importance of

obtaining a majority share. It appears that these

journalists erred mainly because of ignorance of a fairly

complicated subject or failure to do proper fact-checking.

Another likely factor is that people with an interest in a

particular outcome may be feeding the press biased or

incomplete information.



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COMMENT

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16. (C) The GOL faces a serious dilemma. Its leaders want a

Western-oriented firm to purchase Yukos's shares. If Russia

chooses to apply all the pressure it can on behalf of Gazprom

or another Russian company, however, it will be very

difficult for any other company to convince the GOL that it

can guarantee the crude oil supply necessary for Mazeikiu

Nafta to function properly.

Kelly