POLISH COMPANY SURGING IN BID TO BUY LITHUANIAN

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000459

SIPDIS

SIPDIS

STATE FOR EUR/NB AND EB/ESC

E.O. 12958: DECL: 05/17/2016
TAGS: ENRG ECON EPET PREL PGOV ETRD NL RS LH
HT12, HT9
SUBJECT: POLISH COMPANY SURGING IN BID TO BUY LITHUANIAN
REFINERY

REF: A. VILNIUS 349 AND PREVIOUS

B. 05 THE HAGUE 3119

C. JOHNSON/JONES E-MAILS 05/04/2006

Classified By: Economic Officer Scott Woodard for reason 1.4 b and d


1. (C) SUMMARY: The Polish energy company PKN Orlen has
emerged as the frontrunner to secure a controlling interest
in Lithuania's oil refinery, according to a reliable
government source. Court challenges in the United States and
Netherlands continue and may yet derail the sale of the
refinery. END SUMMARY.

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YUKOS REACHES AGREEMENT WITH PKN ORLEN
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2. (C) Saulius Specius, an adviser to the Prime Minister and
one of the GOL's lead negotiators on the sale of the Mazeikiu
Nafta (MN) refinery, told us on May 17 that the sale of MN
had taken a new twist in favor of the Polish energy company
PKN Orlen (PKN). He said that Yukos had reached an agreement
to sell its 53.7 percent of MN shares directly to PKN. The
GOL, he said, had reached an agreement in principle to sell
all (or almost all) of its 40.6 percent ownership of MN to
PKN as well. PKN would buy a 30 percent stake in MN from the
GOL, with an option to purchase the rest of the GOL's shares
within five years. Specius added that Lithuanian law
currently requires the GOL to own at least 10 percent of MN's
shares, a requirement that parliament will need to amend to
allow PKN to exercise this option.


3. (U) Press reports from mid-April, citing unofficial PKN
sources, suggested that PKN was prepared to pay approximately
USD 2.5 billion for the shares held by Yukos and the GOL:
USD 1.5 billion for Yukos's entire stake and USD 1 billion
for all of the GOL's shares. Specius noted that this deal
would turn the GOL shares to cash and eliminate the
government's risk of getting stuck with a frozen asset or a
minority share of limited interest to other buyers.

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SITTING HERE IN LEGAL LIMBO
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4. (C) Meanwhile, the GOL awaits the outcome of the May 19
New York Bankruptcy Court hearing of the case that Yukos
receiver Eduard Rebgun filed on behalf of Yukos creditors
(ref C). Specius said that Yukos's executives hope to use
PKN's signature on the purchase agreement as evidence that
the MN sale will benefit Yukos's creditors -- evidence that
might persuade the judge to lift the temporary restraining
order that bars Yukos from executing the MN sale.


5. (C) Specius expects there will also be a hearing in the
Dutch courts May 18 on the bankruptcy case involving Yukos
International UK BV, the Dutch legal entity that owns the
majority stake in MN. He said it is unclear, however,
whether the May 18 hearing involves the case Rebgun filed in
the Netherlands in April or a case Yukansneftegaz filed
earlier (ref B). He also said that it was not yet clear how
this case (or these cases) might affect MN's sale.

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EXPENSIVE OIL INCREASES MN'S OPTIONS
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6. (C) Specius told us that the current high price of crude
and refined petroleum products means that MN's profitability
no longer depends solely on Russian supply or transport of
crude. He acknowledged that MN will be most profitable if it
receives Ural crude via pipeline, but will turn a profit even
if Russia turns off the spigot and MN has to bring crude in
through its Baltic Sea terminal at Butinge. This profit
point, Specius said, allowed the GOL to consider companies
like PKN-Orlen and Kazmunaygaz as competitors to their
Russian rivals like TNK-BP and Lukoil.

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COMMENT
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7. (C) Specius is a well-placed source, but we suspect that

VILNIUS 00000459 002 OF 002


this is not the final chapter in the struggle for control
over the refinery. Litigation relevant to the sale continues
in several foreign jurisdictions. In Lithuania, the intrigue
and infighting between many interests over the company's
largest private enterprise persist.


8. (C) PKN's apparent emergence as the frontrunner is
certainly newsworthy, however. It has been in the running as
a potential buyer for the past several months, but few people
gave it a chance, noting that it seemed less capable of
providing a guaranteed supply of crude than other bidders
(KazMunayGaz, TKN-BP, and Lukoil). The high price of both
crude and refined products, however, may have changed the
calculations. The big surprise here is the GOL's apparent
interest in getting out of the oil business, which it has
regarded since independence as strategic. One possible
explanation is that, as soon as the plant is operating, the
government will reap its tax revenues, without the risk of
holding onto a minority interest of no cash value.
KELLY