LITHUANIAN OIL REFINERY CONTINUES SEARCH FOR CRUDE

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000645 SIPDIS SIPDIS DOE FOR HARBERT DOC FOR 4231/IEP/EUR/BOHIGIAN NSC FOR GRAHAM, MCKIBBEN AND COEN TREASURY FOR LOWERY, LEE AND COX E.O. 12958: DECL: 07/10/2021 TAGS: EPET PREL ECON LH RU SUBJECT: LITHUANIAN OIL REFINERY CONTINUES SEARCH FOR CRUDE SUPPLY REF: VILNIUS 618 AND PREVIOUS Classified By: Economic Officer Scott Woodard for reasons 1.4 b and d ¶1. (C) SUMMARY: Well-placed GOL officials told us July 10 that Lithuania's Mazeikiu Nafta oil refinery (MN) was on the brink of signing a contract with TNK-BP to bring a shipment of crude from Primorsk via tanker to MN's Baltic Sea terminal. MN's general manager (protect) says that MN is still receiving supplies of crude, but at a rate lower than anticipated for July. Barring further supply cuts, he says, MN will have enough crude to supply the Baltic republics, but its exports will be severely cut. One of the GOL officials said that "someone from the Kremlin" had told TNK-BP to cancel its July contract to supply MN. Both officials agreed, however, that the signals from Russia were mixed, and that it was not clear who was trying to cut MN's supply or why. END SUMMARY. -------------- SUPPLY SLOWS BUT STILL FLOWS -------------- ¶2. (C) MN's Amcit general manager, Nelson English (protect), told the CDA on July 4 that the current flow rate of crude to MN suggested a delivery of 600,000 tons for July. This is less than the 800,000 tons MN had contracted before two of the suppliers canceled (reftel),but more than the 400,000 tons that MN has still contracted after those cancellations. He said that Transneft had promised to try and help locate and deliver an additional 200,000 tons. He surmised that the current flow rate suggested that Transneft felt confident it could deliver on that promise. Barring further supply cuts, English said, MN would have enough crude to supply the Baltic republics, but its exports would be severely cut. ¶3. (C) English also clarified that the two companies that canceled their July supply contracts were Vitol and TNK-BP (not RosNeft, as reported reftel). He said that the additional 200,000 tons was likely to come from RosNeft, which has long wanted to increase its supply to MN. ¶4. (C) English opined that "political motives" were undoubtedly at work in the two contract cancellations, whose abruptness made it unlikely that they resulted from purely commercial considerations. July, he noted, was a time when �0A;MN could earn particularly high margins on its products. -------------- NEW SUPPLY OPTION: RUSSIAN OIL BY TANKER -------------- ¶5. (C) Nerijus Eidukevicius, an Economy Ministry Under Secretary who sits on MN's Board of Directors, told us on SIPDIS July 10 that MN was on the brink of signing a supply contract with TNK-BP for a shipment of 100,000 tons, possibly for a July delivery. He said that this delivery to MN's Baltic Sea terminal in Butinge would come by tanker loaded in Primorsk, adding that this would cost only about USD 1 or 2 per barrel more than delivery by pipeline. He also said that MN has brought in oil by tanker only once before, in 2002, when MN's Butinge terminal off-loaded two tankers. At that time, he said, Butinge required a week's worth of engineering work to convert from a loading to an off-loading facility. Renovations undertaken since then, he added, allow the terminal to make this switch now in a matter of hours. -------------- GOL WONDERS WHAT THE KREMLIN IS UP TO -------------- ¶6. (C) We also spoke July 10 to Saulius Specius, an adviser to the Prime Minister and one of the GOL's main negotiators on the recent deal to sell MN to PKN Orlen. Specius, just back from a trip to Warsaw, reported that TNK-BP officials had told the Lithuanian Embassy in Moscow that "someone from the Kremlin" had told TNK-BP to cancel its July contract to supply MN. He said that it was not clear to him, however, if that person was acting on direct orders from the top of the Russian government or was freelancing. Perhaps, he said, one of TNK-BP's rivals had encouraged the official to pressure VILNIUS 00000645 002 OF 002 TNK-BP to cancel so that the rival could ship more of its own product. Specius said that this kind of explanation, although still unsettling, was ultimately less worrisome than a top-of-the-Kremlin decision to squeeze the refinery. ¶7. (C) Eidukevicius said he was unsure why TNK-BP and Vitol canceled their July contracts. He did not discount the possibility that the companies came under pressure from the Kremlin, but also said that various Russian interests might have engineered the cancellation at a lower level to scare off PKN Orlen from its purchase of the refinery, enabling a Russian company like RosNeft to swoop in and buy MN. -------------- PKN STILL ONBOARD -------------- ¶8. (C) Both Eidukevicius and Specius were in Poland last week, visiting several PKN Orlen facilities. They said that PKN Orlen was concerned about the supply situation but did not consider the situation to be a crisis at present. -------------- COMMENT -------------- ¶9. (C) The worst-case scenario for MN -- a complete supply cut-off -- has not happened, but both MN and the GOL still see this as a possibility and are doing their best to brace themselves. It is interesting to us that the two people in the GOL most familiar with MN's operations are not leaping to the conclusion that a Putin-level Kremlin decision led to the cancellation of the July supply contracts. That said, even the more "innocent" explanations -- like infighting among various Russian crude suppliers -- are still unsettling to the Lithuanians because they illustrate the problems of relying on Russia as the sole source of its oil. KELLY