Identifier
Created
Classification
Origin
06VILNIUS801
2006-08-25 14:16:00
CONFIDENTIAL
Embassy Vilnius
Cable title:  

MAZEIKIU NAFTA REFINERY LEARNING TO LIVE WITHOUT

Tags:  ENRG ECON PREL XG VE 
pdf how-to read a cable
VZCZCXRO1293
PP RUEHAG
DE RUEHVL #0801/01 2371416
ZNY CCCCC ZZH
P 251416Z AUG 06
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 0532
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0019
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 VILNIUS 000801 

SIPDIS

SIPDIS

STATE FOR EUR/NB, EUR/NCE, EB/ESC
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION
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: 08/24/2021
TAGS: ENRG ECON PREL XG VE
SUBJECT: MAZEIKIU NAFTA REFINERY LEARNING TO LIVE WITHOUT
RUSSIA'S PIPELINE

REF: A. VILNIUS 727 AND PREVIOUS


B. MOSCOW 8340

C. VILNIUS 774

Classified By: POL/ECON Section Chief Rebecca Dunham for reasons 1.4 (b
) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 VILNIUS 000801

SIPDIS

SIPDIS

STATE FOR EUR/NB, EUR/NCE, EB/ESC
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION
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: 08/24/2021
TAGS: ENRG ECON PREL XG VE
SUBJECT: MAZEIKIU NAFTA REFINERY LEARNING TO LIVE WITHOUT
RUSSIA'S PIPELINE

REF: A. VILNIUS 727 AND PREVIOUS


B. MOSCOW 8340

C. VILNIUS 774

Classified By: POL/ECON Section Chief Rebecca Dunham for reasons 1.4 (b
) and (d)


1. (C) SUMMARY: Lithuania's Mazeikiu Nafta (MN) oil refinery
is operating at full capacity, despite the recent cutoff of
its most economic source of crude, via pipeline from Russia
(refs A and B). MN is currently using its Baltic Sea
terminal at Butinge to offload its entire crude supply from
tankers loaded mainly at Russia's Primorsk facility, but
expects to supplement this with supplies delivered via rail.
Senior MN officials expect to operate at near-full capacity
in September, even though repairs to the Butinge terminal
will put that facility out of service for nearly two weeks.
MN remains optimistic about its prospects and continues to
search for new supplies of crude in case the supply from
Primorsk becomes unavailable. Press reports suggest that
some shipping companies are already coming under pressure to
stop transporting Russian oil from Primorsk to Butinge. The
GOL is also finding it hard to maintain a consistent public
relations message that avoids blaming Russia for the pipeline
problems. END SUMMARY.

--------------
STILL RUNNING AT FULL-TILT
--------------


2. (C) MN's General Director Nelson English told us on August
17 that MN continues to operate at full capacity
(approximately 840,000 tons of crude per month),even though
its traditional supply of crude delivered by pipeline is no
longer available because of the "accident" on the Druzhba
pipeline (refs A and B). He said that eight vessels (at
approximately 100,000 tons of crude each) will offload at
Butinge in August and that he expects another six to offload
in September. He added that in September MN will also start
receiving some 20,000 tons of crude per month by rail from

Ukraine and that MN was also exploring the possibility of
receiving rail-delivered crude from Kaliningrad as well. He
said that the outlook for October was also good and that MN
would continue to look for non-Russian crude supplies
(including from Venezuela) to hedge against the possibility
of crude supplies from Primorsk becoming unavailable.

-------------- --
REPAIRS WILL LOWER SEPTEMBER PROCESSING TARGETS
-------------- --


3. (C) The long-planned replacement of Butinge's damaged
single-point mooring (SPM) buoy will prevent MN from
offloading any crude for at least 12 days in early September.
English emphasized, however, that MN still expects to
process more than 700,000 tons of crude in September, only 20
percent below its capacity. He said that MN could easily
obtain enough crude to operate at full capacity in September,
but the combination of the SPM buoy replacement and MN's
limited storage capacity will curb MN's production that month.

--------------
CUTOFF MAY BE PERMANENT, BUT WHO CARES?
--------------


4. (U) Local press, citing various Russian media sources,
reported August 16 that the pipeline that used to supply MN
may never reopen. These reports suggest that Transneft will
focus on increasing the capacity of its Baltic Pipeline
System that supplies Primorsk rather than on making repairs
to the aging pipeline that supplies MN. Local press also
carried PKN Orlen Chair Igor Chalupec's August 11 comments
that, despite the supply issues, he remains committed to the
purchase of MN. (One local paper with a reputation for
scandal-mongering also mentioned a Chalupec statement that
PKN could legally withdraw from the deal before December 31,
if the value of MN dropped sharply, but it is not clear when
or under what circumstances Chalupec made this statement, if
at all.)

VILNIUS 00000801 002 OF 003




5. (C) English told us that MN can and will continue to
operate as if it expects the pipeline to remain closed for
the indefinite future. He stressed that MN was still
learning how to operate using only tanker-offloaded crude and
that it was only going to get better and more efficient at
it. He emphasized that he remains confident that MN will
remain able to obtain the necessary crude supplies, saying
"there is almost no way we can run dry or have to shut down."

--------------
AN UNFORTUNATE PR INCIDENT
--------------


6. (C) As we reported in ref C, much of the Lithuanian
national security establishment, including Foreign Ministry
Under Secretary Albinas Januska, continue to tell us that
they are abiding by the advice from USG energy consultant
Steve Hellman to refrain from commenting publicly on the
pipeline issue. Less than 24 hours after Januska talked with
the Ambassador about this, however, he reportedly told
Russian Embassy's Charge Dmitry Tsvetkov that if the
"repairs" to the damaged pipeline were not carried out
expeditiously, the Lithuanians may begin repairs on the rail
link that connects Kaliningrad with Belarus (and by
extension, Russia proper). These repairs, Januska reportedly
told Tsvetkov, would necessarily reduce the amount of
"special cargo," especially military cargo, that transit this
stretch of railway. (An MFA source we contacted after the
story hit the wires would not confirm the story, but he
pointedly did not deny it, either. A different GOL source
told us that Januska later told the PM that his comments were
directed not at the pipeline situation, but towards gaining
leverage on negotiations with the Russians over rail tariffs.)


7. (C) The President's office and the Prime Minister quickly
issued public statements distancing the GOL from Januska's
thinly veiled threats and emphasized that the national
railway company alone is responsible for deciding if and when
any repairs to the country's rail network are necessary.
Prime Minister's advisor Saulius Specius told us August 24
that the PM wants to avoid politicizing the pipeline issue
and wants instead to focus on painting the situation as an
opportunity for MN to become an independent operation, no
longer dependent on one source of supply. Similarly,
presidential advisor Nerijus Udrenas told us August 24 that
President Adamkus also sees no advantage in publicly blaming
Russia for the "accident."


8. (C) Both Specius and Udrenas emphasized, however, that it
will become increasingly difficult for the GOL to avoid
appearing embarrassingly naive if the press continues to
highlight the "accident." Both recognized that it may well
be in Russia's long-term interest to focus its resources on
developing its export routes through Primorsk and to China at
the expense of MN, but noted that this explanation is
unlikely to satisfy everybody here -- especially those that
want to highlight Russian malfeasance towards Lithuania.

--------------
THE START OF THE PRIMORSK CUTOFF?
--------------


9. (C) Local press reported August 18 that some shipping
companies currently transporting crude from Primorsk to
Butinge have noticed the first signs of Russian pressure
against this activity. The article alleges that these
shipping companies have received unspecified "signals" from
Specnefteport (the company that runs the Primorsk port) that
if they want to continuing loading in Primorsk they will need
to avoid offloading at Butinge. State Department Advisor
Steve Hellman told us August 18 that some oil companies are
coming under pressure to include clauses in their contracts
with shipping companies that specifically exclude Butinge as
a destination for crude from Primorsk. Both Specius and
English have told us that they expect the Russians to cut MN
off from Primorsk at some point and that MN is actively
planning to manage this possibility.


VILNIUS 00000801 003 OF 003


--------------
ANOTHER REGULATORY HURDLE
--------------


10. (C) Specius told us August 22 that lawyers hired by PKN
Orlen and MN have advised that PKN's purchase of MN will need
approval not only from the European Commission's
DG-Competition (a process that has already begun),but also
from competition authorities in the United States and
Ukraine. Specius said that the lawyers advised that the
processes in these countries -- both significant markets for
MN's production -- would be unlikely to derail the deal.
Specius added that the lawyers planned to submit the
necessary paperwork to the U.S. authorities sometime between
August 28 and September 1.

--------------
COMMENT
--------------


11. (C) Januska's reported comments are not particularly
helpful, but they are understandable -- Lithuania's leaders
do not want the public to view them as naive or helpless in
the face of what many Lithuanians view as yet another Russian
attempt to use energy as a political tool. Once Lithuania's
political class returns from vacation at the end of August,
the GOL will come under increasing pressure to "do
something," and Januska may have made these comments to blunt
some of this pressure.


12. (C) The GOL, however, may be able to turn this situation
to its -- and Lithuania's -- ultimate advantage. If MN
successfully secures non-Russian supplies of crude and MN
continues to remain fully supplied, operational, and
profitable without the pipeline or Primorsk, the GOL will be
able to argue that Lithuania has become less dependent on
Russian energy.
CLOUD