RUMORS CONTINUE TO SWIRL ABOUT THE FATE OF

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000891 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 EPET PREL KZ VE LH SUBJECT: RUMORS CONTINUE TO SWIRL ABOUT THE FATE OF LITHUANIA'S OIL REFINERY REF: VILNIUS 801 AND PREVIOUS Classified By: Pol/Econ Section Chief Rebecca Dunham for reasons 1.4 (b ) and (d). ¶1. (C) SUMMARY: Rumors about the fate of Lithuania's Mazeikiu Nafta (MN) oil refinery continue to circulate. Most of them appear false. A front-page article in Lithuania's largest newspaper proclaiming that MN was "sliding again into Moscow's hands" was a near-total fabrication, according to one of our most reliable sources on MN issues. MN's Board of Directors unexpectedly voted four to three on September 22 to reject a proposed long-term supply contract with Venezuela, complicating management's efforts to diversify supply away from Russia. Local press also reports that PKN is concluding its pre-notification consultations with EU competition authorities and will officially submit its application to purchase MN within two weeks. END SUMMARY. -------------- A BOUGHT-AND-PAID-FOR ARTICLE -------------- ¶2. (C) An article alleging that the Polish oil company PKN Orlen -- which is currently finalizing arrangements to buy MN from Yukos and the GOL -- was preparing to transfer a portion of MN's shares to Russia's LUKoil is "total nonsense," according to Saulius Specius, adviser to the prime minister on energy issues and one of our most reliable sources on MN. The article, which appeared on the front page of Lithuania's largest-circulation daily (Lietuvos Rytas) on September 23, also alleged that a "prominent Lithuanian woman" would receive USD 100 million in an offshore account if the transfer of shares to LUKoil went well. Our local staff interpreted this woman to be former PM Brazauskas's wife, Kristina, the subject of speculation about her links with LUKoil. MN Chairman Nerijus Eidukevicius, however, told us that he thinks the reference was to a Social Democrat party member, whom he did not wish to name. ¶3. (U) PM Kirkilas also flatly denied that PKN was preparing to sell MN shares to LUKoil in a public statement on September 26. He announced that he will meet PKN president Igor Chalupec in Vilnius to discuss the article's allegations. (Chalupec is already in town.) ¶4. (C) Specius told us on September 25 that the journalist who wrote the article (Ramune Sotvariene) called him several times before publishing the story. He said that he explained repeatedly that PKN's contract with the GOL prohibits any transfer of shares in the near future (he thought five years, but wasn't sure) and prohibits indefinitely the possibility of PKN selling or transferring part of the shares. After the transfer-prohibition period lapses, Specius explained, PKN can sell only the entirety of its stake in MN (approximately 85 percent of MN's shares),not portions of it. Even further, he emphasized, any sale or transfer would require the consent of the GOL, as the contract recognizes MN as a "strategic asset" whose sale requires a national security review by the GOL. Specius said that the contract -- negotiated under English law and enforceable in English courts -- very clearly prohibited the type of transfer described in the article. ¶5. (C) Queried on the source of the article, Specius opined that the Kazakh state-owned energy firm KazMunayGaz (KMG) likely paid to have it written. He said that the KMG team that attempted to negotiate KMG's purchase of MN earlier this year failed to present KMG's final offer for MN on time, effectively leaving PKN as the sole remaining bidder. This team (which includes one of President Nazarbayev's in-laws), he said, is now trying to save face by portraying PKN as an untrustworthy partner and scuttling the MN deal. ¶6. (C) Nerijus Eidukevicius, chairman of MN's Board of Directors, told us much the same thing on September 26. He said that PKN could not transfer any shares to LUKoil or anybody else without the agreement of the GOL. He said that a KMG rep was in Vilnius to negotiate a supply agreement with VILNIUS 00000891 002 OF 002 MN the night before the article appeared and suggested that the article may have been intended to support KMG's last-ditch efforts to win this contract. -------------- POSSIBLE SUPPLY DEAL SHOT DOWN -------------- ¶7. (C) MN General Director Nelson English told the Ambassador on September 23 that MN's Board of Directors rejected a proposed long-term supply contract with Venezuela. English personally negotiated the agreement with the Venezuelans, which would have mitigated MN's supply problems stemming from the July 29 shutdown of the crude pipeline from Russia. While the three GOL directors supported the deal, the four Yukos-appointed directors voted against it. English suggested that the Yukos-appointed directors were "doing the Russians' bidding." ¶8. (C) Specius told us that he was at first unsure of the Yukos directors' motives, but his concern was mitigated when he learned more about the reasons for their decision. He said that one or two of them had previously worked on oil projects in Cuba and had first-hand experience dealing with the Venezuelans, who proved themselves undependable by providing crude of wildly varying quality. Specius added that the Yukos directors were not opposed to obtaining Venezuelan oil on the spot market, but felt that a long-term contract with an unreliable supplier would not be in MN's best interest. ¶9. (C) Eidukevicius, who chaired the meeting, told us that he detected personal animosity between the Yukos directors and English. He said that the Yukos directors believed that English had conducted the negotiations with the Venezuelans without consulting board members, and they were not happy with being kept in the dark. At one point, Eidukevicius said, English and one of the Yukos directors were literally yelling at each other. ¶10. (C) Eidukevicius said that, enmity aside, the main reason for the board's rejection of the deal was that a long-term (five-year) contract with the Venezuelans would dissuade the Russians from ever repairing the pipeline that used to supply MN. He added, however, that two of the board members were participating by telephone from Russia (and a third from Riga),which may have prevented them from speaking freely. He said that he did not have the feeling that the Yukos directors were unduly influenced by LUKoil or other Russian interests, but could not completely discount the possibility. -------------- STATUS OF EU REVIEW -------------- ¶11. (C) Local press and our sources say that PKN is only now finishing up its pre-notification consultations with the EU's DG-Comp and will apply formally for approval of its purchase of MN within two weeks. Because of the extensive advance consultations PKN has done, our contacts claim that the deal will sail through quickly (i.e., within the span of about one month). -------------- COMMENT -------------- ¶12. (C) There are still many players outside of this deal who want it to fail. We therefore expect these kinds of rumors to continue at least until PKN finalizes its purchase of the refinery. What is disturbing about this episode is that Lithuania's "paper of record" seems to have served as a vehicle for deal-breaking disinformation. CLOUD