LITHUANIAN REFINERY FIRE LOOKS LIKE ACCIDENT

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000962

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STATE FOR EUR/NB, EUR/NCE, EB/ESC
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION
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DOC FOR 4231/IEP/EUR/BOHIGIAN
NSC FOR GRAHAM, MCKIBBEN AND COEN
TREASURY FOR LOWERY, LEE AND COX

E.O. 12958: DECL: 10/19/2016
TAGS: ENRG EPET PREL LH RS PL
SUBJECT: LITHUANIAN REFINERY FIRE LOOKS LIKE ACCIDENT

REF: VILNIUS 944 AND PREVIOUS

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


1. (C) Summary: There is no evidence yet to suggest that the
October 12 fire at Lithuania's oil refinery was anything
other than an unfortunate accident. Five different
investigations into the blaze continue. The fire will delay
finalization of the purchase of the refinery by Poland's PKN
Orlen, probably until January. PKN will also likely re-open
its negotiations over both price and closing date with Yukos
International, the majority shareholder of the refinery.
While no physical evidence yet suggests that the fire was a
deliberate act of sabotage, investigators have also not ruled
it out. End Summary.

Fire looks like an accident, at least for now
--------------


2. (C) Saulius Specius, adviser to the Prime Minister on
economic and energy issues, told us on October 20 that the
October 12 fire at Lithuania's Mazeikiu Nafta (MN) oil
refinery appears to have been accidental, although at least
five separate investigations are still evaluating the
evidence. Those carrying out investigations include the
Interior Minister; the local prosecutor; the fire department;
the GOL Energy Agency; and MN itself. Specius said that the
Interior Ministry's investigation would conclude on December
1, and the others would likely conclude by mid-November.


3. (C) Nerijus Eidukevicius, chair of MN's Board of
Directors, told us on October 20 that the investigations had
so far not turned up anything to suggest that the fire was
the result of deliberate sabotage. He admitted that the
timing of the accident, so close to the potential
finalization of the deal to sell MN to Poland's PKN Orlen,
was unfortunate, but that these kinds of accidents sometimes
happen at refineries, especially those with 20- year-old
equipment.


4. (C) MN's General Director (and Amcit) Nelson English told
us in an October 20 telephone call that his investigation
continued, but had so far not turned up a "smoking gun" that
suggested deliberate sabotage.

PKN's purchase postponed
--------------


5. (C) Specius told us that the fire would postpone the
closing of PKN's deal to purchase MN, previously set for
November or December, most likely until January. (Prior to
the fire, the biggest hurdle for the deal was believed to be
gaining the approval of EU competition authorities, which
Specius expects to happen in early November.) He said that
the fire actually gave PKN a legal reason to get out of the
deal if it wanted to -- on the grounds that Yukos did not
meet its obligation to maintain the value of the asset as
required by the terms of the contract. That said, he
believes that PKN still wants to go through with its purchase
of MN. Specius, who said he has daily telephone
conversations with PKN's chair Igor Chalupec, said that he
was sympathetic to PKN's desire to learn more about the
causes of the fire, its effects on MN's production capacity,
and how much compensation MN's insurers will pay for the
damage before completing the purchase, and that this delay
made good business sense for PKN.


6. (C) Specius said that PKN would almost certainly
renegotiate the terms of the purchase with Yukos
International, MN's majority shareholder. This negotiation
will probably involve the price that PKN will pay for Yukos's
shares and the closing date -- under the current contract,
PKN is required to finalize it purchase of Yukos's MN shares
by December 31. Specius emphasized that PKN's negotiations
with Yukos would not affect the price that PKN will pay for
the GOL's MN shares. He said that the GOL's agreement with
PKN precludes the possibility of PKN paying any less for the
GOL's shares than it agreed to pay last May. He also said
that the GOL's arrangement with PKN already allows for a
closing date as late as March 31. Specius said that the
GOL's focus right now is on facilitating a constructive

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discussion between PKN and Yukos International so that they
reach mutually agreeable terms.

Thwarted MN coup plot?
--------------


7. (C) MN's Board of Directors will meet on October 21.
English told us that he had apparently disrupted an attempt
by some of the Yukos-appointed Board members to oust him as
MN's general manager. He said that he learned earlier this
week that the Yukos Board members planned to introduce
English's ouster as a surprise agenda item during the October
21 meeting. English said that he then sought the support of
Yukos shareholders and PKN, who both weighed in heavily in
his support, apparently forcing the Yukos Board members to
promise not to raise this issue during the meeting.


8. (C) Specius told us that he had also heard about this
"attempted coup," and said that it was not entirely clear who
was influencing the Yukos-appointed Board members. He said
that they seemed to be freelancing, rather than responding to
the will of the shareholders, and that it was difficult to
understand their behavior. He also said that he found their
attempt to oust English "very troubling."


9. (C) Eidukevicius, one of the three GOL-appointed directors
on MN's Board, skillfully avoided discussing this issue with
us directly, but said that he expected an "energetic" meeting
on October 21.

Comment
--------------


10. (C) Prior to the fire, we passed messages to both the
President's and Prime Minister's offices encouraging the GOL
to ensure the physical security of MN and its management. We
also warned these offices about possible attempts to
undermine MN's management (particularly Nelson English)
through slander or trumped-up legal charges. The fire may
well turn out to be a simple industrial accident; no physical
evidence yet uncovered suggests otherwise. The fact that the
blaze occurred within a few weeks of the planned finalization
of PKN's purchase of the refinery, however, coupled with the
June "accident" that cut off MN's piped crude supply and the
vague but serious-sounding threats we've heard against MN and
its management, suggest that there may be more at work here
than mere coincidence.
KELLY