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Viewing cable 05VILNIUS781,
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Reference ID | Created | Released | Classification | Origin |
---|---|---|---|---|
05VILNIUS781 | 2005-07-28 11:11 | 2011-02-03 00:12 | CONFIDENTIAL | Embassy Vilnius |
Appears in these articles: http://www.novgaz.ru/data/2011/004/11.html |
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 VILNIUS 000781
SIPDIS
DEPT FOR EUR/NB, EUR/RUS, EB/ESC, INR
E.O. 12958: DECL: 07/27/2015 TAGS: ECON ETRD PREL PGOV EPET ENRG RS LH
Classified By: Economic Officer Scott Woodard for reasons 1.4 (b) and ( d)
¶1. (U) This cable contains an action request. Please refer to paragraph 13.
------- SUMMARY -------
¶2. (C) Yukos is likely to sell its majority share in the only oil refinery in the Baltic countries in the near future. Several of the world's largest oil companies have expressed interest in purchasing Yukos's portion of Mazeikiu Nafta. A consortium controlled by Gazprom appears to be in the strongest position to buy the refinery. Other companies with a strong Russian connection, like TNK-BP or a ConocoPhillips/Lukoil consortium, are still in the running. According to the shareholder agreement, the GOL can veto a prospective buyer. The GOL would like to sell Lithuania's largest corporate asset to a Western-owned or at least Western-oriented company, but Russia's control of the crude oil that supplies the refinery gives it the ability to tilt the playing field in favor of firms favored by the Kremlin. END SUMMARY.
-------------------------- MAZEIKIU NAFTA: THE BASICS --------------------------
¶3. (U) Mazeikiu Nafta (MN) is the only oil refinery complex in the Baltics. In addition to the actual refinery, the corporation also owns the oil terminal port facility at Butinge on the Baltic coast and the Birzai pipeline, which connects the refinery to a pipeline in Belarus that delivers the refinery's supply of Russian crude oil. MN is Lithuania's biggest industrial facility and generates some 10 percent of the country's GDP. It produced revenue in 2004 of approximately LTL 7.7 billion (USD 2.7 billion), more than double the revenues of Lithuania's next largest company. Its pre-tax profits last year were more than LTL 900 million (USD 310 million). Yukos is the majority shareholder of MN, holding 53.7 percent of shares through a company registered in the Netherlands. The GOL is the other major shareholder, with a 40.6 percent stake. The remaining 5.7 percent of shares are actively traded on the Vilnius bourse and are held by various individuals and institutions.
--------------------------------- YUKOS APPEARS READY TO SELL . . . ---------------------------------
¶4. (U) Yukos International UK BV bought MN from Williams International (a U.S.-based company) in 2002 (ref B). Last March, Yukos's tax and legal problems in Russia began hampering its ability to provide MN with the amount of oil stipulated in its agreement with the GOL (ref A). Sensing that MN would soon be put up for sale, high-level executives from several of the world's major oil companies, including TNK-BP, Gazprom, KazMunayGaz, PKN Orlen, Lukoil, and ConocoPhillips visited Lithuania in May and June. Neither Yukos nor the GOL has announced a date for the sale.
--------------------------------------- . . . BUT NOT WITHOUT THE GOL'S CONSENT ---------------------------------------
¶5. (C) Yukos cannot simply sell MN to whomever it wishes, even though it is the majority shareholder. Vice Minister of Economy Nerijus Eidukevicius, who is also a member of MN's management board, told us that MN's shareholder agreement gives the GOL's representatives on the board authority on par with the majority shareholder for all major decisions. Specifically, this means that Yukos must seek GOL consent for any deal worth more than LTL 10 million (USD 3.4 million), giving the GOL an effective veto on the sale of Yukos's majority holding.
--------------------- WHAT DOES YUKOS WANT? ---------------------
¶6. (C) Jurgis Vilemas, who directed the Lithuanian Energy Institute for more than 20 years and informally advises Prime Minister Algirdas Brazauskas on energy matters, told us that what Yukos wants is simple: as much money as possible. Some press articles have speculated that Yukos may also be in a hurry to sell its shares before legal action in the Netherlands or Lithuania (see para 10) possibly freezes its assets or otherwise hinders its room to maneuver.
----------------------- WHAT DOES THE GOL WANT? -----------------------
¶7. (C) Vice Minister Edukevicius told us that the GOL will want to renegotiate with a potential buyer some of the technical agreements that tie the GOL, MN, and a new majority shareholder together. He implied that the GOL would prefer a company willing to operate MN in a manner that respected the GOL's interests -- most notably, ensuring a constant supply of crude oil for the refinery.
¶8. (C) Vilemas echoed this point, saying that the GOL needs a buyer who can ensure a steady supply of oil, but stressed that it also wanted a company with a "Western style" of management. He said that MN had done well under Yukos's leadership, which had increased MN's abilities to produce different types of refined products and opened new markets. He also said that TNK-BP would be the GOL's first choice as a buyer of MN because it offered the best combination of Western management and guarantee of supply.
¶9. (C) The head of the Social Democratic parliamentary group, Juozas Olekas, told us that the Prime Minister (also a Social Democrat) would put economic considerations first. He said that the PM believed that the economic realities of globalization would strongly influence any buyer of MN and prevent it from becoming a tool to be used for political ends. In his view, this means that the PM would be looking for a company that will continue MN's development and increase its ability to create new products and find new markets.
----------------- THE RUSSIA FACTOR -----------------
¶10. (C) Dr. Gitaras Nauseda, an industry analyst and adviser to the CEO of one of Lithuania's most prominent banks, told us that the Russian government has significant leverage in determining who will buy MN. He stressed that since Russia controls the supply of oil, any buyer not to the Kremlin's liking faces the very real prospect of being cut off.
¶11. (C) Nauseda also told us that the Russian government's recent letter to the Netherlands and Lithuania asking the governments of those countries to freeze Yukos's assets because of the company's tax liabilities in Russia is most likely a lightly veiled threat intended to scare off any non-Russian buyers. The legal status of these requests is not clear at present, but the GOL stated last week that it had received the letter and that its lawyers were examining the possible legal implications. He said that it was probably not a coincidence that the letters to the Dutch and Lithuanian governments came soon after Gazprom's announcement that it wished to expand its oil interests.
--------------------------------------- GOL STILL WILLING TO CONSIDER AMERICANS ---------------------------------------
¶12. (C) Olekas told us that potential buyers still have an opportunity to influence the GOL's decision. He mentioned that ConocoPhillips did not manage to convince Prime Minister Brazauskas that it was a serious contender when its officials visited Lithuania in June. He said that the company still had time to make a stronger pitch.
¶13. (C) Vice Minister Eidukevicius expressed some interest in a ConocoPhillips bid, but said that he would like to understand the company's partnership with Lukoil better. He asked specifically if the USG could provide information clarifying the relationship between these two companies. (ACTION REQUEST: While we will work our own sources, we would appreciate any information from the Department on this relationship, especially if ConocoPhillips decides to bid on Yukos's shares. END ACTION REQUEST.)
------------------------------ POTENTIAL BUYERS KEEPING QUIET ------------------------------
¶14. (C) The visits of oil company executives to date have been generally quick and quiet, with brief reports appearing in the press only the day after. (A lobbyist working for ConocoPhillips advised us of that company's visit just before it occurred.) Only one potential buyer has requested a meeting with emboffs. Shawn McCormick, Vice President of International Affairs for TNK-BP, met with us twice during visits to Lithuania. During his second visit on May 26 he told us that TNK-BP officials had again met with Prime Minister Brazauskas, who gave the officials the clear impression that TNK-BP was his primary choice as a buyer of MN. McCormick told us that TNK-BP was definitely interested in acquiring MN, but said that his company "would not overpay," noting that anything more than USD 600 million to USD 800 million probably would be too much.
--------------------------------------------- --- DON'T BELIEVE EVERYTHING YOU READ (IN THE PRESS) --------------------------------------------- ---
¶15. (SBU) Many articles in the local media recently have contained incorrect information about Mazeikiu Nafta, the number of shares potentially for sale, the various technical agreements governing MN's management, and the importance of obtaining a majority share. It appears that these journalists erred mainly because of ignorance of a fairly complicated subject or failure to do proper fact-checking. Another likely factor is that people with an interest in a particular outcome may be feeding the press biased or incomplete information.
------- COMMENT -------
¶16. (C) The GOL faces a serious dilemma. Its leaders want a Western-oriented firm to purchase Yukos's shares. If Russia chooses to apply all the pressure it can on behalf of Gazprom or another Russian company, however, it will be very difficult for any other company to convince the GOL that it can guarantee the crude oil supply necessary for Mazeikiu Nafta to function properly. Kelly