Lithuania suspects Russian oil grab

By Andrew E. Kramer

The New York Times
SATURDAY, OCTOBER 28, 2006--
Published: October 27, 2006
http://www.iht.com/articles/2006/10/27/business/embargo.php
MOSCOW The Russian government has never been straightforward about its plans to take control of the oil and natural gas business. (DUH! DOH!)

So Lithuanians were suspicious in late July when Moscow said it had shut down the only pipeline supplying them with Russian crude oil and blamed it on the environmental risks of a leak.
In fact, it was not so much their pipeline the Russians were concerned about, according to Lithuanian officials, analysts and company executives. It was what the pipeline was connected to: Lithuania's sole refinery.
And because in this region Moscow often gets what it wants, Lithuania's agreement in June to sell the refinery to a Polish company for more than Russians had offered did not end the story.
The Lithuanian government, oil analysts and the operators of the refinery have said they suspect Moscow had a darker objective - to win the refinery.
"The goal was to force Lithuania to reconsider the sale," said Tomas Janeliunas, deputy director of the Center for Strategic Studies in Vilnius, the capital of Lithuania. "They wanted a Russian company to buy the refinery, but for cheaper than a market price."
Lithuania's brush with Kremlin oil politics, critics of Russian business practices say, is a case study of what the U.S. vice president, Dick Cheney, called Moscow's use of energy exports as "tools for intimidation and blackmail" with the neighbors it once controlled under the Soviet Union.
That characterization angered Russian officials, who say they are simply being discriminated against in the business world.
"What is all the hysteria about?" Vladimir Putin, the Russian president, asked rhetorically at a meeting with German business executives this month, the Interfax news agency reported.
Russian companies, their accounts padded by high commodity prices, are on a buying spree overseas - a steel mill in Michigan, a pipeline in Germany and a mine in Australia have recently been sold to the Russian companies Severstal, Gazprom and Rusal, respectively.
In Lithuania, the government and Yukos, the Russian energy company that is out of favor with the Kremlin, were trying to sell the Mazeikiu Nafta refinery in a sale organized by Lehman Brothers of New York.
Four companies bid: two from Russia, one from Kazakhstan and the Polish company PKN Orlen, which ultimately won. The Russian companies, Lukoil and TNK-BP, bid less than the others. When asked to match the competing prices, the Russians declined, Nerijus Eidukevicius, chairman of the board of the Mazeikiu refinery, said during an interview in Vilnius.
In June, PKN Orlen won the refinery with a bid of $1.49 billion for Yukos's 53.7 percent stake and $850 million for the 30.6 percent owned by the Lithuanian government.
"They weren't showing interest," Eidukevicius said of the Russian companies. "It was strange."
In fact, analysts and market participants say, the Russian government was pursuing strategies to gain the refinery for a Russian company outside the sale process - and at a discount price.
At the time of the sale, Yukos was heading into a politically tinged bankruptcy proceeding in Russia. Rosneft, the state-controlled oil company whose chairman, Igor Sechin, is a former KGB agent and Putin's chief of staff, had already acquired most of Yukos in a forced auction in 2004, and had its sights on the rest.
To get to the front of the line for Yukos assets, Rosneft signed a confidential agreement with Western creditor banks in December 2005 to assume Yukos's debt if the banks forced that company into liquidation, which happened in March. This made Rosneft a creditor in the bankruptcy filing.
The Russian bankruptcy receiver representing Rosneft's claim, Eduard Rebgun, then sued in New York and in the Netherlands to block the refinery sale, but lost both cases, ending legal attempts to win the refinery outside the auction run by Lehman Brothers.
In what Yukos executives say was a sign of the deep displeasure of the Russian government at these rulings, Russian prosecutors opened criminal fraud investigations against four Yukos executives. The announcement of these investigations came less than an hour after the decision in Amsterdam on Aug. 17.
Meanwhile, Russia suffered a setback of a different nature inside Lithuania, political analysts in that country say.
In the midst of the sale process, a pro-Russian politician in the Lithuanian government whose ministry was responsible for overseeing the refinery sale was ousted in a campaign finance scandal. The minister, Viktor Uspaskich, fled to Moscow and is now wanted by Interpol.
The Russian government invited his successor, Kestutis Dauksys, to a Kremlin meeting on May 23 with Dmitri Medvedev, a Russian deputy prime minister, according to Dauksys. The message, he said, was that the Russians truly wanted the refinery.
"He said the Russian government was interested in who buys Mazeikiu Nafta," Dauksys said. "He said Russian companies are interested in buying it."
"They thought they could buy it at low cost, but that is not possible today," he added.
Alexander Temerko, a former vice president of Yukos, said the company interpreted Dauksys's account of the meeting as a threat to the refinery's Russian-controlled oil supply through the Druzhba pipeline.
The refinery immediately retooled for tanker oil, a decision that proved prescient: The first shipment arrived a week before the pipeline was shut down.
The contract with PKN Orlen has an escape clause that would apply if the market value of the refinery dropped significantly before the sale closed. Lithuanian analysts and politicians said that one motive for Russia to shut down the pipeline was to force PKN Orlen to exercise this escape clause, thus reopening the sale for Russian companies.
Then, on Oct. 13, a fire at the Mazeikiu refinery caused about $75 million in damage and lost profit for 2006, according to the Lithuanian government and the Fitch credit rating agency. The fire is expected to reduce output by 50 percent until early next year. While arson has not been ruled out, Lithuanian media have reported that the likely cause was a petroleum leak. A formal determination is expected in November.
PKN Orlen, in a statement made shortly after the fire, said it would discuss with its lenders whether the sale could go forward.
With his country's largest asset tied up in business negotiations, the Lithuanian president has hinted at possible reciprocation in kind. The president, Valdas Adamkus, on Aug. 19, suggested that the only Russian railroad supplying the Kaliningrad region, which passes through Lithuania, could be shut for what the Lithuanian media called "political repairs."
"We should guarantee the safety of trains and passengers," he said, according to the Baltic News Service. "Should repairs be needed in order to increase the safety of railway services, I see no reason to heat up political tensions."

*CLIP*

(I am not too sure how accurate THIS little article is, but it's got its good nuggets. If you have an interest as to how GLOBAL WWIV is really going to be, I do suggest you read it)