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Lithuania: Vilnius Faces Hard Choices In Oil Deal With Russian Company

Lithuania faces hard choices following a deal that would give Russia's second-largest oil company Yukos control of the country's prized refinery. Political doubts run deep, but the facility has been losing money for seven years and may need five more years of investment before it achieves profitability.

Boston, 30 August 2002 (RFE/RL) -- Questions about Russian oil and power are again stirring fears in Lithuania with the sale of the country's Mazheikiu Nafta refinery.

Earlier this month, Russia's giant Yukos oil company announced an agreement to buy a controlling share in the facility, which is said to account for about 10 percent of Lithuania's economic output. The property includes the Butinge oil terminal and a critical pipeline. Mazheikiu is the Baltic countries' only major refinery.

Yukos will pay $85 million to double its existing stake by buying nearly 27 percent from Williams International, a U.S.- based energy firm that has run the refinery since 1999. Williams has been forced to sell off assets following the fall of its own shares in the wake of the Enron energy-trading scandal in the United States.

But the shift from American interests to Russian ones has come as a shock since Yukos acquired its initial 27 percent stake in the refinery in June.

At the time, Lithuanian leaders welcomed the Yukos investment with open arms. Prime Minister Rolandas Paksas called it a "breakthrough," while Lithuanian President Valdas Adamkus also pledged support. Now, with Yukos on the brink of taking control, the leaders are less sure.

A spokeswoman for Adamkus charged last week that the deal was the result of "backstage actions," adding that it "pushes Lithuania into a complicated situation." Government approval is needed for it to become final.

The reason for the change of heart is that the money-losing refinery has bounced from one peril to another. Yukos seemed like a savior two months ago, but now officials are wondering whether Lithuania's interests are in danger again.

Before June, the threat was from Russia's biggest oil company LUKoil, which was accused of blocking crude supplies to the refinery, forcing shutdowns in 1999. LUKoil denied the charge, arguing that its refusal to sign a supply contract was only due to a disagreement with Williams over the oil price. The American firm was forced to buy more-expensive oil from Western sources to keep the refinery going.

But LUKoil did little to foster trust with comments by its chief executive, Vagit Alekperov. In May 2000, Alekperov told students at a St. Petersburg mining institute, "We believe that it is our market, and we are going to fight for this market."

Reuters quoted Alekperov as saying, "We expect as a result of a harsh competitive struggle to gain control not of the share capital of the company, but of its operations." He added, "This means that today we believe that it does not matter to whom the firm belongs, as long as our company controls its supplies and the distribution of its products."

After such statements, Lithuanian officials greeted the first Yukos deal with relief, considering that the company also agreed to supply the refinery with nearly 100,000 barrels of oil per day for the next 10 years.

But majority control has renewed historical fears about Russia, especially since the refinery must be modernized at a cost that could reach $400 million. At the time of the Williams deal in 1999, Lithuanian officials complained that the expense could bankrupt the country.

On one level, Yukos control could mean less risk of Russian political power than a takeover by LUKoil. The Russian government owns 13.5 percent of LUKoil but only 0.07 percent of Yukos, a minor interest that it plans to sell. Yukos, Russia's second-largest oil company, is known as a fierce business competitor rather than as a political tool of Moscow.

But analysts say the picture is not free of doubt. They note that Russian petroleum companies have been taking a series of investment steps to extend their empires into countries including Slovakia, Poland, Georgia, and Greece this year.

Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, said, "My sense is that Yukos is clearly looking out for Yukos, but in the end, there is a fine line between Russia and the companies."

Yukos is apparently sensitive to the concerns. On Thursday, it put a new face on the venture by sending Britain's Lord Owen, chairman of Yukos International, to Lithuania to "persuade [the] government to stop fearing Russians," the SKRIN Issuer news service said.

No matter who owns the refinery, the outcome may be hard to assure. The Russian newsletter "RusEnergy" noted this week that Mazheikiu Nafta has lost money steadily for the past seven years. According to "RusEnergy," Williams hoped it could profit from the plant by buying oil cheaply in Russia and selling refined products at world prices abroad. There is little chance that Yukos will supply cheap crude now, unless it wants to do so at a loss, it said.

Former Prime Minister Algirdas Brazauskas said last year the Lithuanian government may already have lost $290 million in loans to the refinery. No turnaround is expected without modernization. "RusEnergy" said, "It seems that Yukos has on its hands a company that is destined to be losing money for at least three or four years." The advantages for Yukos are access to Butinge and a chance to compete with LUKoil, which is seeking control of Poland's Gdansk refinery.

Lithuania could now face financial risk and political doubt at the same time, leaving no clear choice on the Yukos deal.