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Same-Day Analysis

Song Remains the Same as Russia Confirms No Oil for Lithuania in September

Published: 23 August 2006
Amid continuing speculation that Transneft is withholding oil to Mazeikiu Nafta in order to put pressure on Poland’s PKN, the new owner of the Lithuanian oil complex, all sides are sticking to their original stories as Russia released its latest oil export schedule showing no oil slated to be delivered via Lithuania in September.

Global Insight Perspective

Significance

A preliminary Russian oil export schedule for September released yesterday confirms what was widely expected: namely, that Russia will export no oil to Lithuania for a second month in a row after a pipeline leak in late July prompted Transneft to halt oil supplies via the Druzhba pipeline.

Implications

The Lithuanian government has rejected reports that it would seek to retaliate for the halt in oil supplies to Mazeikiu Nafta, and Poland's PKN Orlen, which recently purchased a controlling stake in the strategic Lithuanian oil complex, maintained that it still planned to complete the acquisition, but the continuing halt in oil deliveries could yet doom the deal.

Outlook

The halt in September Russian oil exports was largely expected, given the planned maintenance at Lithuania's Butinge terminal and the need for repairs on the affected section of the Druzhba pipeline, but the status quo is clearly not in the interests of either Lithuania or PKN Orlen.

Re-Stating Their Positions…

More than three weeks after a spill on the northern section of Russia’s Druzhba oil pipeline triggered a halt in supplies to Lithuania’s Mazeikiu Nafta oil complex, it remains unknown whether the spill was an unfortunate accident caused by a rupture in an ageing pipeline system or a convenient excuse for Transneft to put pressure on Lithuania and Poland’s PKN, the new operator of Mazeikiu (see "Related Articles"). While there is heavy speculation that the latter explanation is the cause of the disruption in oil supplies, the various parties are continuing to operate as if the former explanation has created the current predicament.

Thus, Lithuanian Prime Minister Gediminas Kirkilas told state radio yesterday that he had no reason to believe that PKN would walk away from its yet-to-be-completed acquisition of a controlling stake in Mazeikiu Nafta. Kirkilas, addressing concern in Lithuania that PKN might withdraw from the deal, said that the Polish firm is "solid in its intention to follow the deal through, right up to the end". PKN, which earlier said it reserved the right to pull out of the acquisition if Mazeikiu’s value dropped substantially by the end of the year owing to a halt in Russian oil shipments, also sought to downplay the potential that it would back out on its plans. Mazeikiu Nafta includes the Mazeikiai refinery, the Butinge export/import terminal, and the connecting Naftioteikis pipeline.

Transneft, the Russian crude oil pipeline operator, recently gave both Lithuanian and PKN officials pause when it said that it might "never" re-open the affected section of the Druzhba pipeline, only to clarify that the pipeline would be replaced and re-opened if not rebuilt. Still, yesterday’s release of a preliminary Russian oil export schedule for September brought no end to the anxiety for PKN or the Lithuanian government, as it confirmed that no Russian oil is planned to be shipped next month to the Butinge terminal. Russia plans instead to direct additional volumes to its own Baltic export terminal at Primorsk, meaning the overall volume of planned Russian oil exports is largely the same.

…or a Hardening of Positions?

Although it comes as little surprise that the Butinge terminal will not get any Russian oil shipments by pipeline next month—considering the need for what Russian officials say could be lengthy repairs on the affected section of the Druzhba—the export schedule seems somehow to make it more official, as if it was now codified Russian oil export policy. Lithuanian and PKN officials, of course, fear that is exactly what is happening, as they are well aware that Russian oil shipments by pipeline to Latvia’s Ventspils Nafta terminal were halted at the start of 2003 and have never resumed.

With both Lithuania and PKN determined that Mazeikiu Nafta will not be "another Ventspils", the restated positions on PKN’s acquisition of a controlling stake in Mazeikiu from Yukos and the Lithuanian government sound more like a hardening of their stance on the issue in the context of a burgeoning dispute with Transneft over oil supplies. Hence, if Transneft is determined to continue to withhold oil supplies in an effort to force PKN to pull out of the Mazeikiu acquisition (or to cede control of the oil complex to a Russian company), the Polish firm is making clear that it will not be bullied into submission. Likewise, the Lithuanian government, which long feared being stuck in the very position in which it now finds itself, is asserting its support for PKN and demonstrating that it cannot easily be cowed by a halt in oil supplies.

Outlook and Implications

The developing "cold war" between Lithuania and PKN on one side and Transneft and Russia on the other is still undeclared, but both sides seem to be digging their heels in for a potential fight. At the same time, Lithuania and PKN are clearly wary of antagonising Russia and creating a worse situation. PKN, which initially played right into Transneft’s hands by threatening to pull out of the Mazeikiu acquisition, is now seeking to downplay that possibility, noting that Mazeikiu can still be profitable if it is limited to seaborne oil shipments and expressing confidence that the supply disruption via the Druzhba will only be temporary.

Similarly, Lithuanian officials are apparently determined to take the high road as well, with Kirkilas rejecting a report in the Baltic News Service that the government was considering retaliating for the oil supply disruption by restricting Russia’s access via Lithuania to the exclave of Kaliningrad. Indeed, Kirkilas said that "Lithuania seeks good relations with Russia. If there are conservative factions in Russia who may be seeking to damage relations with Lithuania, Lithuania's government does not seek this."

Russia’s intentions at this point are uncertain, but the fact of the matter is that regardless of the motive behind the supply disruption, the status quo in the current situation is in neither Lithuania’s nor PKN’s favour. The longer the halt in oil supplies to Mazeikiu Nafta continues, the more pressure Lithuania will feel to retaliate, and the more likely the "unified front" that PKN and the Lithuanian government are seeking to present will crumble. The halt in oil deliveries in September is perhaps not so problematic, given that the Mazeikiai refinery has said it has supplies for at least two months and because the Butinge terminal is scheduled for two weeks worth of maintenance in the second half of next month in any case, but an extension in the pipeline oil outage into October will increase the pressure on the PKN-Lithuania alliance. A divergence of views between PKN and the Lithuanian government would likely see PKN pull out of the Mazeikiu deal, with Lithuania then left confronting Transneft on its own.

Related Articles

Russia: 17 August 2006: Mixed Signals from Transneft on Future of Russian Oil Supply to Lithuania Via Druzhba Pipeline


Lithuania: 16 August 2006:Mazeikiu Nafta to Cut Refining Runs as Lithuanian Terminal Plans Maintenance


Lithuania: 14 August 2006: PKN Warns of Potential Pullout from Mazeikiu Acquisition in Lithuania


Lithuania: 11 August 2006: Oil Supply to Mazeikiu Nafta Secure for Two Months, Says Lithuanian PM


Lithuania: 9 August 2006: Will History Repeat Itself with New Russian Oil Blockade in Baltics?


Lithuania: 3 August 2006: Lengthy Pipeline Repair Puts Russian Oil Supplies to Lithuania in Jeopardy 


Lithuania: 2 August 2006: Diversion of Russian Oil Pipeline Shipments from Lithuania Raises Questions After Spill


Russia: 1 August 2006: Druzhba Oil Spill Highlights Tension Between Russia's Transneft, Environmentalists 


Russia: 1 August 2006: Court Officially Declares Russia's Yukos Bankrupt


Lithuania: 29 May 2006: PKN Signs Agreement to Acquire Majority Stake in Lithuania's Mazeikiu Nafta

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