Global Insight Perspective | |
Significance | The spill on the northern branch of the Druzhba oil pipeline—which mysteriously does not seem to be affecting Russian oil supplies to Belarus—has raised the stakes for PKN in its recent acquisition of Mazeikiu Nafta, the Lithuanian oil complex. |
Implications | The halt in pipeline oil supplies to Mazeikiu Nafta's Mazeikiai refinery and Butinge export terminal is reminiscent of the cessation in 2003 of Russian oil supplies by pipeline to Latvia's Ventspils Nafta terminal, formerly the top northern oil export route for Russia but now reduced to receiving dwindling volumes of oil supplies by rail. |
Outlook | Despite the cut-off in oil supplies to Mazeikiu Nafta—or perhaps because of it—PKN is angling to acquire a stake in Ventspils Nafta in a risky strategy that could give the company leverage in securing Russian oil supplies—or blow up in the Polish company's face. |
Fears Realised
For much of the past two years, the Lithuanian government has anxiously watched the Russian government's campaign against Yukos, fearing that the crackdown against the oil company would adversely affect Mazeikiu Nafta, the Lithuanian oil complex that was majority-owned by Yukos. In forcing Yukos to sell its 53.7% stake, the Lithuanian government was mindful of the fact that U.S.-based Williams, Yukos's predecessor in charge of Mazeikiu after the complex's 1999 privatisation, had difficulties in securing oil supplies for its Mazeikiai refinery and Butinge offshore export/import terminal. Yet, in the end, the government approved the sale of the Yukos stake in Mazeikiu in May 2006 to another non-Russian operator, Poland's PKN Orlen (see "Related Articles" below). Perhaps hedging its bets, the government also offloaded a state-owned 30.66% stake in Mazeikiu to PKN, preferring to shift any potential future problems with Russian oil supplies to the Polish company.
Less than three months later, the government now appears justified in its wariness. An oil spill along the northern branch of the 1.2-million-b/d Druzhba export pipeline supplying Belarus and Lithuania last week has cut off Russian oil supplies to the Lithuanian oil complex indefinitely. This has forced PKN Orlen—which still has not completed the transaction to acquire the Yukos and government stakes in Mazeikiu—to resort to importing seaborne oil supplies at Butinge for refining at the Mazeikiai facility. Conflicting reports on the size of the oil spill and the extent of the damage to the branch pipeline have only fed speculation. Transneft, the Russian crude oil pipeline operator, has said that the spill has been dealt with, while Russian Natural Resources Ministry officials say that repairs to the pipeline may take up to one year to complete.
Given the timing of the spill and the cut-off of oil supplies, Lithuanian officials are understandably sceptical, questioning whether the spill was merely a convenient method by which Transneft could put pressure on PKN and the Lithuanian government to cede a stake in Mazeikiu to a Russian company. Adding fuel to the fire are reports that Belarussian refineries are still receiving oil supplies via the pipeline. PKN has said that an extended cut-off in oil supplies by pipeline will dent Mazeikiu's profitability, but that the oil complex can still survive via seaborne oil shipments. Nevertheless, the incident has raised fears that PKN and the Lithuanian government are heading down the same road as Ventspils Nafta and the Latvian government, in a bad case of déjà vu.
Learning from Latvia's Mistakes?
At the start of 2003, Transneft stopped sending oil supplies by pipeline to Ventspils Nafta, the Latvian oil terminal that was—until then—the top northern route for Russian oil exports. Since then, the terminal has seen its transshipment volumes (and profits) continue to dwindle as it is forced to rely on costly rail oil shipments. The Latvian government, after long battling with Transneft on the issue, finally conceded defeat last year and said it would sell its 38.6% stake in the terminal on the Riga Stock Exchange. Privately owned Latvijas Naftas Tranzits (LNT), the terminal's main shareholder with a 42.3% stake, may also sell its stake.
The Latvian government is hoping to auction the stake on the local stock exchange in October, with hopes of raking in US$70 million. However, with Transneft saying it now has "no interest" in the stake, there are serious doubts whether new ownership of the Latvian terminal can actually resuscitate Ventspils Nafta's business. Nevertheless, the Latvian government has high hopes for the sale, with Economy Minister Aigars Stokenberg saying yesterday that as many as seven or eight foreign suitors are interested in the government's stake. The Kazakh government, for one, has already expressed its interest, after Kazmunaigaz, the Kazakh state oil company, lost out to PKN Orlen in the Mazeikiu Nafta stakes.
Outlook and Implications
Interestingly, PKN is also mulling a bid, having sent representatives to Riga to check out the Latvian terminal. PKN has not confirmed that it will make an offer, but the Polish company's interest in Ventspils hints at a wider strategy in dealing with Transneft that potentially buffers PKN's Mazeikiu acquisition. While the Lithuanian government was keen to avoid repeating the Latvian government's mistake in holding onto a key oil facility too long in a battle with Transneft (although Lithuania still has a 10% stake in Mazeikiu, PKN has an option to buy those shares as well), PKN appears to be gearing up for a potential "cold war" over oil supplies with the Russian pipeline operator.
PKN, rather than buckling under the pressure of a cut-off in oil shipments to Mazeikiu, appears to be employing the opposite approach in mulling a possible acquisition that would expand its exposure to the whims of Transneft. A potential PKN acquisition of a stake in Ventspils Nafta could actually support the Polish company's efforts to secure oil supplies for Mazeikiu (and conceivably restart pipeline oil shipments to Ventspils) by increasing PKN's leverage in dealing with the Russian pipeline operator. As one of the largest buyers of Russian oil supplies, PKN could counter-balance Transneft and negate any attempt to turn the screws politically and economically on the Baltic countries further by redirecting oil supplies.
On the other hand, PKN's strategy could be quite risky if it antagonises Transneft and results in the typical Russian over-reaction. Despite speculation to the contrary, the Druzhba oil spill could actually be legitimate and not merely a convenient excuse for Russia to increase the pressure on PKN to cede all or part of Mazeikiu to a Russian company; a quicker-than-expected restart in oil supplies to Lithuania would rapidly put an end to the conspiracy theories. Moreover, as Transneft has tried to point out, it is cheaper for Russian oil exporters to send their supplies via Russian ports than via terminals in Latvia, Lithuania, and elsewhere that charge transit tariffs in addition to the export tariffs that Russia itself charges. Ventspils was already handling reduced volumes after Russia's Primorsk terminal on the Baltic Sea was commissioned in 2001, and Lithuania's Butinge terminal was also transshipping lower volumes before PKN took over Mazeikiu from Yukos.
Thus, a continued reduction in Russian oil supplies via Butinge could reasonably be expected, independent of the Druzhba oil spill, especially as high Russian crude oil export tariffs give producers incentive to refine their crude oil output at home. The pattern of increased refining runs and the explosion of Russian oil product export terminals on the Baltic and White Seas indicate that the bulk of refined oil product exports from Russia will be sent to markets from Russian ports rather than from Lithuania, Latvia, or Estonia. In mulling a bid for Ventspils Nafta at a time when Mazeikiu Nafta's Butinge export terminal is cut off from oil supplies by pipeline, PKN should be aware that even an offer to partner with a Russian company to operate both the Lithuanian and Latvian oil terminals may not be sufficient to ensure a resumption of oil supplies by pipeline.
Related Articles
Lithuania: 3 August 2006: Lengthy Pipeline Repair Puts Russian Oil Supplies to Lithuania in Jeopardy
Russia: 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
Latvia: 19 July 2006: Kazakhstan Interested in Acquiring Beleaguered Latvian Oil Terminal
Lithuania: 29 May 2006: PKN Signs Agreement to Acquire Majority Stake in Lithuania's Mazeikiu Nafta
Latvia: 2 November 2005: Government to Sell Stake in Key Latvian Oil Terminal on Domestic Exchange
Latvia: 29 July 2005: Defeat for Latvian Government in Ventspils-Transneft Oil Supply Dispute
Latvia: 29 June 2005: Government Reaffirms Plans to Divest Stake in Latvia's Ventspils Oil Terminal
Latvia: 12 July 2004: Exports Drop Another 20% in H1 at Latvia's Ventspils on Continued Transneft Dispute
Latvia: 6 January 2003: Russia's Transneft Turning the Screws on Ventspils Nafta