Lithuania, the little state on the shore of the Baltic Sea, has a proud, and under Adolf Hitler, an unpleasant history of hostility towards Russia.
If its accession to the European Union was an understandable attempt to conserve, and build on its post-Soviet independence, Lithuania’s application to join the North Atlantic Treaty Organization (NATO) sharpened the military edge to the relationship with Moscow. But as the great British strategist, Basil Liddell Hart, spelled out a long time ago -without fuel waging war is a losing business. Lithuania’s Mazheikiu refinery can produce fuel, but it lacks crude oil for the purpose. The decade-long history of oil supplies to the refinery keeps repeating Liddell Hart’s lesson several times over.
The Lithuanians apparently haven’t read Liddell Hart.
Instead, they tried putting Williams, a Kansas-based oil company, in charge of the refinery in the belief that Washington would assure the imports of crude oil. Perhaps it promised to do so; but at a price Williams could not afford. It defaulted on the investment, tax and other obligations it had signed with the Lithuanian government. Mazheikiu was then put up for sale again, and this time it was acquired by Yukos, the Russian oil company owned by Mikhail Khodorkovsky. Perhaps Washington told Vilnius it could trust Khodorkovsky. But even Khodorkovsky at the peak of his power didn’t have the means to deliver oil to Mazheikiu himself. For that, as for much more than Khodorkovsky realized at the time, Yukos depended on the Kremlin. Since the Transneft pipeline system is state-owned, access can be controlled by a directive from the Kremlin to Semyon Vainshtok, Transneft’s chief executive. When Khodorkovsky was convicted by a Moscow court and imprisoned on fraud charges, and Yukos’s principal assets sold to pay tax evasion claims, Mazheikiu was once more a problem for Lithuania. It could have decided to negotiate with Yukos’s heir, the state oil company Rosneft. It might have tried exciting a contest for the Yukos stake between Transneft, Rosneft, and Russia’s ambitious commercial oil producers, including BP-controlled TNK and LUKoil. But last November Vilnius decided against all Russians. This month, the Russians decided what to do about it.
Transneft is now diverting an estimated 163,000 barrels per day (bd) of additional Russian crude oil exports to Ukrainian ports on the Black Sea. This diversion started after Transneft cut off the flow of crude through a spur of the main Druzhba (that’s Russian for ‘friendship’) pipeline that has been supplying the Mazheikiu refinery, and Lithuania’s oil port on the Baltic, Butinge.
First reports of the cutoff appeared to be in response to a leak and falling pressures reported in the Lithuanian spur of the pipeline on the weekend of July 30-31.
Last November, in what it announced as a fresh bid to break free of Russian crude oil supply constraints, the Lithuanian government proposed to sell the Yukos stake to either a Kazakh or Polish company. Transneft then responded it would not deliver the oil required to fill the bid by the first of the non-Russian bidders, Kazmunaigaz (KMG). In addition to KMG, the other contenders for the refinery were PKN Orlen of Poland, and TNK-BP and LUKoil of Russia.
At the time, Transneft was piping 3 to 4 million tons per annum of KMG crude to Lithuania, a Transneft source told RJ. But to operate profitably, the refinery needs between 7 to 12 million tons. According to Sergei Grigoriev, Transneft’s spokesman, his company could deliver to market up to 17 million tons of KMG oil annually. It was not doing so, he claimed, because KMG had failed to “fulfill its obligations in the intergovernmental agreement between Russia and Kazakhstan. Kazakh officials claimed this was camouflage for an attempt to pressure the Lithuanians to select a Russian supplier, and was “not in line with open market principles”. KMG claimed that, if selected, it would despatch its crude by tanker to Mazeikiu, if Transneft persisted with its cutoff threat.
In what then appeared to be further retaliation against Moscow, the President of Ukraine, Victor Yushchenko, announced a scheme of his own to induce KazMunaiGaz to ship oil across the Caspian and Black Seas to the Ukrainian terminal at Yuzhny, near Odessa. This oil would then be pumped northwards, Yushchenko claimed, to Poland, and onwards from there to Mazeikiu, if KMG’s bid for the refinery won acceptance.Yushchenko’s move returned to earlier Ukrainian proposals to pipe non-Russian crude northwards through the Odessa-Brody pipeline, rather than Russian crude southwards. It is the latter direction which is currently operational, supplied by Russian oil producers. Yushchenko’s scheme didn’t survive the collapse of his political support; the raising of Russian gas prices; and new parliamentary elections which have returned to power the pro-Russian prime minister, Victor Yanukovych.
The situation today is that Lithuania has lost its crude oil supply, and Ukraine is gaining transit fees and tanker revenues from the Lithuanian loss. Boris Biryukov, a spokesman for Yuzhniy port, in Ukraine, told The Russia Journal last Thursday that for the month of August he has been promised, and is getting “additional oil from Transneft”; but he refused to identify the additional volumes. Industry sources claim Yuzhniy is receiving an additional 300,000 tons this month (68,000 bd). Odessa port confirmed that it will receive 970,000 tons of crude from Transneft, piped southward from the Druzhba; this is 420,000 tons (95,000 bd) more than previously planned. Alexey Bezborodov, a Russian maritime analyst, told The Russia Journal “this is a likely reorientation of flows from Transneft, as they have to put the Druzhba oil somewhere.”
Pipeline deliveries to Belarus, another neighbour, have been unaffected by the Lithuanian cutoff.
Lithuanian industry sources say that, although it will raise the cost of production, for as long as the Russian shutoff lasts, the refinery will be supplied by tanker deliveries to Butinge. Tanker deliveries were what made Mazheikiu a losing business for Williams a decade ago.
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