VZCZCXRO1293
PP RUEHAG
DE RUEHVL #0801/01 2371416
ZNY CCCCC ZZH
P 251416Z AUG 06
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 0532
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0019
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 VILNIUS 000801 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NB, EUR/NCE, EB/ESC 
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/BOHIGIAN 
NSC FOR GRAHAM, MCKIBBEN AND COEN 
TREASURY FOR LOWERY, LEE AND COX 
 
E.O. 12958: DECL: 08/24/2021 
TAGS: ENRG ECON PREL XG VE
SUBJECT: MAZEIKIU NAFTA REFINERY LEARNING TO LIVE WITHOUT 
RUSSIA'S PIPELINE 
 
REF: A. VILNIUS 727 AND PREVIOUS 
 
     ¶B. MOSCOW 8340 
     ¶C. VILNIUS 774 
 
Classified By: POL/ECON Section Chief Rebecca Dunham for reasons 1.4 (b 
) and (d) 
 
¶1. (C) SUMMARY:  Lithuania's Mazeikiu Nafta (MN) oil refinery 
is operating at full capacity, despite the recent cutoff of 
its most economic source of crude, via pipeline from Russia 
(refs A and B).  MN is currently using its Baltic Sea 
terminal at Butinge to offload its entire crude supply from 
tankers loaded mainly at Russia's Primorsk facility, but 
expects to supplement this with supplies delivered via rail. 
Senior MN officials expect to operate at near-full capacity 
in September, even though repairs to the Butinge terminal 
will put that facility out of service for nearly two weeks. 
MN remains optimistic about its prospects and continues to 
search for new supplies of crude in case the supply from 
Primorsk becomes unavailable.  Press reports suggest that 
some shipping companies are already coming under pressure to 
stop transporting Russian oil from Primorsk to Butinge.  The 
GOL is also finding it hard to maintain a consistent public 
relations message that avoids blaming Russia for the pipeline 
problems.  END SUMMARY. 
 
-------------------------- 
STILL RUNNING AT FULL-TILT 
-------------------------- 
 
¶2. (C) MN's General Director Nelson English told us on August 
17 that MN continues to operate at full capacity 
(approximately 840,000 tons of crude per month), even though 
its traditional supply of crude delivered by pipeline is no 
longer available because of the "accident" on the Druzhba 
pipeline (refs A and B).  He said that eight vessels (at 
approximately 100,000 tons of crude each) will offload at 
Butinge in August and that he expects another six to offload 
in September.  He added that in September MN will also start 
receiving some 20,000 tons of crude per month by rail from 
Ukraine and that MN was also exploring the possibility of 
receiving rail-delivered crude from Kaliningrad as well.  He 
said that the outlook for October was also good and that MN 
would continue to look for non-Russian crude supplies 
(including from Venezuela) to hedge against the possibility 
of crude supplies from Primorsk becoming unavailable. 
 
--------------------------------------------- -- 
REPAIRS WILL LOWER SEPTEMBER PROCESSING TARGETS 
--------------------------------------------- -- 
 
¶3. (C) The long-planned replacement of Butinge's damaged 
single-point mooring (SPM) buoy will prevent MN from 
offloading any crude for at least 12 days in early September. 
 English emphasized, however, that MN still expects to 
process more than 700,000 tons of crude in September, only 20 
percent below its capacity.  He said that MN could easily 
obtain enough crude to operate at full capacity in September, 
but the combination of the SPM buoy replacement and MN's 
limited storage capacity will curb MN's production that month. 
 
--------------------------------------- 
CUTOFF MAY BE PERMANENT, BUT WHO CARES? 
--------------------------------------- 
 
¶4. (U) Local press, citing various Russian media sources, 
reported August 16 that the pipeline that used to supply MN 
may never reopen.  These reports suggest that Transneft will 
focus on increasing the capacity of its Baltic Pipeline 
System that supplies Primorsk rather than on making repairs 
to the aging pipeline that supplies MN.  Local press also 
carried PKN Orlen Chair Igor Chalupec's August 11 comments 
that, despite the supply issues, he remains committed to the 
purchase of MN.  (One local paper with a reputation for 
scandal-mongering also mentioned a Chalupec statement that 
PKN could legally withdraw from the deal before December 31, 
if the value of MN dropped sharply, but it is not clear when 
or under what circumstances Chalupec made this statement, if 
at all.) 
 
VILNIUS 00000801  002 OF 003 
 
 
 
¶5. (C) English told us that MN can and will continue to 
operate as if it expects the pipeline to remain closed for 
the indefinite future.  He stressed that MN was still 
learning how to operate using only tanker-offloaded crude and 
that it was only going to get better and more efficient at 
it.  He emphasized that he remains confident that MN will 
remain able to obtain the necessary crude supplies, saying 
"there is almost no way we can run dry or have to shut down." 
 
-------------------------- 
AN UNFORTUNATE PR INCIDENT 
-------------------------- 
 
¶6. (C) As we reported in ref C, much of the Lithuanian 
national security establishment, including Foreign Ministry 
Under Secretary Albinas Januska, continue to tell us that 
they are abiding by the advice from USG energy consultant 
Steve Hellman to refrain from commenting publicly on the 
pipeline issue.  Less than 24 hours after Januska talked with 
the Ambassador about this, however, he reportedly told 
Russian Embassy's Charge Dmitry Tsvetkov that if the 
"repairs" to the damaged pipeline were not carried out 
expeditiously, the Lithuanians may begin repairs on the rail 
link that connects Kaliningrad with Belarus (and by 
extension, Russia proper).  These repairs, Januska reportedly 
told Tsvetkov, would necessarily reduce the amount of 
"special cargo," especially military cargo, that transit this 
stretch of railway.  (An MFA source we contacted after the 
story hit the wires would not confirm the story, but he 
pointedly did not deny it, either.  A different GOL source 
told us that Januska later told the PM that his comments were 
directed not at the pipeline situation, but towards gaining 
leverage on negotiations with the Russians over rail tariffs.) 
 
¶7. (C) The President's office and the Prime Minister quickly 
issued public statements distancing the GOL from Januska's 
thinly veiled threats and emphasized that the national 
railway company alone is responsible for deciding if and when 
any repairs to the country's rail network are necessary. 
Prime Minister's advisor Saulius Specius told us August 24 
that the PM wants to avoid politicizing the pipeline issue 
and wants instead to focus on painting the situation as an 
opportunity for MN to become an independent operation, no 
longer dependent on one source of supply.  Similarly, 
presidential advisor Nerijus Udrenas told us August 24 that 
President Adamkus also sees no advantage in publicly blaming 
Russia for the "accident." 
 
¶8. (C) Both Specius and Udrenas emphasized, however, that it 
will become increasingly difficult for the GOL to avoid 
appearing embarrassingly naive if the press continues to 
highlight the "accident."  Both recognized that it may well 
be in Russia's long-term interest to focus its resources on 
developing its export routes through Primorsk and to China at 
the expense of MN, but noted that this explanation is 
unlikely to satisfy everybody here -- especially those that 
want to highlight Russian malfeasance towards Lithuania. 
 
--------------------------------- 
THE START OF THE PRIMORSK CUTOFF? 
--------------------------------- 
 
¶9. (C) Local press reported August 18 that some shipping 
companies currently transporting crude from Primorsk to 
Butinge have noticed the first signs of Russian pressure 
against this activity.  The article alleges that these 
shipping companies have received unspecified "signals" from 
Specnefteport (the company that runs the Primorsk port) that 
if they want to continuing loading in Primorsk they will need 
to avoid offloading at Butinge.  State Department Advisor 
Steve Hellman told us August 18 that some oil companies are 
coming under pressure to include clauses in their contracts 
with shipping companies that specifically exclude Butinge as 
a destination for crude from Primorsk.  Both Specius and 
English have told us that they expect the Russians to cut MN 
off from Primorsk at some point and that MN is actively 
planning to manage this possibility. 
 
 
VILNIUS 00000801  003 OF 003 
 
 
------------------------- 
ANOTHER REGULATORY HURDLE 
------------------------- 
 
¶10. (C) Specius told us August 22 that lawyers hired by PKN 
Orlen and MN have advised that PKN's purchase of MN will need 
approval not only from the European Commission's 
DG-Competition (a process that has already begun), but also 
from competition authorities in the United States and 
Ukraine.  Specius said that the lawyers advised that the 
processes in these countries -- both significant markets for 
MN's production -- would be unlikely to derail the deal. 
Specius added that the lawyers planned to submit the 
necessary paperwork to the U.S. authorities sometime between 
August 28 and September 1. 
 
------- 
COMMENT 
------- 
 
¶11. (C) Januska's reported comments are not particularly 
helpful, but they are understandable -- Lithuania's leaders 
do not want the public to view them as naive or helpless in 
the face of what many Lithuanians view as yet another Russian 
attempt to use energy as a political tool.  Once Lithuania's 
political class returns from vacation at the end of August, 
the GOL will come under increasing pressure to "do 
something," and Januska may have made these comments to blunt 
some of this pressure. 
 
¶12. (C) The GOL, however, may be able to turn this situation 
to its -- and Lithuania's -- ultimate advantage.  If MN 
successfully secures non-Russian supplies of crude and MN 
continues to remain fully supplied, operational, and 
profitable without the pipeline or Primorsk, the GOL will be 
able to argue that Lithuania has become less dependent on 
Russian energy. 
CLOUD