VZCZCXRO0909
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV
DE RUEHVL #0727/01 2161512
ZNY SSSSS ZZH
O 041512Z AUG 06
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0450
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHTA/AMEMBASSY ALMATY PRIORITY 0153
RUEHCV/AMEMBASSY CARACAS PRIORITY 0014
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUEHTRO/AMEMBASSY TRIPOLI PRIORITY

S E C R E T SECTION 01 OF 05 VILNIUS 000727 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NB, EUR/NCE, EB/ESC 
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: 08/03/2031 
TAGS: ENRG ECON PREL LH XG VE LY
SUBJECT: LITHUANIA'S CHOICE:  FIGHT OR SURRENDER ITS 
REFINERY TO THE RUSSIANS 
 
REF: A. VILNIUS 711 AND PREVIOUS 
     ¶B. VILNIUS 285 
     ¶C. WARSAW 1336 
 
VILNIUS 00000727  001.2 OF 005 
 
 
Classified By: Economic Officer Scott Woodard for reasons 1.4 b and d 
 
¶1. (S) SUMMARY:  Lithuania and its Mazeikiu Nafta (MN) oil 
refinery need to decide how to proceed, now that an 
"accident" has resulted in a complete cutoff in the 
refinery's pipeline-delivered supply of Russian crude.  State 
Department Advisor Steve Hellman framed this issue for the 
Lithuanians during his very timely and helpful visit, and 
sketched out strategies and tactics that Lithuania can employ 
if it chooses to resist this apparent Russian attempt to 
squelch the sale of MN to Poland's PKN Orlen and ensure that 
the refinery ends up in Rosneft's hands.  MN's leadership 
says that it can supply the refinery profitably by tanker, 
and the GOL seems willing to support this effort.  Lithuanian 
officials very much appreciated Hellman's visit (and the 
USG's willingness to send him), and clearly intend to lean on 
his industry expertise as they manage the challenge ahead. 
End Summary. 
 
------------------------------- 
ASSESSMENT OF CURRENT SITUATION 
------------------------------- 
 
¶2. (S) During his August 2-3 visit to Lithuania, State 
Department Advisor Steve Hellman told his interlocutors that 
MN should not expect any crude shipments via pipeline in the 
foreseeable future.  He said that, according to his sources 
in Russian industry and government, the Kremlin -- 
specifically Igor Sechin, Rosneft's chair and Deputy Head of 
Russia's Presidential Administration -- had ordered MN's 
supply cut off and that the end-of-July pipeline "accident" 
near Bryansk, Russia was in fact the execution of this order. 
 Hellman advised that influential Russians openly spoke of MN 
as "Rosneft's refinery" and that members of Russia's "oil 
vertical" (nefti vertikal) believed that "their" share of 
this bit of Yukos's former empire amounts to USD 3 billion, 
which they intended to start collecting by taking over the 
refinery.  The crude cutoff, Hellman said, was the first step 
of the Russians' plan.  No amount of negotiation or 
diplomatic pressure at any level, Hellman advised, would 
result in a re-opening of the pipeline to MN at this time. 
(Note:  The Lithuanian press, citing Transneft officials, 
reports that the damage to the pipeline will take 9-12 months 
to repair.) 
 
¶3. (S) Underlying the Russians' strategy, Hellman said, is 
the belief that MN cannot supply itself without the pipeline. 
 Hellman added that not all members of the Russian oil elite 
share this view, specifically citing various Transneft 
officials and other technical experts, but emphasized that 
those who believe that this strategy will work do. 
 
¶4. (S) Hellman also explained that Russia's actions towards 
MN are only one facet of a much broader Russian energy 
strategy.  He told his interlocutors that Russia has been 
using similar strong-arm tactics in many countries on 
Russia's periphery, including Slovakia, Hungary, Italy, 
Greece, Serbia, Ukraine, Azerbaijan, Georgia, Turkey, 
Uzebkistan, and Turkmenistan.  The ultimate goal, he said, 
was to achieve Russian domination of the European energy 
business.  Hellman encouraged the GOL to reach out informally 
to these countries and share experiences and strategies for 
dealing with Russian pressure on energy. 
 
--------------------------------------- 
LITHUANIA'S CHOICE:  FIGHT OR SURRENDER 
--------------------------------------- 
 
¶5. (S) Hellman said that Lithuania (and MN) therefore faced a 
choice.  As one option, Lithuania could capitulate and 
arrange for a way for Rosneft to take over MN.  He admitted 
that this choice would probably cost Lithuania less in the 
short run.  He emphasized, however, that it would turn out to 
be far costlier to both Lithuania and Europe over the longer 
 
VILNIUS 00000727  002.2 OF 005 
 
 
term, because Russia would likely use this foothold inside 
the European Union to undercut European refined oil 
retailers, beginning with Poland's PKN Orlen.  He said that 
MN's capacity for exports (only about half of its capacity is 
necessary to supply the markets of Lithuania, Latvia, and 
Estonia) meant that Russia could supply MN with crude at 
rock-bottom prices that would allow the refinery to undercut 
retail prices in other markets, starting with Poland.  Once 
PKN Orlen found itself unable to compete with a Russian-owned 
MN, Hellman surmised, PKN Orlen's value would drop, creating 
an opportunity for a Russian firm to take it over.  With 
Poland in the bag, Hellman said, the German market would be 
the next target.  The end result: customers in Lithuania and 
elsewhere would end up subject to the whims of a Russian 
energy monopoly that controlled both supply and distribution. 
 
¶6. (S) Lithuania's other alternative, according to Hellman, 
would be to fight by demonstrating that MN can function 
perfectly well without the pipeline.  This strategy, Hellman 
cautioned, could prove expensive in the short run, but had a 
very good chance of succeeding, and would likely prove less 
expensive over the long run than the capitulation option. 
Once MN established itself as a successful economic entity 
without the pipeline, Hellman said, the internal debate among 
Russia's oil elite would shift in favor of its more 
enlightened members, leading eventually to the possibility 
for Lithuania and/or PKN to cut some kind of deal to restore 
the flow through the pipeline. 
 
--------------------- 
TACTICS FOR THE FIGHT 
--------------------- 
 
¶7. (S) Hellman suggested several tactics that the GOL and MN 
should pursue, should they choose to fight: 
 
-- Take all necessary steps to ensure that MN can be supplied 
effectively via its Butinge terminal, including constructing 
additional storage facilities (a typical tanker-supplied 
refinery would have ten times the storage capacity MN has 
now, according to Hellman); 
 
-- Understand that MN may need to supply itself solely via 
Butinge for an indefinite period -- at least for the next 
6-18 months; 
 
-- Expect that Russia will also move to prevent MN from 
obtaining crude via tanker from Primorsk; this means that MN 
needs to enhance its trading expertise so that it can more 
efficiently obtain the non-Russian crude available in the 
Northern European market; 
 
-- Enhance the refinery's ability to operate effectively 
using different types and blends of crude (to date, MN has 
only operated only on Urals crude); 
 
-- Upgrade physical security and safety procedures at MN -- 
and especially at Butinge -- to guard against sabotage and 
accidental oil spills; 
 
-- Ensure (including through bookkeeping legerdemain) that MN 
remains profitable, so that Lithuania will be negotiating 
from a position of strength when the time is right to discuss 
the issue with the Russians; 
 
-- Follow a public relations strategy that emphasizes a 
constructive Lithuanian-Russian joint effort to address the 
pipeline supply problem and avoid any suggestion that the 
"accident" is anything other than an unfortunate mishap; 
 
-- Emphasize close GOL/MN cooperation to ensure that 
bureaucratic bottlenecks do not hamper MN's ability to 
function effectively, for example, by expediting the process 
of issuing the licenses necessary to build additional storage 
capabilities; 
 
-- Recognize that Russia will be losing the capacity to 
export approximately 500,000 barrels of crude per day 
 
VILNIUS 00000727  003.2 OF 005 
 
 
(250,000 to MN and 250,000 to export via Butinge, worth a 
total of about USD 15 million) and that this will depress its 
own domestic market, causing real pain for many in the oil 
business there; and 
 
-- Urge the European Commission's DG-Competition to consider 
expeditiously PKN Orlen's application for approval to 
purchase MN so that PKN can complete this transaction as soon 
as possible. 
 
¶8. (S) Hellman said that if Lithuania successfully implements 
these tactics, the Russians should be willing -- probably in 
6-18 months -- to start talking indirectly about how to 
reopen supplies to MN via pipeline.  At that point, he said, 
Lithuania (and MN and perhaps PKN) will need to decide 
whether or not they will be willing to pay the price the 
Russians will demand, which will likely consist of a few 
billion dollars for "repairs" to the pipeline and lucrative 
contracts with, or side payments to, various businesses with 
close ties to key decision makers. 
 
------------------------------------------- 
PKN NEEDS TO STAY ON THE SIDELINES, FOR NOW 
------------------------------------------- 
 
¶9. (C) Hellman said that PKN will be unable to provide any 
real assistance to Lithuania or MN at present.  To do so, he 
said, would violate EU anti-competition rules, virtually 
guaranteeing that DG-Competition would reject PKN's purchase 
of MN. 
 
--------------------------- 
GOL RESPONSE:  NO SURRENDER 
--------------------------- 
 
¶10. (S) Hellman met with all the key Lithuanian players on 
this issue.  Their initial reactions suggest that the GOL is 
unlikely to hand over MN to the Russians.  Saulius Specius, 
advisor to the Prime Minister and one of the GOL's 
negotiators on the sale of MN to PKN, said that there was no 
legal way at this point to hand over the refinery to the 
Russians, even if the GOL wanted to.  Simonas Satunas and 
Nerijus Udrenas, who advise President Adamkus on foreign 
policy and economic issues, respectively, also suggested that 
the GOL was unlikely to capitulate, especially if there were 
a realistic chance for MN to supply itself effectively via 
Butinge. 
 
¶11. (S) Hellman swayed Albinas Januska, an MFA Under 
Secretary and one of the country's top foreign policy and 
 
SIPDIS 
national security strategists.  Januska intimated that the 
GOL intended to go public about Russian machinations in order 
to bolster the Polish-Lithuanian case for a Common Energy 
Policy in the EU.  After hearing Hellman's pitch, however, he 
said he was "convinced" that the GOL should follow the 
approach outlined above.  Januska asked, and Hellman agreed, 
to stay in touch with Hellman, and asked him to return to 
Lithuania in September if necessary. 
 
¶12. (S) Januska also added some interesting information about 
the end-game of MN's sale earlier this year.  He said that 
Kazakh leader Nazarbayev called then-PM Brazauskas several 
times in early 2006 to try to sway him to sell MN to 
KazMunayGaz.  Last May, four days before a New York 
Bankruptcy Court ruling on Yukos assets cleared the way for 
the sale, Putin called Nazerbayev and convinced him to pull 
KazMunayGaz out of the competition.  Januska said that 
KazMunayGaz officials pleaded with Brazauskas to call 
Nazerbayev to allow them to carry on with the competition, 
but he declined, arguing that Nazerbayev would not defy Putin 
over an issue of this magnitude. . 
 
¶13. (S) We detected one exception to the impulse to resist 
Russian pressure.  The outlier was Under Secretary Anicetas 
Ignotas at the Ministry of Economy.  Ignotas told Hellman 
that he believed that MN would be unable to supply itself via 
Butinge and still operate effectively.  While he expressed 
the hope that PKN would be able to find a way to complete its 
 
VILNIUS 00000727  004.2 OF 005 
 
 
purchase of MN and be successful.  He said that he was 
resigned, however, to the fact that Lithuania would always be 
vulnerable to Russia on energy issues and that Lithuania 
therefore needed to maintain good relations with its large 
neighbor.  (Note: Ignotas usually does not cover MN issues, 
but he is covering the portfolio due to a recent resignation. 
 We expect Vytautas Nauduzas, currently Ambassador to Turkey 
and known to be close to Januska, will take over this 
portfolio at the Ministry in early September.) 
 
-------------- 
MN'S RESPONSES 
-------------- 
 
¶14. (C) MN officials, including General Director Nelson 
English and Chairman of the Board Nerijus Eidukevicius, 
assured Hellman that MN was fully capable of supplying itself 
via Butinge.  They said that Butinge had a theoretical 
capacity to offload about 12 million tons/year, but 
considerations of weather and sea conditions in the Baltic 
(Butinge cannot offload if waves are 1.5 meters or higher) 
meant that 10 million tons/year was a more realistic 
estimate.  They said that this capacity exceeded MN's 
projected annual needs, which they estimated at 8.6 million 
tons for 2006. 
 
¶15. (C) English said that MN had already lined up seven 
tankers (carrying approximately 100,000 tons of crude each) 
for August and another eight or nine for September, all 
delivering Urals crude loaded in Primorsk.  Offloading each 
ship, he added, took about 28-30 hours.  Delivery of these 
supplies, he said, would keep the refinery going at full 
capacity.  He added that MN's calculations indicated that 
this method of delivery was approximately USD 2.50/barrel 
more expensive than pipeline-delivered oil, but still allowed 
the refinery to remain comfortably profitable. 
 
¶16. (C) Addressing Hellman's concerns about MN's lack of 
adequate storage, English said that this was a problem and 
that MN and Butinge together had the capacity to store only 
about 10-12 days-worth of crude (340,000 tons), if the 
refinery was operating at capacity.  English added, however, 
that Butinge already had a foundation laid for an additional 
50,000-ton storage tank and that it would take approximately 
six months to construct if MN decided to move ahead with the 
project.  MN currently has no plans to expand its storage 
capacity beyond that. 
 
¶17. (C) English said he recognized the possibility that the 
Russians could also cut off MN from Russian crude loaded at 
Primorsk, but that as this is MN's most economic option 
(after the pipeline), MN will continue buying from Primorsk 
as long as possible.  Several Russian producers, he said, 
were obviously nervous about doing business with MN, 
presumably because of their concern that they would come 
under pressure from the Kremlin to cancel their contracts 
with the refinery. 
 
¶18. (C) English said that he was still exploring the options 
of obtaining crude from Venezuela, Libya, and elsewhere (ref 
B), but had nothing firm yet.  He noted that the Venezuelan 
deal could result in an arrangement to supply nearly a 
quarter of MN's annual needs at a price comparable to what MN 
was paying for pipeline-delivered Urals crude, but that he 
still considered this a long shot. 
 
------------------------------------- 
BUTINGE NEEDS TO REPLACE DAMAGED BUOY 
------------------------------------- 
 
¶19. (C) English explained that MN plan to replace its damaged 
buoy at Butinge in September, a process that he expects to 
take 12-14 days, if the weather cooperates.  During this 
time, he said, the terminal will be unable to offload any 
crude.  MN plans, however, to stock up as much crude as 
possible before the repairs begin and have tankers ready to 
offload as soon as the new buoy is in place. 
 
 
VILNIUS 00000727  005.2 OF 005 
 
 
------- 
COMMENT 
------- 
 
¶20. (S) Hellman's visit -- using a top industry expert with a 
USG security clearance to help an ally navigate an 
economic-commercial crisis with national security 
implications -- was transformational diplomacy in action.  It 
will empower to GOL to react soberly and intelligently to the 
cutoff of pipeline-delivered crude.  Hellman's interlocutors 
were impressed by his depth of understanding of the key 
issues, scribbling furiously (along with us) to note his 
suggestions and ideas. 
 
¶21. (S) The GOL and MN will ultimately have to decide for 
themselves how to proceed, but there is no doubt that 
Hellman's visit demonstrated tangible, credible, and 
much-appreciated USG support for Lithuania in a moment of 
need.  That said, even if the Lithuanians can implement many 
of Hellman's suggestions, the GOL will have an increasingly 
difficult time avoiding pointed questions about the 
"accident."  The press is already starting to question this 
explanation and the newly-formed, minority government may 
come under increasing attack from the conservative, 
anti-Russian opposition if it continues to characterize the 
cutoff as a mere accident. 
 
¶22. (S) We do not expect the Lithuanians to capitulate -- at 
least not yet.  MN will make every attempt to supply itself 
via Butinge and operate profitably.  If it should fail, 
however, we assess that it is not realistic to expect 
Lithuania to let its largest economic enterprise simply sit 
and rust.  Lithuania has allowed the Russians to buy MN 
before, when Yukos took over from Williams International. 
While it would be the first choice of almost no one here, 
there is always the chance that MN could become Russian again. 
 
¶23. (C) Steve Hellman did not have the opportunity to clear 
this cable. 
 
MINIMIZE CONSIDERED 
KELLY