Yukos Takes Over Key Baltic Refinery

The fallout from a U.S. company's financial troubles has made its way to the Baltics -- and Russia's second-largest oil company is capitalizing on the misfortune.

Yukos said Tuesday that it has agreed to buy out a stake in strategic Lithuanian refinery Mazheikiu Nafta held by Williams, an international energy company caught in a cash crunch.

Oklahoma-based Williams is to sell its 26.85 percent stake in the refinery for $85 million, according to a joint statement. As part of the deal, Yukos is to install its own management.

"Yukos is pleased to be able to increase its percentage ownership in Mazheikiu Nafta and assume management control," said Mikhail Brudno, first vice president of Yukos' refining and marketing division. "Yukos is making a commitment to Lithuania, and this transaction is further evidence of that commitment."

Faced with a liquidity crisis brought on by diving equity markets in the United States, Williams this summer embarked on a selling spree. Mazheikiu is the latest in a long list of sold assets that include pipelines and natural gas production facilities.

"When you are in the business conditions we are in at this point, you are forced to make some choices," said Williams spokeswoman Julie Gentz.

The beleaguered firm has not been able to turn a profit at the refinery since 1999, when it bought 33 percent of Mazheikiu in a controversial privatization. The refinery was in dire need of upgrades when it was privatized, and supply problems brought on by disagreements with LUKoil only exacerbated the financial situation. It reported second-quarter net losses of $349 million.

Yukos should prove more successful than Williams at managing the refinery because it will have the advantage of being the majority shareholder once the deal goes through, said Konstantin Reznikov, an analyst at Alfa Bank.

"With a controlling stake, it will be in a better position to quickly make decisions," Reznikov said. Before Yukos bought its original stake in Mazheikiu, the Lithuanian government and Williams had different goals for the refinery and different ways of approaching them, he said.

Tuesday's announcement did not catch many by surprise. Yukos' interest in Mazheikiu, the only refinery in the Baltics, became apparent last year, when it agreed to buy 28.6 percent for $75 million and to supply crude oil under a 10-year contract.

The current deal, however, still needs to be approved by the Lithuanian government, which in the past has been wary of putting economically vital assets in former Soviet hands. The government also has an option until the end of September to preempt Yukos and buy the stake itself.

Violeta Gaizauskaite, spokeswoman for Lithuanian President Valdas Adamkus, said the deal "pushes Lithuania into a complicated situation," Baltic news agency BNS reported Tuesday.

"The Lithuanian government is faced with a difficult task of balancing Western and Eastern investments in Mazheikiu Nafta and making the sale agreements more beneficial to Lithuania," Gaizauskaite said.

Lithuania's parliamentary chairman Arturas Paulauskas, however, said he approved of the deal.

"Parliament has made extensive efforts for Yukos to come to Lithuania, which means we trust them," Paulauskas said.

"I support the idea of Yukos buying the shares."

The government probably will not exercise their option to take back control, said Vladislav Metnyov, an analyst with Renaissance Capital, adding that the transaction would strengthen Yukos' export portfolio.

"This opens up export markets in Eastern Europe," Metnyov said. "While Yukos isn't short of refining capacity, many of its refineries are located in eastern Siberia, making sales to Europe impractical."