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. Last Updated: 07/27/2016

Lithuania Stalls Mazheikiu Nafta Sale

VILNIUS, Lithuania -- Lithuanian state-owned oil concern Mazheikiu Nafta, a cornerstone of the Baltic state's economy, appeared to face an uncertain future Tuesday after a deal to sell the firm to U.S. energy group Williams was abruptly put on hold.

Prime Minister Rolandas Paksas said Monday evening that the deal - which sees Williams taking 33 percent and operational control of Mazheikiu for $150 million and an option for a majority stake over 7 years - would place too much of a financial burden on the Baltic nation.

Then on Tuesday, Finance Minister Jonas Lionginas and Economy Minister Eugenijus Maldeikis, who headed the government's negotiations with Williams, resigned after the Cabinet voted to continue talks instead of agreeing to wrap up the sale of the Mazheikiu Nafta stake.

Williams refused to comment on the announcement, saying only that it was surprised to hear such news after five months of talks with Paksas.

With some $350 million in funding from the government required to recapitalize a company that has been running heavy losses for over a year, the short-term burden on the state is large, especially as revenues have fallen short this year.

But long-term benefits may outweigh them.

Mazheikiu Nafta - an 88.5-percent state-owned enterprise consisting of a refinery, pipeline system and crude oil terminal - is estimated to contribute some 10 percent of gross domestic product and 20 percent to 25 percent of total tax revenues.

It was the country's largest enterprise in terms of turnover in the first half of 1999 even though turnover slumped to 1.08 billion litas ($252 million) from 1.44 billion a year ago.

But the firm's first half loss also soared to 47.2 million litas from 20.7 million litas, due in large part to a pair of cutoffs in Russian crude supply that left the refinery dormant for almost three weeks.

With Lithuania's economy having more difficulty than expected righting itself from last year's Russian crisis, a stable Mazheikiu could provide the groundwork for a recovery.

The interruptions in getting supplies from Lithuania's sole source, Russia, highlighted for many politicians the importance of being energetically independent of its former Soviet ruler.

The Butinge terminal - a 160,00 barrel per day on-shore terminal with a floating buoy - provides just that, as it operates most profitably exporting Russian crude into Western markets, but can just as easily import crude for local refining.

Its start-up this summer was a major national event, politically as much as economically, and Williams' plans to increase capacity up to 12 million tons annually would help relieve the over $170 million in debt racked up to pay for the $280 million terminal.

With Butinge dependent upon fickle Russian supply, and currently offline for final construction, the Naftoteikis pipeline system - which runs from the Belarus border to the refinery in Mazheikiai and Latvia's Ventspils Nafta port - is the only stable element of the merged complex.

Shipments in the nine-month period totalled 17.5 million tons of crude and diesel product, the majority of that crude heading to Ventspils. In the same period a year ago, throughput was 17.8 million.

But the undisputed crown jewel of the system is the refinery, planned with a design capacity of 15 million tons of crude per year but currently capable of only 12 million tons.

It was built in 1980 to supply the entire Baltic region and parts of northeastern Soviet Union, but now exports normally about two-thirds of its production, most of that destined for neighboring Latvia or Western Europe.

However, due to smaller than necessary crude imports from Russia, the plant now has enough feedstocks only for the coming week, with further supply in doubt after key exporter LUKoil said it wanted the refiner to offer better terms.

The $150 million cash injection from Williams in addition to the government lending would help financially right the company.

The funds would also help launch a planned $700 million capital investment program needed to upgrade the refinery to meeting Europe 2000 oil product standards. Without the renovation, the Western markets may dry up quickly.