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. Last Updated: 07/27/2016

Oil Majors Negotiate Mazheikiu Deal

Russian oil giants Yukos and LUKoil are prepared to deliver up to 8.5 million tons of oil to Lithuania's Mazheikiu Nafta oil complex this year provided it offers good prices, but a supply agreement has yet to be reached.

Last year, the Lithuanian-American company - a refinery, pipeline and the Butinge crude terminal - complained it suffered massive losses because of several largely unexplained cut-offs in Russian crude supply, Reuters reported. Mazheikiu's nine-month pretax loss was estimated by the company at $40 million.

It wants more than 2 million tons of crude oil from Yukos and up to 6 million tons from LUKoil this year. The problem is the price.

"Mazheikiu's problem is that it does not offer the best prices in comparison with other export markets - they are always $1 or $2 [a barrel] lower," LUKoil spokesman Dmitry Dolgov said Tuesday.

"Last year, we had hoped we would participate in the privatization of the company, so we closed our eyes on prices while we thought of the future. But now, it is clear we are not participating in the privatization, the prices don't suit us any more. So, the price negotiations are quite tense."

"Of course, when we discuss terms of direct deliveries to Mazheikiu and they offer lower than market prices, it is seriously embarrassing," Yukos spokesman Pavel Yerasov said.

"Last year, it was a new market for us; we delivered only 500,000 tons there. This year, it may be up to 2.5 million tons. Together with exports to Poland, it may reach about a quarter of our total exports [set at about 17 million tons in 2000]," Yerasov said.

Mazheikiu declined Tuesday to comment on the terms of the agreement with LUKoil and Yukos, though it has said in an earlier statement it pays an "attractive" price.

Lithuanian newspaper Respublika, quoting unnamed sources, reported Tuesday that Yukos is negotiating the purchase of a 10 percent stake in Mazheikiu Nafta for $22.8 million in exchange for crude deliveries to the refinery and guarantees for export through the Butinge terminal.

Nikolai Bychkov, head of Yukos' refining and marketing division, did not deny such talks are under way. "If I were in the Lithuanian company's shoes, I would have offered us a certain stake, as a kind of insurance policy to secure stable supplies," he told reporters in Moscow on Tuesday.

Bychkov said it would be a shame to lose the Lithuanian market because "if Russian companies leave it, foreign oil producers will quickly take it."

Bychkov said Yukos is coordinating its sales policies in Lithuania with LUKoil and if LUKoil could achieve a better deal with Mazheikiu Nafta, Yukos would sell oil via LUKoil.

Neither of the spokesmen would speculate on when the negotiations will end, but according to earlier reports, the talks are scheduled to finish by the end of January.

The Lithuanian company is one-third owned and fully operated by U.S. oil giant Williams, which purchased its stake in Mazheikiu for $150 million last October. The remaining 59 percent stake belongs to the Lithuanian government.

Mazheikiu Nafta's terminal in Butinge, with a capacity of 160,000 barrels per day, was opened last summer, primarily to export Russian crude. But in November, it had to import oil to process at the refinery after oil stocks ran dry due to interrupted deliveries from Russia, Reuters reported.

In January, the company plans to import another 80,000 tons of North Sea oil for its refineries as Russian supplies have run out again.