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. Last Updated: 07/27/2016

Oil Majors Close In on Latvian Refinery

Russian oil companies are trying to pressure Latvia into selling them a key Baltic oil terminal -- which until this year was their main outlet to north European markets -- by starving it of crude supplies, industry sources say.

And the signs are the Latvians, who have always relied entirely on Russian oil to keep the Ventspils terminal in business, may be about to capitulate.

"Ventspils is set to move under Russian ownership and serve again as a perfect export route," a high-level source in a Russian oil major said.

One thing is certain. Latvia's Baltic coast terminal is doomed to stand idle without Russian oil, traditionally supplied through a pipeline operated by Russian state firm Transneft.

"Ventspils is dying. October will be disastrous," said a Western trader regularly lifting oil from Ventspils.

Russian firms have already successfully pursued similar tactics in neighboring Lithuania, where after a virtual blockade Yukos acquired a local refinery. The oil there is now flowing again.

Latvia's Ventspils is even more important for Russian firms.

While oil prices are high, they can forego sending crude by pipeline to Ventspils and send it instead by more costly routes such as rail. But if prices drop, Ventspils will be vital again.

Oil has always been a powerful lever in Moscow's relations with Riga after Latvia regained its independence in 1991, but powerful Russian oil majors had always opposed cutting oil flows through Latvia as Ventspils has long been the only large northern export outlet for Russian crude.

But that all changed last year after Transneft built a large export port in Primorsk on the Gulf of Finland and rerouted volumes from Ventspils to Primorsk and Butinge in Lithuania, a Baltic state enjoying better relations with Moscow.

However, traders say the world's second largest oil exporter, with output approaching 8 million barrels per day and exports running above 4 million bpd, could have easily supplied both Ventspils and the new routes with healthy volumes.

Traders also attributed Ventspils' recent problems to a row over supply coordination between Transneft and the Energy Ministry. Transneft coordinates oil supplies to all major ports except for Ventspils, still under the ministry's supervision.

"Transneft keeps flexing its muscles," another trader said.

And Russia's top oil firms, in a break with their normal practice, have refrained from criticizing Transneft despite a vital need for export routes to ship their booming oil output.

Transneft will load only three 100,000-metric-ton cargoes from Ventspils in October compared with 10 to 15 tankers in the past.

Ventspils is able to ship 1 million bpd of oil a year, but handled only 11.8 million tons (310,000 bpd) of oil and products in January-September, down 32 percent year on year. Transneft's crude oil shipments plunged to 6.9 million tons from 11.2 million in January-September 2001.

"We attribute the drop to Transneft as it is seeking to expand beyond Russian borders," said Valery Nesterov from Troika Dialog brokerage. A Transneft source confirmed the oil shortage has pushed Ventspils into more active talks with Russian firms. "We are not holding direct talks with Ventspils but Russian firms are pushing us toward buying into the terminal," he said.

"Transneft's participation in Ventspils' charter capital could help optimize Russian crude exports," said Vagit Alekperov, head of top Russian oil producer LUKoil.

The Latvian government has said it wants to sell its remaining 38.82 percent in Ventspils Nafta, the firm that controls the terminal. Industry sources say Ventspils Nafta's main shareholders, a group of private investors, are holding separate talks after giving up hope of raising oil supplies.

"Ventspils' owners know Russians will not boost supplies until they have a majority stake," a Western trader said.