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. Last Updated: 07/27/2016

Mazeikiu Pipeline's Future in Doubt

bloombergSemyon Vainshtok in May 2003
Russia could be forced to close down the pipeline that feeds the Mazeikiu refinery in Lithuania because it is more than 40 years old and constructed with banned metals, said Semyon Vainshtok, the president of pipeline monopoly Transneft.

Transneft halted supplies to the refinery following an oil spill along the Druzhba-1 route two weeks ago. Refineries in Belarus along the pipeline route are still being fed. But Mazeikiu has been left high and dry after a pressure cut was enforced in the wake of the accident, starving the refinery of revenue just weeks after it was bought by Polish energy company PKN Orlen.

In his first public comments since the spill, Vainshtok said Transneft could be forced to shut down the pipeline altogether, pending the outcome of an investigation. "This could happen," he said in an interview at Transneft's sleek Moscow headquarters on Monday.

"You understand that the lifespan of a pipeline according to industry norms is 30 years. Druzhba-1 is 42. ... It is made out of metals that are now forbidden," he said.

The accident in the Bryansk region earlier this month highlighted fears over corrosion in Russia's aging pipeline system. But the subsequent cutoff of supplies to Mazeikiu has also provoked accusations that the monopoly is playing hardball power games to force Mazeikiu into Russia's fold and away from outsiders like Orlen.

When Orlen stepped in to buy the refinery in May from embattled oil firm Yukos, a Russian court-appointed bankruptcy manager attempted to block the sale. One of Yukos' largest creditors, state-controlled oil firm Rosneft, is believed to be eyeing Mazeikiu.

A person familiar with the negotiations said on condition of anonymity that the Russian government indicated it would only give the go-ahead for supplies if Mazeikiu went to an approved buyer.

In what was also seen as an attempt to win control over all routes west, 3 1/2 years ago Transneft shut off supplies to Latvia's Ventspils port and rerouted oil to its own Baltic terminal in Primorsk.

Alexei Grigoryev, an environmental expert with the International Social and Ecological Union who visited the site of the Bryansk spill, said it looked smaller than two other worse incidents in Russia earlier this year. "This was a medium-size spill," Grigoryev said. "The condition of the pipeline looked extremely doubtful, but I suspect that a significant part of Transneft's network is in a similar state."

Orlen could not be reached for comment Tuesday, a public holiday in Poland and Lithuania. Orlen president Igor Chalupiec called on Transneft on Friday to resume supplies soon or risk its reputation as a reliable partner.

Vainshtok denied the recent cutoff to Mazeikiu had anything to do with politics and said it was only down to the accident caused by the pipeline's age.

"We are an apolitical company," he said. "Thank God we were able to contain the consequences of the accident. But the oversight agencies, which are becoming stricter and stricter every year, have forbidden us to work [with the pipeline] at high pressure."

The future of Druzhba-1, Vainshtok said, now depends on the instructions of an independent institute charged with examining its safety. The most likely outcome would be to maintain the limits currently imposed on the volume of oil shipped through the pipe while Transneft builds a new pipeline parallel to the existing one, he said. Such an outcome would mean that Mazeikiu could be left without supplies for years to come. Belarus, meanwhile, would continue to receive supplies.

Vainshtok said he could not say how long it would take for Mazeikiu to be brought back on line. Officials at the Moscow-based institute leading the study, VNIIST, could not be immediately reached for comment.

Transneft has already shut down 12 million to 13 million tons of annual export capacity in the Druzhba pipeline to reduce pressure, Vainshtok said. Closing it down completely would cost Transneft another 19 million tons in lost capacity, he said.

Alexei Babushkin / Itar-Tass
A Bryansk region Druzhba installation in 2004, when the pipeline turned 40.
Transneft can replace the lost pipeline capacity by beefing up supplies to the south by another 5 million tons, as well as by speeding up efforts to build a new 80 million-ton pipeline east to markets in China and Japan, Vainshtok said. Transneft has already been rerouting supplies south since the spill.

"We need to hurry with the East. If we start up the eastern route we will not have any problems. We can shut down [Druzhba-1] and spend many years rebuilding it," Vainshtok said.

Transneft has already laid the first 175 kilometers of the 4,100-kilometer pipeline east from Surgut to Skvorodino in the Far East and intends to finish construction on schedule by the end of 2008.

Transneft also intends to make up for the shortfall by sending another 5 million tons through its Baltic pipeline system, Vainshtok said, confirming a company announcement made last week.

The Druzhba-1 spill prompted concerns about Russia's aging pipeline system and caused a temporary surge in oil prices because of fears over security of supplies.

At an energy conference last week, U.S. Deputy Assistant Secretary of State Matthew Bryza called Russia's creaking pipeline network "a serious issue" and called for major investments to repair it.

During Monday's interview, Vainshtok said those fears over Transneft's network were "groundless" even though Druzhba-1 might have to be replaced. The company is investing more than $1 billion per year in replacing its aging pipelines, many of which were built in Soviet times, he said.

Those investments have reduced the proportion of the company's outdated pipelines from more than 50 percent to 47 percent, Vainshtok said.

Of this 47 percent, most were still under 30 years old, Transneft vice president Sergei Grigoryev said.

Druzhba-1 is the oldest major export route in Transneft's network, he said, while the branch of the Druzhba pipeline heading south is much less problematic as it was built a decade later.

Western experts polled Monday said they were still suspicious of the cutoff to Mazeikiu, even though Druzhba-1 could well be aging fast. "It's very strange that this happens right after there's an agreement for a non-Russian company to buy Mazeikiu Nafta," said Keith Smith, a former U.S. ambassador to Lithuania and currently a senior associate at the Washington-based Center for Strategic and International Studies.

"One way to remove any suspicions would be to have an independent pipeline group inspect the pipeline," he said.

Vainshtok denied speculation that Transneft had become a target of hard-line forces in the Kremlin, saying an investigation by prosecutors into trading in the company's preferred shares had no impact on the company's activity. Since the investigation began in May, trade in the company's shares has been frozen.

"There is no more secure lender in the country than Transneft, regardless of whether our shares have been frozen," he said, adding that he saw no chance of the shares being annulled. "The investigation will end and the shares will be returned to the market," he said, repeating earlier assertions that the probe had targeted the monopoly's former management and not the current team.

He denied speculation that his deputy in charge of exports, Sergei Yevlakhov, had been forced to resign by hard-liners. Yevlakhov stepped down from his post in April together with Oleg Gordeyev, a deputy head at the Federal Energy Agency. Yevlakhov was reinstated to his post in late June.

"Employees come and go. This is natural," Vainshtok said. "But no one has been appointed from the law enforcement agencies and no one has been fired on the orders of law enforcement officers."

As for himself, Vainshtok said his position at Transneft was -- as always -- in the hands of its main shareholder, the state.

"My deep conviction is that a hired manager should understand that he is a hired manager and not the owner of the company, and he should be ready for any order from the main shareholder to leave the company," Vainshtok said. "Considering this, I am always ready to go."