The Baltic Course




Two Fingers of One Hand

Last October the American company Willams International clinched a deal with the Lithuanian government buying 33 percent shares stake and taking operational contro over the Lithuanian oil corporation Mazeikiu Nafta Co. Willams is eagerly trying to cultivate a positive image in the Baltics which was unfortunately spoiled soon after the company's first appearance selected: Williams decided to approach the Lithuanian government in secrecy and ignored the possibility of a public backlash. BC has addressed the Director General of Williams Lietuva, Randy Majors on conclusions and future plans of the American investor after the first five months of activities in Lithuania.

Inese Gaiks

- How would you describe the basic principles of successful and profitable business for Mazeikiu Nafta?

- The basic principle is a long-term, reliable and uninterrupted supply of crude oil. We must build long-term relationships with suppliers and oil product purchasers in order to maximise throughput and generate the best business atmosphere for our company.

- What is your vision of the future Lithuanian oil supply policy? How important a role will be played by the supply of crude originating in the North Sea?

- It's a fact that the Mazeikiu oil refinery was built to run on URALS crude oil. It is entirely natural that we should look to secure supplies from Russia. It is obviously also natural, that we should look for crude oil from the most reliable and most economical sources. Over the past few months there have been some occasions where the price for URALS oil has been higher than certain North Sea crudes. All these factors are taken into account. We did take in some North Sea cargoes quite simply in order to fill up; we experienced complications [i.e., the shortage of supplies from Russia - BC]. Apart from that, we will also be looking to bringing North Sea oil just to see how it will perform in our refinery and to determine the yield. Geographically, it makes sense to look towards Russia.

- What are the main reasons that the negotiations with the company LUKoil over the long-term oil supplies are taking so long? When, in your opinion, will the negotiations come to a conclusion?

- It is very easy to answer the first question. There have never ever been any long-term contracts agreed to up till this point and what we are trying to do is something completely new. Obviously various factors exercise an influence on preparation of a ten year contract on co-operation.
These factors are different than the ones which we would face in a short term contract for a single shipment of oil. This is merely a case of all interested parties having to examine every aspect of the case in great detail to make sure that the contract is absolutely fair to all sides and to be sure that there are no mistakes that can bring about any adverse effects later on.
No one wants to put a firm date on the end of these negotiations. All I can say, is that we are working to see that negotiations continue and we are looking for the speediest possible outcome.

- Despite difficulties in the negotiations process with LUKoil, the Mazeikiu refinery and the Butinge terminal are preparing to work at almost full capacity this year. Does it mean that various Russian oil companies are interested in oil supplies to Lithuania?

- Yes, both the factory and the terminal should be operating fairly close to capacity this year. It means that a lot of companies are interested. LUKoil itself has been supplying oil to the factory. There are various Russian companies with whom we have been negotiating for a considerable time. The biggest share of oil exported via the Butinge terminal comes from the company Yukos. Other suppliers include Nafta Moskva and Sibneft. As for the refinery, the main suppliers are Yukos, Lukoil but we also cooperate with some smaller Russian companies.

- How much oil must you secure this year so that the Butinge terminal will operate with a profit already this year?

- Currently the capacity of the Butinge terminal is 8 million tons per year. Obviously, we are looking to secure a level of as near to full capacity as we can. If we achieve full capacity, then we will be close to the point of breaking-even.

- What conditions are you offering to Russian suppliers to make them choose the Butinge terminal instead of its competitors working in the Baltic Sea region?

- The conditions are very similar to those offered by other Baltic terminals. We see ourselves not as competitors for the other Baltic terminals but as a company able to offer a complementary service. We see enough business to ensure that all terminals run successfully.
We firmly believe that the Northern export route via the Baltics is very favourable when compared to the Southern export route via the Black Sea. The situation today is that the amount of ships trying to squeeze through the Bosphorus strait is limited by Turkey's extreme sensitivity to the environmental hazards.
We have in general the advantage in the Baltic States of enjoying much wider access without the same geographical limitations as are found along the Black Sea route.

- Are you looking at a costs reduction for oil exporters in Lithuania in order to increase competitiveness of the Butinge terminal?

- Obviously we do keep costs on the review but when we look at prices we should also look to see that the service we give is the most reliable possible.

- According to the agreement with the Lithuanian government, Williams can purchase another 33 percent stake of Mazeikiu Nafta Co shares. Are you planning to use these rights?

- This additional 33 % of shares can be seen as a security measure for Williams International.
Time will tell if Williams International will decide to buy the additional 33 percent stake of shares. There is the facility to do so, if there will be such a wish. We are still completely open to this possibility.

- In your opinion, how will negotiations end up with international financial institutions, including the EBRD, concerning their participation in the modernisation of Mazeikiu Nafta?

- We are working very actively at the moment to put financing in place for the modernisation programme. We have discussed the Modernization Plan with the EBRD and several financial institutions, and all are very positive about our plans. We are in the process of obtaining the environmental permits and the final documentation that is required by our investors. The Lithuanian Government issued a tender to select the bank to coordinate and manage the syndication of loans for the Modernization Plan. Chase Manhattan was selected as the banker.

- How much attention are you currently paying to the organisation of future export of Mazeikiu refinery oil products? In which markets do you see the best prospect?

- We have several contracts with purchasers, for example, with LUKoil Baltija to supply their filling stations in Lithuania, Kaliningrad and in Latvia. We now supply Statoil for Latvia as well as Lithuania. We are supplying Neste for the first time, as well as other local clients. We are looking at more international product sales agreements [A long-term marketing agreement was signed in mid-April with BP Amoco allowing BP Amoco to market internationally all of the Mazeikiu Nafta sea-bound oil product exports - BC].
One of the markets we are most aware of is Poland where there was a shortage of light oil products. That would obviously be a market that we are aiming at. Once we will have production up to the European standards we could look at the whole of Europe as our market. Parts of Northern and Eastern Europe geographically would make sense for Mazeikiu Nafta.
We also look at the markets in East. Once we had quite a lot of product sales to Ukraine until the balance of payments crisis hit this country. The situation is normalising very quickly. We have resumed the sales of products to Ukraine.
Likewise there was a time when the Moscow market was quite receptive to our products, especially for high octane gasoline. We will follow the development of the situation in Moscow because this would be a very natural market for us.

- Have sales policies of the Mazeikiai refinery changed after the Williams International Company took over operational control of the refinery? Could you characterise the main customers of Mazeikiu Nafta Co inside and outside of the Lithuanian borders?

- Sales policies have changed. We are putting in place much more flexible purchase and product sales contracts for crude oil. We are orienting ourselves to the market and changing our prices in a direct proportion to the change in the world oil prices to make sure that we pass along all these changes to consumers as quickly as possible. For the moment, the entire wholesale system is being reviewed. Everybody who is able to pay for the products in accordance with our regular terms is able to buy products.

- How worrying for you is competition with port of Ventspils and plans to increase transportation of oil and oil products from Russia in this direction?

- We earn money by pumping oil and diesel fuel to Ventspils. The more oil we transport to Ventspils, the more income we will see in terms of the tariffs [The pipelines from Polotsk to Ventspils cross through part of Lithuanian territory - BC]. We see ourselves very much in a role of colleagues rather than as a sort of fierce bear-like competitors. We are almost like two fingers of one hand. We are closely related to each other and our interests are closely related in a number of ways.

- Are you planning any investments towards development of the importance of the City of Mazeikiai as a centre for regional business and industry?

- At the moment all our attention is focussed on the Mazeikiu refinery. We look at the refinery as being a rather sick patient whom we have to bring back to health and make her look beautiful again. Our policy is going to be to bring in local contractors and local labour as much as possible. It will help both development of Mazeikiai regionally and the Lithuanian economy in general. To become a regional centre of business and industry is a wonderful thing, yet this is all going to happen in the future.