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Re: INSIGHT/DISCUSSION - POLAND/LITHUANIA/RUSSIA/ENERGY -- Baltic Intrigue Over Energy and Polish-Lith Relations

Released on 2012-10-23 00:00 GMT

Email-ID 994094
Date 2010-11-03 21:41:06
for the historical perspective explaining why Lithuania doesn't trust
Poland, I know the PLC references are too tempting for you to avoid, but
what you told me on Spark about Poland ruling Vilnius between world wars
is more relevant to modern day Lithuanians' POV on Poland. (but please, do
include the words "infamous" and "PLC" back to back in the piece.)

other than that, only comment would be that Lithuania better be careful,
lest they want to see big cyrillic letters printed all over their
beautiful refinery!

great stuff

On 11/3/10 1:22 PM, Marko Papic wrote:

ATTRIBUTION: Sources in PKN Orlen
SOURCE Reliability : First time use, but info
ITEM CREDIBILITY: Matches my other information

This is a DISCUSSION primarily, peppered with insight from a very good
source that has managed to piece together for me some of the piecemeal
information I have had on this issue.


Polish-Lithuanian relations are at a very low level right now. At the
heart of the issue is the PKN Orlen owned refinery in Lithuania. PKN
Orlen is a state owned Polish energy company that invested $1.6 billion
in the refinery in Lithuania in 2006. Since then, Poles have said that
the Lithuanian government has done nothing to make the purchase
profitable, leading PKN Orlen to recently hire a bank to start looking
at selling the refinery. Meanwhile, a parallel issue going on are
minority rights of Poles in Lithuania. Lithuanians are not letting the
Poles spell their names with Polish spelling in Lithuanian passports
(specifically Poles want to use the letter "w").

What is really going on?

Lithuania is one of those countries that cherishes its sovereignty over
security. A country that is willing to literally risk its independence
in order to maximize its sovereignty. It is counterintuitive, but there
are many countries like that. Lithuanian history and geography make it
extremely wary of not just Russia -- which has dominated it in recent
time -- but also neighboring Poland.

Poland and Lithuania are both EU and NATO member states, they have also
shared a state in Medieval times (the infamous Polish-Lithuanian
Commonwealth which at one time was the most powerful country in Europe
and liberated Christendom from the Ottoman threat in 1683 at the Battle
of Vienna). However, while Poles remember the PLC fondly as an example
of Central European success under benevolent Polish leadership, the
Lithuanians remember it far less fondly. They think of it as a period of
outright Polish domination.

Bottom line therefore is that Lithuanians do not see Poland as a
benefactor or as a potential ally against Russia. This is similar to how
Poles themselves equally do not see Germany as a protector against
Russia (thanks Lauren for that analogy). Lithuanians just don't really
feel that Russia is that much of a larger threat than Poland.

While the minority rights issue is an interesting window into this
dynamic, the far more important and pertinent issue is that of PKN Orlen
Refinery. We now understand the entire story. I will elaborate...

PKN Orlen's investment in Lithuania is huge. PKN Orlen is the largest
single tax payer to Vilnius and the purchase of the refinery is to this
day the single largest Polish investment ever, in the world. Poles felt
that they were doing Lithuanians a huge geopolitical favor. The Mazeikiu
refinery is a 300,000 bpd behemoth, only only refinery in the Baltics,
you mean? in the Baltics. It was owned by Russian Yukos and as Yukos was
being disemboweled by the Russians it was looking to sell it. Rosneft
and LUKoil were licking their chops. PKN Orlen stepped in and saved
Vilnius from outright Russian domination. ...couldn't Russia have just
sold it to Russia? not sure I see how PKN Orlen was able to pull this
off if Moscow had an actual interest in maintaining possession of it.
This implies that Vilnius had final say, but I have no idea
However, since the 2006 sale, the refinery has barely scraped to make
profit, no thanks to Lithuanian government. Poles feel used. They saved
Vilnius and felt that they deserved concessions on tariffs and
logistics, but none came.

A brief history of the purchase. The Poles signed a SPA with Lithuanians
in May 2006 to buy the refinery. In July 2006, the Russians cut the flow
of crude to Mazeikiu via the Druzhba pipeline. Did Russia give a reason
for this? In September 2006 there was a major fire in the refinery.
(Sounds like Russia started this fire...) The sale was finalized in
December 2006.

The fire caused PKN Orlen to spend money on fixing the plant throughout
2007. The fire occurred at the oil distillation unit of the refinery and
therefore the refinery ran at half capacity throughout 2007. Druzhba cut
meant that Poles now had to import the same Russian crude -- for the
same price -- via sea, which increased transportation costs $1 a barrel,
or around $75 million a year in terms of how much the refinery had to
get via Primorsk in Russia. PKN Orlen is forced to therefore import
crude from Primorsk via the Butenge Oil Terminal (which is really just a
pipeline that runs on a sandy bank and then 8km into the Baltic Sea
where it ends in an import buoy, highly unstable during stormy weather
and not possible to expand). This was followed by economic downturn in
2008 and 2009, which hit the Baltics hard, causing refinery to barely
scrape a profit, finally losing $34 million in 2009.

wait so the cutoff on Druzhba is permanent?

However, the real problem is LOGISTICS internal to Lithuania that
Vilnius refuses to improve. Two main issues:

1. PKN Orlen ultimately wants to open up the refinery products to a
bigger market in Europe, thus allowing itself to not depend on just
Baltic demand, which as the recession proved is fickle. To do that, they
want Lithuania to improve the railway transportation within the Baltic
countries themselves. The problem is that Lithuanian Railways has a
monopolistic hold on the tariffs they charge PKN Orlen. Furthermore, PKN
Orlen wanted Lithuanian rail to allow them to ship to Latvia via a 20km
shortcut -- thus saving money on tariffs -- and then the next day the
Lithuanians said that that spur was no longer operational. They
essentially cut off the spur just so PKN Orlen can't save the money.

2. PKN Orlen wants to improve its options for exporting crude. It wants
to buy - or invest - in the Klaipeda Nafta terminal. However,
Lithuanians are saying no, they have deemed the terminal a strategic
asset. Lithuanians are afraid that Poles will buy the terminal and then
sell both the terminal and the refinery as a package deal to the
Russians. Or are the Lithuanians simply uncomfortable about the Poles
controlling both? Sort of like how European Commission unbundling regs
are designed to prevent one country (Russia) from having too much
control over energy infra The lack of trust between Lithuania and Poland
is quite interesting. The reason PKN Orlen wants Klaipeda Nafta is
because that is an actual port, with concrete bank, and equipment. The
Butenge Oil terminal is not really good for export, although it is
technically feasible. PKN Orlen wants to invest in a $100 million
pipeline from refinery to Klaipeda, but it doesn't want to do that until
they are sure that Klaipeda Nafta will not raise rates in the future.

Bottom line is that the logistical problems of shipping via rail and via
Lithuanian owned terminal is costing PKN Orlen about another $75 million
a year, for a grand total of $150 million of costs due to the combined
effects of Russian pipeline cut and Lithuanian intransigence.

All of this has boiled down to PKN Orlen seriously considering selling
the refinery. They hired Nomura to look at their options and apparently
half of interesting potential buyers are Russian.

Meanwhile, the relations between Poland and Lithuania are at their
lowest in a really long time. The situation is so bad that the Poles are
willing to sell the refinery to the Russians. They have seen the
Lithuanians squander a chance to make Polish investment make sense and
the Poles are sick of it. This shows us that there are not only breaks
in the EU/NATO amongst the New Europe / Old Europe paradigm. There are
also important regional rivalries among the Intermarrum states.
Rivalries that play into Russia's hands. Russia in all of this is just
sitting back and watching the carnage.



Marko Papic

Geopol Analyst - Eurasia


700 Lavaca Street - 900

Austin, Texas

78701 USA

P: + 1-512-744-4094