OilVoice - Opening For a New Partner in Baltic Refinery

Opening For a New Partner in Baltic Refinery

Friday, March 12, 2010

Polish refiner PKN Orlen is set to invite a rival operator to take a stake in its Orlen Lietuva refinery, in Lithuania, as a partner. The refinery holds incredible strategic value given that it is the only one in the Baltic States. Orlen Lietuva is subsequently seen as and is therefore seen by Lithuania and the EU as a strategic asset for regional energy security. Orlen's latest announcement of the need for a partner to get involved in the project, prompted by declining profit margins at the facility, could lead to a Russian company acquiring a stake.

The refinery, which currently produces around 190,000 barrels per day (bpd), was privatised by the Lithuanian government just over a decade ago and was eventually acquired by Russia's Yukos.

The Lithuanian government had wanted to avoid a sale to a Russian company because of the perceived risk to the country's energy security. Subsequently when Yukos decided to sell the facility, Orlen's bid was supported by a combination of both the Lithuanian and Polish government. As a result, rival bidders Lukoil and TNK-BP, who are both Russian, lost out.

Following the acquisition of the refinery by Orlen back in 2006, Russia almost immediately claimed that a section of the Druzhba pipeline supplying the refinery had been damaged and subsequently cut off oil supplies. Since the incident the refinery has resorted to receiving crude supplies over ground by train from the Klaipedos Nafta oil terminal in Lithuania.

Since 2006, Orlen has invested around $3.7 billion upgrading the infrastructure at the facility. This has made little difference to the refinery's profitability however, which has been hit by depressed refining margins during the global economic downturn. In addition the added cost of transporting supplies by train certainly hasn't helped the balance sheet.

To deal with the problem, Orlen proposed back in December 2008 that it should take over the oil terminal, enabling it to link the refinery to the terminal by pipeline. The Lithuanian government has, however, been unwilling to spin-off of its majority 70% stake in the terminal so far. This is in part due to fears that control of the facility would pass outside the country. And with Russian firms lurking, this only increases the government's chances of retaining control in the short term.