INTERVIEW: Williams Mulls Doubling Butinge Capacity
Updated 7:30 AM ET February 3, 2000
Dateline: VILNIUS, Feb 3 ( Reuters )
U.S. energy group Williams said on Thursday it was seriously considering doubling the 160,000 barrel per day capacity at the Lithuanian Butinge oil terminal to make Western crude imports more commercially viable.
Williams International President John Bumgarner told Reuters on the sidelines of a power sector investment conference that the idea would be to put in a second buoy and another pipeline from the refinery in Mazeikiai to the coastal terminal to allow near simultaneous import and export of crude.
When asked how seriously the company was in considering this idea, first floated at a meeting with Lithuanian parliamentarians on Wednesday, he said: "Pretty seriously."
Lithuania's key oil concern Mazeikiu Nafta, in which Williams bought a 33 percent stake and operational control last autumn, is composed of a refinery, pipeline system and oil terminal.
Due to interruptions in Russian crude supply and difficulty in sealing new contracts, the refinery was forced to shut several times last year and has imported three tankers of Western crude for refining in recent months.
Although the Butinge terminal can import as well as export, doing so obviously limits the amount of Russian crude that can be shipped westward. A second buoy and pipeline would allow both export and import to run at or near the over eight million tons per year capacity.
Construction could take a year to 18 months, Bumgarner said, with the cost well below the over $300 million Lithuania spent building Butinge. "It depends on how much tankage you put with it, (it could cost) less than $50 million," he said.
Officials had earlier said importing Western crude at Butinge was a loss-making exchange, but Bumgarner said the financials were viable.
"(Importing) doesn't make as much money as (refining) eastern oil, so to that extent you are taking a loss. But from the financial side you are still making a profit," he said.
Sources close to the refinery told Reuters that the fourth tanker to deliver Western crude was expected within the next few weeks, although Russia's Yukos YUKO.RTS -- a major throughput supplier for Butinge -- had recently supplied some 100,000 tons to the refinery.
Mazeikiu late last year accused LUKoil LKOH.RTS, Russia's crude oil coordinator for Lithuania, of blocking supply deals with other companies. Officials have been watching the Yukos batch closely to see whether it would be held up in Russia.
Bumgarner said talks with LUKoil over a long-term supply agreement were "tricky" as they were both supplier and customer. LUKoil Baltija has a substantial petrol station network in the region fed largely with refined product from Mazeikiu Nafta.
Sources close to the talks say they have recently grown strained because LUKoil has returned to the issue of having equal ownership in the Lithuania firm with Williams, something the U.S. company has ruled out.
However, as part of the privatization, the government's contract with Williams includes a clause that allows up to 30 percent duties placed on oil products imported from CIS countries, which could hurt LUKoil if it loses Mazeikiu as a retail supplier of fuel.
Asked if he was hopeful on sealing a deal, Bumgarner said: "I'm a very patient person."
Mazeikiu Nafta contributes about 10 percent of the country's gross domestic product (GDP) and analysts say stable and growing operation of the facility is a cornerstone to Lithuania's economic recovery.
PRIVATIZATION OF LITHUANIAN OIL SECTOR
by Al Plodzinskas, President of the Lithuanian American Community of Houston
While not an exert analyst, I’ve been asked to provide a discussion of events that are leading to the privatization of Lithuania’s largest industry, the oil transportation and refining sector. Since Houston is a worldwide center of the oil industry, it is not surprising that companies from our area and even members of our group are involved in the Lithuanian project. In addition, as work progresses, we expect that Lithuanian specialists will be working in Houston on a regular basis.
The “downstream” oil sector in Lithuania (“upstream” refers to the drilling and production from oil wells) consists of a 260,000 barrel of oil per day refinery at Mazeikiai (in the NW corner of the country), a pipeline system that brings crude oil (and products) from Russia to the Baltics and an offshore buoy/onshore crude oil terminal just north of Palanga at Butinge. The system is interconnected so that crude oil can be brought into Lithuania for refining or export (a leg splits off to Latvia for export at Venspils). The newest component, the Butinge oil terminal was commissioned last fall. It now provides Lithuania the capability to import oil from the West by tanker as well from the East by pipeline. This much delayed project was started after the oil blockade in the early 1990’s and cost over $300 million dollars. Construction of the Butinge terminal involved a Houston firm, Fluor Daniel.
Under government management only the pipeline system consistently earned a profit. The refinery - saddled with unfavorable contracts and unable to collect payment from clients - lost money. Construction at the terminal dragged on. Under pressure by the West to accelerate privatization, the Government began discussion in 1998 with a US firm, Williams International (part of Williams Companies from Tulsa OK - which several years ago acquired Houston’s Transco).
Initial discussions lead to a proposal in which the Lithuanian Government, which was the majority shareholder, would join the three related sector companies (Birzai pipeline, Mazeikiu refinery and Butinge terminal) into a new conglomerate called “Mazeiku Nafta”. Williams would acquire 1/3 of the newly merged company and would invest additional hundreds of millions to finish the oil terminal and to modernize the refinery. However, if Williams was to invest millions of dollars - it would require management control.
The William deal also involves other area firms, Mustang Engineering (engineering), IAG (project management) and Turner (construction management). Much of the work will be done by local Lithuanian contractors. Several of our members are involved with the companies mentioned above and the community expects to meet Lithuanian engineers working on the project on their visits to Houston. Over the last several years various managers and engineers from Lithuanian’s energy sector have visited Houston including those working with Fluor Daniel on Butinge or touring various HL&P plants in Texas. Several of Lithuania’s ministers dealing with energy have also been in Houston. Lithuania’s national oil company, Geonafta purchased and reconditioned a drilling rig from this area.
Negotiations for the investment by Williams in the oil sector took almost two years and the careers of several ministers and prime ministers. The largest Russian oil company, Lukoil, who is “coordinator” for oil flow through the Baltics, wanted to acquire the Lithuanian conglomerate and as if to stress its importance shut off oil flow to Lithuania several times during the last year. With the completion of Butinge several tankers of oil were brought in from the North Sea during the curtailments. Even now negotiations are continuing to secure long term supplies from Russia. These large Russian producers still want to acquire shares in the conglomerate.
The agreement reached at year end with Williams has been criticized by many politicians. Many in Lithuania do not believe that allowing Williams to have management control of the Mazeikiu Refinery has been a fiscally sound arrangement. Many believer that Lithuania’s government in ther eagerness to attract foreign investment undervalued the refinery. Quite a fe are upset that Lithuania will not retain 51% after all investors have brought in capital. Many think that competitive bidding should have been used to determine “strategic partner”.
In my opinion, the agreement to sell to Williams is probably good for Lithuania in the long run. First, Lithuania sold as assets for which it made no/little financial outlay to the Russians for its construction (excluding the claim for reparations). Lithuania retains a permanent stake in a major refinery. It receives $75 million in cash investment immediately plus another $75 million over 5 years. Another $150 million is to be reinvested in the operation. $500 million is to be spent on revamping the refinery to a “state of the art” facility over a 4 year period.
A good portion of the $500 million refinery revamping is likely to be spent in Lithuania with Lithuanian businesses. Contractors will hire additional workers. Materials will be ordered. Companies doing business with Williams will be able to pay off some of their debts and pay salaries/wages to their employees. $500 million dollars (2 billion Litai) apportioned into 4 years is an average annual outlay to the Lithuanian economy of 500 million Litai (the amount of the current budget deficit). The government will certainly collect taxes on a portion of this money received by businesses and citizenry.
Currently the refinery processes less than 6 million metric tons of crude per year (1/2 of its capacity) but manages to contribute 10% of Lithuania’s Gross National Product - just from value added (VAT) and excise taxes. If, as planned, Williams can double or triple the amount of crude processed - it will make a huge impact.
Lithuania also gains a western style management firm with strict financial controls and accountability. Controls should eliminate unnecessary purchases and non-profitable contracts by insiders. Government audits have already identified theft by previous management in excess of 100 million Litai. Reasonable management controls should result in profit for all shareholders including the Lithuanian people.
Since Williams is not a gasoline retailer, it must make its money refining and transporting petroleum products. That means that the profit will be taken within Lithuania. Finally, without the ability to produce products that meet the new European environmental standards Mazeikiu Nafta will be forced to sell low quality fuels to cash strapped neighbors.
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