By Ben Nimmo Sep 8, 2006, 8:38 GMT
Riga - The future of Latvia's oil-transit industry - currently awaiting a final round of privatisation - lies in Russian hands regardless of who owns it, experts in the Baltic state agree.
'A company which can guarantee oil supplies from Russia could make a success (of the industry),' economic analyst Roberts Remess told Deutsche Presse-Agentur dpa.
Latvia's oil industry was built in Soviet times, when the then-Soviet Republic offered Moscow's central planners the Baltic's northernmost ice-free ports. Two major pipelines linked the port of Ventspils to the USSR's oil industry.
When Latvia regained its independence in 1991, its oil infrastructure was broken up and privatised, creating a network of companies which are often accused of lacking transparency.
'This is a very murky industry, as murky as the oil they transport and sell,' Alf Vanags, director of the Baltic International Centre for Economic Policy Studies, said.
Ventspils remained Russia's main outlet for crude and refined oil throughout the 1990s, but political tensions between Moscow and Riga and business disputes between the Ventspils group and Russian transit titan Transneft soured relationships.
In 2002 Transneft closed its crude-oil pipeline to Ventspils. The refined-oil pipeline is still open, but crude supplies now reach Ventspils by train, a more expensive option.
Latvia joined the EU and NATO in 2004, and has frequently criticised Russia's attitude to its former satellites. Perhaps not surprisingly, all efforts to have the crude pipe reopened have failed, damaging the Ventspils operation's profitability.
'The closure of the pipeline dealt a heavy blow to the operation, though it was by no means a mortal one,' Vanags said.
On Wednesday, a group led by Austrian billionaire Martin Schlaff declared its intention of buying a controlling stake in the most important oil company in Ventspils, Ventbunkers.
If the deal goes ahead, the group will thereby gain control of Ventspils firm Latvijas Naftas Tranzits (LNT), which in turn owns almost 48 per cent of pipeline operator Ventspils Nafta (VN).
'My partners and I will become majority shareholders of Ventbunkers in the near future... we will have control of LNT, which already owns a major stake in VN,' Schlaff's business partner Herbert Kordt told the Telegraf newspaper.
Moreover, ten days ago the Latvian government announced plans to privatise its 38.6-per-cent share in VN on October 7. If, as Kordt hopes, the sale of VB has already gone through by then, this would put his group within reach of Latvia's entire oil industry.
The Austrian investors have made a name for themselves by buying Eastern European companies, restructuring them and selling them. In the case of Ventspils, the key challenge for restructuring is clear.
'The most important thing will be to renew oil deliveries to Ventspils through the pipeline,' Kordt said.
However, any such reopening would almost certainly come at a price. Russia's oil and transit firms are fully aware of the value of their product, and have gained a reputation for wanting close control of the entire export cycle.
'As a general rule, Russian oil companies like to have control of the whole vertical chain of production and transit. My impression is that they would definitely want some sort of a say in the downstream business,' Vanags pointed out.
That impression has been reinforced by recent events in Lithuania. In May Polish oil refiner PKN Orlen signed a deal to buy Lithuanian refinery Mazeikiu Nafta, trumping rivals who reportedly included Russia's Rosneft and Lukoil.
Less than two months later, Transneft closed its pipeline to Mazeikiu as a result of an oil leak in Russia. The line has not yet been reopened, leading some observers to allege that the closure was motivated by political, rather than technical, considerations.
Whatever the truth of the Lithuanian case, Transneft's control of the pipelines to Ventspils means that any firm wishing to become involved in oil transit will have to take its wishes into account.
'A long-run successful Ventspils would really need the blessing of Transneft,' Vanags said.
Whoever ends up buying the VN shares, therefore, all eyes are likely to turn to Moscow, not Ventspils, once the bidding is over.
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