A Cloud Over Ventspils

At the end of last year, Transneft, Russia?s pipeline monopoly stopped exporting oil through the Latvian port of Ventspils, which is the largest terminal in the Baltics with a 2001 profit of $ 42.8 million.

Oil shipments to Ventspils have already been declining from 14.9 million tons in 2001 to 7.4 million tons in 2002, since Russia opened a new oil terminal at Primorsk near St Petersburg in December 2001. This facility should help reducing transit fees of $1.5 billion annually which went mainly to Latvia. Additionally, the country wanted to become less dependent on the Baltic state.

Latvia has always claimed that the stop of oil supplies is a tactic to pressure Ventspils to sell a controlling stake to Russia. Last week, this proved to be true, as Transneft announced an ultimatum to Latvia, giving it one year to hand over a 50 percent stake in Ventspils or face the consequences. The Russian pipeline operator requested the shares in return for an investment of $143 million to fix claimed technical problems that would prevent it from shipping crude to the terminal. However, Ventspils denies Transneft?s pretension that the pipeline system lacks investments; the company itself invested $240 million last year in the port and pipeline system, enlarging the terminal capacity up to $32 million.

Already the requested size of the equity stake poses problems, as private shareholders would have to be included in the deal. The Latvian government owns only a 43.6% of Ventspils, the rest of the shares belong to mostly unknown private holders.

In response to the Russian ultimatum, the private shareholders of Ventspils lead by board chairman Aivars Lembergs have announced to use an existing option of Latvijas Transits (LNT) to buy an additional 5 percent stake from the Latvian government, thereby increasing their ownership to a majority stake of 53 percent. This 5 percent stake has been reserved for LNT under the original privatization terms. LNT has already paid $860?000 for the shares and the Latvian Privatisation Agency has now two weeks to decide upon the request.

The LNT purchase indicates that its shareholder expect that quite soon there will be cut a deal with Transneft. Otherwise it is hard to explain why the company exercises an option it has held since December 1997 and is eager to invest in a company whose value has massively decreased since Transneft?s decision not to deliver any crude anymore.

One possible solution would be for LNT shareholders to offer a same-sized stake in LNT to Transneft, and then agree to bid jointly in the privatization of Ventspils. The Latvian government announced that it plans to privatize its 38.82% stake in Ventspils by the end of the year. However, there were comments that Latvia does not accept the Russian pressure and that it is not yet sure if the privatization will be accomplished. It is assumed that the relations with Russia will anyway change as soon as Latvia will enter the Nato and the European Union.

Meanwhile, the management of Ventspils is looking for ways to keep the facility going. It was decided to reconstruct an existing railway to deliver crude oil. With this measure, the port will receive at least 2.5 million tones this year. For next year, further railway capacity will be ready which should allow delivering additional 5.5 million tones of crude adding up to 8 million tones a year.

Ventspils problems will not end. With the enlargement of Primorsk and the construction of a new pipeline to Murmansk, Russia will become increasingly independent from its neighbour to deliver crude to Western markets. However, it has to be acknowledged that the company still operates profitable.


Author: Andreas Wild