Energy dependence on Russian energy resources is almost undisputedly seen as a fatal destiny of Lithuania, the rest of the Baltic states, and even entire Europe. Of course, no one can deny the fact that Russia dominates in the gas market, that it is the key player in the oil market, and that it plays a very important role in the electricity market of the Baltic states. It is also obvious that the supply of cheap energy is not to be separated from Kremlin’s political influence and ambitions: the recent Ukrainian–Russian natural gas debate is a perfect illustration.

These evident facts of the Russian energy dominance and political pressure, however, is neither a complete picture of the situation in the energy security nowadays, nor it allows planning a rational strategy which would ensure the interests of energy consumers in Europe, the Baltic states and Lithuania. Let’s us take a look at some latest events from the perspective of Lithuania’s energy market. I will briefly explore one of the main differentiating features of Lithuania’s energy market, as compared to Latvia and Estonia, – the oil refinery giant “Mažeikių Nafta” and the political approach towards it.

The “Mažeikių Nafta” factory has been treated as a very important economic unit, crucial to the Lithuanian economy as a whole, a key element in ensuring energy independence, and at the same time as a threat to energy security of Lithuania. More than a decade ago this approach led Lithuanian politicians to adopt decisions concerning the state support for the construction of the “Butinges nafta” oil import terminal (which, fortunately, was designed both for import and export and today, in fact, is used for oil export only).

The mystification of the factory’s role to the country’s economy also led to probably the most politicized and scandalous privatization. The control of “Mažeikių Nafta” was granted to the US-based company “Williams International” (retaining nearly half of its shares in the hands of the Lithuanian government) instead of selling all shares openly in the market. The famous symbolic phrase “we will not let Ivan to the pipe” expressed by Lithuania’s Minister of Economy in those days became widely known abroad.

It is no surprise that a pro-Western or anti-Russian approach provoked relevant politicized reactions on the Russian side. Today there may be many speculations why “Williams International” failed to ensure a stable oil supply to the factory. However, no one can deny that it was Russia’s political ambition in the first place to demonstrate that only a Russian company is able to run the factory successfully. In the end, the Lithuanian “Mažeikių Nafta” had to be sold. Fortunately - to the then star of all Russian oil companies, private “Jukos,” and the bright days came to “Mazeikiu nafta” factory.

The lesson for Lithuanian politicians to be learned from not so distant history is that wishful thinking leads to nowhere. It was very wishful to think that Western control of the oil refinery would ensure independence from Russia and political influence, as well as sometimes not very acceptable traditions in state dominated Russian oil business. If to be successful commercially, “Mažeikių Nafta” still had to buy oil from Russia ant to transport it through a pipeline. This situation confirms the fact that the problem of dependence cannot be solved by controlling only the factory itself. As Lithuania is not tantamount to the US in size and power, the mechanisms of oil supply simply could not be controlled.

One more lesson is that “Mažeikių Nafta” is not important to Lithuania’s energy security at all. Oil products are easily transportable and the market is very competitive. This means that Lithuania may easily import oil products from abroad (even today it does so). On the other hand, it means that “Mazeikiu nafta” has to be very competitive and as a part of it - to keep its advantage of getting oil from Russia. Political influence on the economic activity, as we know, makes this activity less efficient and competitive.

It would be to too bold to say that the bright days of “Mažeikių Nafta” are over. However, two political threats to the factory have emerged again. The first threat, which is important but perhaps a more predictable and smaller one, is the decision of the Competition Council of Lithuania concerning the huge fine of 32 million litas for abusing the company’s dominant position. The decision does not seem very well-grounded and is still to be disputed in court. But it is certainly a serious headache for the company.

The second threat to “Mažeikių Nafta,” which is much more uncertain and less predictable, is related to the change of owners again. It is obvious now that “Jukos” has no other possibility than to sell “Mažeikių Nafta.” It wouldn’t have been bad it if not the ambitions of the Lithuanian government again. The government has been busy trying to hit at least three targets since the autumn of 2005. Their plan is to buy out “Mažeikių Nafta” from “Jukos” and then to sell it again. The declared targets are (1) to find a new good (politically acceptable?..) owner of “Mazeikiu nafta”, (2) to make profit (the plan is to buy the company at cheaper price and then to sell it at a higher one), and (3) to get rid of the much criticized unfavourable conditions of the first privatization agreement (fee for the governance of the company, obligation to cover losses, fixed oil products transportation costs).

The practice, however, does not support the scheme at all, and it was obvious since the very start. The so called unfavourable conditions are not so important any more because the financial obligations of the government are not relevant any more, and fixed transportation costs do not seem to be low any more. To gain profit from this speculatory action is practically impossible, as any potential buyer may offer its bid directly and there is no need to wait for a higher price asked by the Government of Lithuania. This also means that the target of finding a new politically acceptable owner for the company may only be achieved by paying a certain price for it – directly and clearly, or indirectly and latently.

Unfortunately, Lithuania was pushed into discussions about who would be the best possible owner of “Mazeikiu nafta”. According to different political statements, the buyer has to have good relations with Russia, but not to be too Russian. The Russian oil giant “Lukoil” even formed a consortium with a US company to meet this criterion. However, the real practice has already almost smashed all of the plans of the government as none of its favourites (TNK-BP and “Lukoil”) offered a sufficient price to outbid the Kazachian “KazMunaiGaz” and the Polish “Orlen.”

It is not clear what the Lithuanian government is going to do next. As we experienced from the past, it may resort to very unexpected and controversial actions. Hopefully, this time economic arguments will prevail and the government will simply step out of this process. Only by depoliticizing the process itself the Lithuanian government may expect that oil business will be as depoliticized as possible. This lesson has to be taken into account not just in this quite simple case of the oil refinery, but also in much more complicated and more energy-dependence related cases of the nuclear power station and the gas market.