The main pipeline to Lithuania seems to be too old to operate properly, the Moscow Times said yesterday, citing the company's CEO Semyon Vainshtok. According to him Druzhba-1 is operating at a fifth of its normal pressure and has outlived its normal lifespan (it is 42 years old, compared with the industry norm of a 30-year lifespan). In the worst case scenario, Transneft will have to fully rebuild only a 140 km (87 mile) stretch. Until that Mazeikiu refinery will be cut off the crude oil supply and Mr.Vainshtok couldn't say when they may be restored. According to the Mazeikiu spokesman, even if Russia closes the pipeline the company can maintain output with shipments coming from the Primorsk oil terminal.
The news is definitely negative for PKN Orlen. Although the company declines it will use its option to pull out of the Mazeikiu deal, it seems to us that market would favour such a decision. The problems with supply through the Druzhba pipeline seem to have a permanent nature and supplying the refinery through other sources would definitely depress the margin. We have a growing concern whether the Mazeikiu deal could be further justified at the price agreed with Yukos.