Transneft may opt not to reopen its Lithuanian route if Russia's technical standards agency demands repairs that make the link unviable, Transneft CEO told Reuters yesterday. Mr Vainshtok added that Russia is also trying to speed up plans to build an export pipeline to the Baltic port of Primorsk, which could pump one million barrels per day. When asked about the time horizon of the project, he said that " press speculated eighteen months is way too long".
Our view: Russia seemingly plays a political game and investors should really be prepared for the situation the crude supply to Mazeikiu through the Druzba pipeline would never be restored. If Mazeikiu purchases Urals type crude from Primorsk it pays roughly US$ 1.0-1.5 per barrel more for it than via the natural gas pipeline. In this case, given its annual crude oil need of 60-70MMbbl, Mazeikiu loses US$ 60-100m a year. Calculating with an average annual damage of 80m US$, Russia's potential decision to close down the pipeline for forever could cut off US$ 0.8-1.0bn from PKN's fair value if the company cannot compensate for this. However, we believe it can. Adjusting the refinery to be able to process Middle East sour oils could limit this impact to US$ 0.2-0.4bn loss. Even so, PKN fair value might decline by 3-5%. Although investors did not pay attention to this news in their optimism on PKN's potential Russian expansion, we believe it could be a serious negative price trigger for the share price in the following days.