Petrofac failed to pay on time, Orlen Lithuania cancels contract worth nearly one billion euros

The Lithuanian arm of Polish group Orlen has cancelled a contract worth one billion euros with British company Petrofac. The contract covered the repair and refurbishment of Lithuania’s only refinery, in the city of Mažeikiai. The British partner is facing financial difficulties.

According to an Orlen Lithuania spokesperson, the termination of the contract took place on Monday morning because British company Petrofac repeatedly made late payments. Subcontractors working on the project had to lay off staff and reduce capacity because they were not being paid. Orlen says the project is around 80% complete and that it has already started looking for a new partner to finish it.

Refinery

Mažeikiai is the only oil refinery not only in Lithuania but in all the Baltic states. It began operating in 1980, during the Soviet era, and has capacity of around 10 million tonnes a year, with effective refining volumes of around 8 million tonnes. Most of the crude oil is transported to the refinery through a 91.4 km pipeline from the terminal in the Lithuanian town of Būtingė. The refinery’s products are sold in the Baltic states, Poland and Ukraine.

Orlen acquired a majority stake in the company operating the refinery in 2006 and full ownership in 2009. In 2021, the company decided to invest in the refinery. The aim was to add new hydrocracking capacity and modernise its older sections. The project was due to be completed last year, but it has been significantly delayed and become more expensive.

Petrofac

British energy services company Petrofac has been involved in the project from the beginning. It was responsible for engineering, organisation, procurement and construction of new and upgraded components. However, according to recent accounts from some Lithuanian subcontractors, the company had been paying late for their services for some time, and the situation has worsened recently: Petrofac has entered “administration” (under British law, this is an insolvency process in which some operations and debts are frozen and an administrator is appointed to stabilise the company’s finances).

Petrofac has therefore run into financial difficulties. One major blow to the company was the cancellation of a contract elsewhere in Europe: Dutch transmission system operator TenneT terminated Petrofac’s contract to build infrastructure for a large offshore wind farm in the North Sea. Petrofac’s involvement in the Lithuanian project therefore appears unsustainable given the company’s current financial situation. It is also unclear exactly how much the company owes its Lithuanian partners.

Current situation

The original 2021 contract was worth 641 million euros. In 2023, Orlen announced that the project would cost an additional 45%, bringing the total to 970 million euros, or nearly one billion. The project was also delayed, and this year, when it was supposed to be completed, it was announced that completion was not expected until the end of 2026.

Orlen Lithuania has said it is considering paying the debts owed to some affected subcontractors and will do everything it can to keep the project moving, since March this year, when the Lithuanian state also deemed the project strategically important. In its letter, however, the company also asked subcontractors for more time to resolve the situation.

The Lithuanian prime minister has also commented on the situation, emphasising the project’s strategic importance and saying that she hopes it will be completed on time, in autumn 2026.