Belarus Looks Away From Russia to Venezuela for Oil Supplies

2010/11/19

analiza STRATFOR

Summary

Belarus and Ukraine will soon begin joint tests to see if the Odessa-Brody pipeline, which currently ships Russian oil south to the Black Sea, can be reversed to flow to Belarus. In an attempt to diversify its energy supplies away from Russia, Belarus has made energy deals with Venezuela. All of the oil Belarus has received from Venezuela has been shipped to ports in Ukraine and the Baltics and then moved via truck and rail. If Belarus begins transiting its Venezuelan oil through pipelines, Russia will have a greater opportunity to intervene if it deems necessary.

Analysis

An oil tanker will arrive at the port of Pivdenny, Ukraine, on Nov. 17, and within days will begin pumping oil as Belarus and Ukraine conduct joint tests to determine whether the Odessa-Brody oil pipeline in Ukraine, which Russia currently uses to take shipments south to the Black Sea, can be reversed to flow to Belarus. Russian energy transit giant Transneft said it planned to send observers to the oil pumping tests. This is part of Belarus’ latest attempt to diversify its oil supplies away from Russia. Economic issues related to energy have been the biggest source of disagreement between Russia and Belarus. However, Minsk’s expansion of its diversification efforts to include pipelines will increase Moscow’s ability to intervene in these efforts if it so chooses.

Since the fall of the Soviet Union, Belarus and Russia have been close in terms of their political, economic and security relationships, even forming a political union in 1997. This relationship was intended to grow stronger when Belarus and Russia, along with Kazakhstan, formed a customs union at the beginning of 2010. Belarus joined the customs union thinking it would not have to pay tariffs for energy and that it would get a preferential price on oil and natural gas from Russia. But for Russia, the customs union was meant as an avenue to exert influence and dominate the two other countries economically (and by extension politically), and Moscow has not satisfied Minsk’s desires for further energy subsidies. The customs union essentially had the opposite effect — until the end of 2009, Belarus had received all shipments of Russian crude at 35.6 percent of the standard duty for Russian exports, but beginning in January, Moscow imposed 100 percent crude export duties on the bulk of its supplies to Belarus, allowing only about 45 million barrels of oil out of a total of roughly 146 million barrels to be delivered tax-free.

These pricing and tariff disagreements led Belarusian President Aleksandr Lukashenko to speak out publicly against Russia and its leadership, and Russian leadership responded in kind. These disputes eventually moved from the rhetorical to the concrete. Russia briefly cut off natural gas supplies to Belarus in June, and Lukashenko did not initially sign on to the second phase of the customs union — the Customs Code — on July 1 as scheduled (though he eventually agreed to sign on). The disputes between Russia and Belarus reached a level previously unseen, and Lukashenko responded by pulling away from Russia in the energy sector. While Belarus has no alternatives to Russia for natural gas — Russia monopolizes natural gas in Belarus via an intricate pipeline network — Minsk does have options for oil.

Belarusian-Venezuelan Energy Ties

In the midst of Lukashenko’s ongoing disputes with the Kremlin, he struck an agreement with Venezuelan President Hugo Chavez for Venezuela to begin shipping oil to Belarus in relatively small increments. Beginning in May, Venezuela shipped crude by tanker halfway around the world to the Ukrainian port of Odessa, where it was then offloaded onto cargo trains and sent via rail to the Mozyr refinery in Belarus. Shortly thereafter, additional shipments of Venezuelan crude began to arrive in the Baltic countries of Estonia and Lithuania and were then shipped by rail to the Naftan refinery.

Most of the Venezuelan crude imported so far has come through Ukraine — as of Nov. 1, 6 million barrels had come in through Odessa, while a little more than 3.6 million barrels had been brought in through the port of Muuga in Estonia by Oct. 28. A smaller shipment was delivered to the port of Klaipeda in Lithuania. In total, Venezuela is expected to supply Belarus with nearly 30 million barrels in 2010 — roughly two thirds of Belarus’ domestic consumption — while Russia is expected to export roughly 117 million barrels via the Druzhba pipeline.

Tensions between Minsk and Moscow have shown no signs of abating — indeed, they have only grown as Russia has begun pressuring Lukashenko ahead of Belarus’ mid-December elections. These tensions were evident when on Oct. 16, Belarus signed a new energy agreement with Venezuela to increase oil imports to 73 million barrels (200,000 barrels per day) beginning in 2011. Lukashenko said he believed Belarus would receive less than half of its oil supplies from Russia in 2011 (as recently as 2009, Belarus received nearly all its oil imports from Russia).

Obstacles to Belarus’ Energy Plans

This increase in supplies raises several questions, not least of which is whether it is logistically possible for Belarus to handle these import levels. It has not yet been determined which ports will be used to transit Venezuelan supplies beginning in 2011 — there are four possible routes, through Ukraine, Latvia, Estonia and Lithuania — and Belarus is testing different options at this point. In October, Belarus reached a deal with the Lithuania’s port of Klaipeda to transit 18 million barrels of Venezuelan crude per year beginning at the start of 2011, while the Latvian port of Riga must perform several upgrades, such as increasing its depth, to be able to accept Venezuelan oil. Minsk reportedly is now looking at the possibility of importing Venezuelan crude into the Butinge crude oil terminal in Lithuania. This is part of the Orlen Lietuva complex owned by Poland’s PKN Orlen, but it is unclear whether Belarus has opened formal talks with the Poles yet. Local experts say the port technically can handle another two vessels per month whose cargoes could then be sent by rail to Belarus from a terminal at the Orlen refinery.

Beyond the rail and truck networks currently used to transit the Venezuelan oil to Belarus, there has been talk of using existing pipeline infrastructure as a supplemental method for transiting the oil. This is why Belarus and Ukraine will perform the joint test on the Odessa-Brody pipeline to see if it can be reversed. Ukrainian officials have said that reversing Odessa-Brody would be feasible if Venezuelan supplies via Ukraine to Belarus increase to at least 66 million barrels per year (which is less than what Venezuela promised for 2011). But Belarusian officials have said that Venezuelan crude will not be used for testing, and whether the pipeline can be used at all in the future depends on Russia, which runs the pipeline, and Poland, which owns the contract for it. Latvia is looking into sending oil through the Ventspils oil pipeline, but it is also not clear that it would be easy to reverse that pipeline or if the Ventspils pipeline is even functional.

Another key question is whether and how Belarus will be able to pay for Venezuela’s oil under the new agreement. Initially, it was reported that the difference in the prices Belarus pays for Venezuelan crude ($90 per barrel) and Russian crude ($55 per barrel) would require Belarus to pay roughly an extra $2.5 billion if it is to fulfill its contract with Venezuela next year. But these numbers are actually misleading. Russia used to provide all of Belarus’ oil, including the supplies Belarus transited to Europe for a substantial profit, with minimal duties. In 2010, however, Russia only provided Belarus with about 45 million barrels of duty-free oil, while the rest was subject to 100 percent tariffs. This duty makes the average price of oil that Russia sends Belarus closer to $75 per barrel. Also, the price that Belarus pays for Venezuelan oil has recently fallen, from $90 per barrel in May to $78 per barrel in June.

Belarusian First Deputy Prime Minister Vladimir Semashko has said the quality of Venezuela’s Santa Barbara oil variety is higher than that of the Russian Urals variety (unlike Venezuela’s usual heavy sour crude) and that it would be more profitable for Belarus to process the Venezuelan oil. When a metric ton of Russia’s Urals oil is processed in Belarus, 30 percent of the output is residual fuel oil, which does not fetch as high a price as crude oil. However, when Belarus’ refineries process a metric ton of Venezuela’s Santa Barbara crude, only 7-8 percent of the output is residual fuel oil. This means more of the output consists of higher-value products.

For these reasons, according to the Belarusian government, the crude oil from Venezuela is a better value than supplies from Russia. However, it is not clear whether this calculation includes the transit costs (which are considerably higher for the Venezuelan crude than for the Russian crude). Furthermore, the quality of the Venezuelan crude has been called into question (both Belarus and Venezuela have bent the truth on such matters in the past).

Russia’s Role

The final, and most important question, is what role Russia will play in Belarus’ diversification efforts. So far, the Russian leadership has been mostly silent about Belarus’ oil shipments from Venezuela. Russian Deputy Finance Minister Sergei Shatalov did say that starting in 2011, Russia could lift export duties on the crude oil Belarus buys if Russia takes all the revenues from duties on the oil products Belarus exports; Belarus has not responded to this proposal yet. If Belarus chooses to ignore this request and increase oil shipments from Venezuela, and particularly if the oil shipments begin to be transited through pipelines rather than by rail and truck, Russia might break its silence.

Of course, Russia may not be threatened at all by the change in Belarusian supplies. Russia retains many important levers in Belarus, not the least of which is ownership of a controlling stake (50 percent plus one share) of Beltranzgas, which runs the country’s pipeline system. This would mean that it would be up to Moscow how the pipelines are used, and Russia previously has shown a willingness to cut off pipelines for political reasons. According to STRATFOR sources, Russia has already blocked one shipment of Venezuelan crude to Belarusian refineries. Also, Russia also has strong political ties to Chavez, and Venezuela depends on Russian trade much more than it does on Belarus. It is perhaps not a coincidence that Russian Prime Minister Vladimir Putin met with Chavez only days after the Venezuelans reached the new oil deal with Belarus.

There is an apparent contradiction in Russian behavior, as Moscow normally would act to prevent diversification; most attempts by European countries to diversify away from Russian energy supplies are met with assertive Russian responses. It is noteworthy that Moscow is not reacting over Belarus — with logistical help from the Baltics, Ukraine and possibly Poland — moving away from Russian energy.

However, there are some circumstances in which Russia is comfortable enough with its influence in a country to allow energy diversification to take place. The diversification of Central Asian supplies to China is one such example — Russia still controls many of the pipelines in that system, so it is not threatened by the supply redirection. It is possible that Russia is essentially condoning Belarus’ behavior — whether because Russia has enough leverage over Belarus in other ways, or it knows Lukashenko is pandering to his domestic audience before elections, or because it is giving Venezuela a handout without looking like it is doing so. Or it could be that Moscow is biding its time and waiting for an opportune moment to act.

Tags: ,

Comments are closed.

September 2017
M T W T F S S
« Aug    
 123
45678910
11121314151617
18192021222324
252627282930  

Site Metter