BELARUS’ OIL SECTOR: A TARGET OF OPPORTUNITY FOR MOSCOW

2010/01/13

Friday, January 8, 2010—Volume 7, Issue 5

BELARUS’ OIL SECTOR: A TARGET OF OPPORTUNITY FOR MOSCOW

by Vladimir Socor

Russia’s threat to abolish oil subsidies to Belarus (see EDM, January 5) aims not only to punish Minsk for its recent rapprochement with the European Union, but also to put the oil processing and eventually oil transit in Belarus under the control of Russian companies.

The role of Belarus in the oil transit to Europe is somewhat similar to Ukraine’s role in the gas transit. Each country provides transit service for the bulk of Russian oil and of Russian gas, respectively, by pipelines to Europe. In both cases, the Kremlin would like to control the transit routes so as to gain additional leverage on European consumer countries, as well as over the transit countries.

Russia has broken into Ukraine’s internal gas transportation system and market, thanks to the presumably pro-Western president Viktor Yushchenko in 2006; and it has used that position to drive Naftohaz Ukrainy into insolvency, opening the way for a Gazprom move on Ukraine’s transit pipelines. In Belarus, however, the presumably Russia-oriented president Alyaksandr Lukashenka has all along resisted Russian control of the oil processing plants and transit pipelines.

The Kremlin is arm-twisting Belarus by shifting oil transit volumes from Russia into the Baltic Pipelines Sytem (BPS), which circumvents Belarus to reach Russian Baltic ports for tanker transportation to Europe. This tactic mirrors Russia’s threats to circumvent Ukraine’s gas transit system by laying pipelines on the seabed of the Baltic and Black seas. Moscow uses those bypass projects to pressure Belarus and Ukraine into sharing control of their oil and gas sectors, respectively, with Russian companies. In that eventuality, Russia would presumably maintain the supply and transit flows by the existing overland pipelines through Belarus and Ukraine.

While the threat of bypassing Ukraine through the Baltic and Black Sea is hardly credible, the circumvention of Belarus is credible and indeed in progress through the BPS Phase One, which is already operational, and the incipient construction of BPS Phase Two. The pressure is now growing through the threat of abolishing oil subsidies to Belarus, following Minsk’s attempts to improve its relations with the E.U.

Refineries and transit pipelines in Belarus are all under the jurisdiction of the state-owned holding BelNaftaKhim. This includes: the Belarus section of the Druzhba transit pipeline for Russian oil to Europe (operated by BelNaftaKhim’s subsidiary HomelTransNafta); the Mozyr and Navapolatsk refineries, the Palimir petrochemical plant (associated with the Navapolatsk refinery), and some smaller assets (Interfax, January 1–7).

Belarus provides transit service for more that 70 million tons of Russian oil per year to Europe (not including the oil supplies to Belarus itself) through the Belarus Druzhba pipeline. This staggering quantity takes two directions from Belarus territory: one westward into Poland and Germany, and the other one southward from Belarus, via Ukraine into Slovakia, the Czech Republic, and Hungary (with pipeline links to each country). All these countries critically depend on Russian oil supplies through Belarus and Ukraine.

Originating at Unecha on the Russia-Belarus border, the Belarus Druzhba pipeline bifurcates at Mozyr. The westward branch enters Poland at Adamova/Adamowo and continues across that country to Germany. The southward branch runs from Belarus into Ukraine to Brody, continuing–as the Ukrainian section of the Druzhba pipelinetoward Central Europe. The southward branch, furthermore, links up at Brody with the Odessa-Brody pipeline, which is being reverse-used as Brody-Odessa for Russian oil to Black Sea ports.

A third, northward branch is also a part of the Belarus Druzhba transit pipelines. Running in two spurs to Latvia and Lithuania, respectively, it used to deliver some 12 to 15 million tons per year in the aggregate to those two Baltic States. Russia, however, stopped oil deliveries by pipeline to Latvia and Lithuania in 2002 and 2006, respectively. Thus, the Belarus Druzhba’s northern branch is no longer operating at all. Moscow, using its monopoly as oil supplier, hoped to strangle Latvia’s Ventspils export terminal and Lithuania’s Mazeikiai refinery and acquire them on the cheap. The goal has not been accomplished but it remains on the agenda. It also serves as a reference paradigm for other countries where Russia is a monopoly supplier to local refineries, including Belarus.

BelNaftaKhim’s Mozyr and Navapolatsk refineries operate almost entirely on Russian oil (with meager additions of Belarus-extracted oil). Each of these refineries processes 10.5 million tons of crude oil per year. Russian oil producing companies, chronically deficient in refining capacities at home, use Belarus as a strategic base for refining their crude oil. Russia delivers some 21 million tons of crude oil to Belarus annually in recent years (21.5 million tons in 2009), including 5 to 6 million tons to meet Belarus’ domestic requirements for petroleum products and another 16 million tons to be refined for exporting the products (RIA Novosti, January 4).

Belarus has included the Mozyr and Navapolatsk refineries in the program for privatization of state property since 2008. However, Minsk is bargaining hard over the terms of “privatization” by Russian state-controlled companies or oligarchic entities. As part of its resistance, Belarus supports the goal of using Ukraine’s Odessa-Brody pipeline in the originally planned direction, south-north, for Caspian oil supplies (Valerya Kastyugava, “Prospects of Belarus’ Participation in the Odessa-Brody Pipeline’s Operation,” BISS, 2008). By the same token, Belarus is interested in reactivating the northern pipeline connection to the Baltic States. Since Russia forced that pipeline’s closure, Minsk considers the possibility of using it in reverse, so as to receive oil from international spot markets via Lithuanian or Latvian maritime terminals.

–Vladimir Socor

The Jamestown Foundation

Tuesday, January 5, 2010—Volume 7, Issue 2

MOSCOW USING OIL EXPORT DUTY TO PRESSURE BELARUS

by Vladimir Socor

Effective January 1, Russia has drastically reduced its traditional subsidy to the oil processing industry in Belarus and, thereby, to President Alyaksandr Lukashenka’s government. That industry in Belarus is processing Russian crude oil and exporting the derivatives to European Union markets. Some Russian oil producing companies rely heavily on the Belarus state-owned refineries. Moreover, Belarus provides transit for the lion’s share of Russian crude oil exports by pipeline to Europe. The importance of Belarus for oil transit is similar to Ukraine’s importance for gas transit from Russia.

Politically, Moscow’s move retaliates against Lukashenka’s recent, tentative rapprochement with the EU. Withdrawal of Russian preferential arrangements for oil hits heavily at the state budget of Belarus. From a business perspective, Moscow’s move seeks to pressure Belarus into ceding its oil-processing plants to Russian companies, such as Rosneft and Lukoil. That goal forms part of a wider intention to “privatize” the economy of Belarus through Russian state-connected oligarchic entities. Lukashenka has resisted thus far.

The Russian government and companies are hurrying to force a takeover during the present economic recession, while prices for oil-processing plants have hit rock-bottom. The Belarus refineries could fetch realistic market prices after a general recovery from recession (unless Russia simply cuts the oil supplies, as it did earlier against Lithuania). Belarus, while reluctant to part with its refineries, seeks at least to wait out the recession and thus improve its negotiating position vis-à-vis Russia.

Russia has hitherto subsidized Belarus through deep cuts in the price of crude oil deliveries over the years. As a unique favor, Moscow has been charging only 35.6 percent of the standard export duty on Russian crude oil, correspondingly reducing the acquisition costs paid by Belarus. Thanks to this differential, Belarus has been earning multibillion dollar profits annually by exporting oil derivatives to EU countries, at the market prices prevalent there. The Russian oil companies involved have almost certainly received their share of profit from Belarus for these arrangements, which the Russian government now threatens to end.

Moscow is clearly the initiator of this dispute, which is not its first with Minsk regarding oil. In January 2007, Russia briefly halted all deliveries when Belarus attempted to introduce a more realistic transit fee for Russian oil en route to Europe via the Belarus pipelines. Moscow’s stoppage affected a number of E.U. countries downstream, necessitating emergency measures there.

The current dispute can potentially affect E.U. countries’ supplies of crude oil from Russia and oil derivatives from Belarus, if Moscow chooses to pressure Minsk through another halt in deliveries. This is not the case thus far. In public statements since January 1, Moscow has assured both Minsk and European consumer countries that oil deliveries to and via Belarus would continue while Moscow and Minsk negotiate a solution to their bilateral dispute. Russian Prime Minister Vladimir Putin, Deputy Prime Minister Igor Sechin (in charge of the energy sector), as well as spokesmen for the Energy Ministry and for Transneft have all gone on record with such assurances (Interfax, January 1–5; Russian Television, January 5).

Those assurances to Europe seem credible. Russia and its oil companies can ill-afford a loss of revenue at this time and a further loss of reputation through a halt in oil exports via Belarus to points west. The assurances to Minsk, however, are questionable, given Moscow’s intentions to pressure Belarus into ceding those refineries. Moscow can even threaten to switch some oil export volumes away from Belarus to other destinations by other routes into Europe.

Belarus transports whopping quantities of more than 70 million tons of Russian crude oil per year through the HomelTransnafta pipelines, which form the Belarus state-owned section of the Druzhba pipeline system that supplies Europe. Additionally, 4 to 5 million tons of Russian oil entered Belarus in 2009 by rail and highway transportation. Belarus itself uses some 21 million tons of Russian oil annually for processing in Belarus –a figure that has remained constant in recent years (21.5 million tons in 2009). Of this amount, 5 to 6 million tons are being refined each year to meet Belarus’ internal requirements for oil derivatives. The remaining 15 to 16 million tons are being processed for export of derivatives to Europe, according to Russian government officials (RIA Novosti, December 31; Interfax, January 1).

The Russian government is now abolishing the preferential export duty it has hitherto applied to the oil volume that Belarus processes for export of derivatives. Moscow is imposing its standard export duty on that volume, thus almost tripling that duty from its present level of 35.6 percent of the standard. This move would erase the profits that the Belarus refineries had been earning thanks to that unique preference. The change would also cut severely into the Minsk government’s tax base.

Moscow proposes to maintain its preferential export duty only on the oil volume that Belarus processes for domestic requirements of oil derivatives. Should Minsk reject this solution, Russian government officials threaten to impose the standard export duty on all the oil deliveries to Belarus, including the volumes needed for domestic supply of derivatives (Belapan, January 3, 4; Interfax, January 1–5).

Negotiations held in Moscow during December 2008 ended in deadlock. The negotiations are expected to resume imminently in Moscow. The Russian government can either inflict severe damage on the Belarus economy through these measures, or desist at least partly in return for political and business concessions from Minsk. Some Russian oil producing companies may suffer along with Belarus while other Russian companies hope to take over the oil processing sector and other industries in Belarus.

–Vladimir Socor

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