Energy Sector: Rent cuts
Alyona Rybkin

Summary

The terms of Russian energy supplies to Belarus kept changing throughout 2010, and prices of energy products delivered from Russia kept growing, although Belarus still enjoyed lower energy tariffs than other consumers in the region. The relatively low energy prices enabled the authorities to postpone structural reforms in the election year, and the tariff policy in the energy sector remained unrevised. In the oil sector, alternative (Venezuelan) crude oil supplies commenced, however, the declared efficiency of deliveries has never been proved.

The government was in talks with Russia over arrangements to improve the terms of supplies of fuel and energy resources in the framework of the Common Economic Area (CEA). The lack of any structural transformations, despite the adopted Concept of the development of the energy potential remained a factor that reduced the efficiency and competitiveness of the sector, as well as its appeal to private investments.

Tendencies:

• The country still depends crucially on Russian supplies of fuel and energy resources despite the attempts to diversify oil imports and increase the share of local fuels in the total consumption;
• The rent, currency proceeds and profits generated by the sector go down;
• The efforts to enhance energy security and develop the energy sector potential are impeded by shortages of financing, technological constraints and current principles of economic policy.

Oil sector

In 2010, Belarus reduced both import and processing of oil for the first time in many years. The country imported 12.9 million metric tons of crude oil from Russia, of them 6.3 million metric tons without paying the export duty and 6.6 million metric tons subject to full payment of the duty. The authorities attempted to diversify imports in order to respond to the new terms of trade with Russia: in 2010, Belarus started importing crude oil from Venezuela (imports amounted to 1.8 million metric tons).
Belarus therefore imported a total of 14.7 million metric tons of crude oil in 2010, down 32% year-on-year (in 2007-2009, the country imported 21.5 million metric tons of crude oil from Russia annually). The introduction of export duties on crude oil and refined oil deliveries from Russia caused a drop in imports of oil products, to 900,000 metric tons in 2010 from 3.8 million metric tons in 2009. Furthermore, Belarus did not export crude oil in 2010, whereas in 2009, exports reached USD 738.1 million in value terms.
Despite the serious reductions in the volume of imports and insignificant domestic oil production, at 1.7 million metric tons, oil products remained a very serious Belarusian export, and proceeds from foreign sales of refined oil remained one of the key channels of foreign exchange revenues (see Table 1). Last year, Belarus exported only 11.3 million metric tons of oil products (to compare: in 2009, export of Belarusian oil products reached 15.5 million metric tons, up from 7.7 million metric tons in 2001). Traditionally, countries beyond the CIS accounted for most of the exports, 80%, however, the structure of consumers changed in 2010: Ukraine accounted for 90% of all deliveries to the CIS, while shares of traditional European importers decreased (the Netherlands accounted for 43% of all exports, the UK for 14%, and Latvia for 8%).

Table 1. Dynamics of oil product exports in 2005-2010

Source: BelStat statistical committee, author’s own calculations

The rise in prices of Russian crude oil (the regular price plus the duty) and relatively high price of Venezuelan oil (USD 647 per metric ton) resulted in a dramatic reduction in the profitability of the oil-processing industry for the state budget and poorer foreign trade performance (trade in oil and oil products came to a deficit of USD 909 million). Because of the changes in the terms of oil deliveries in 2010, the two Belarusian refineries were operating at 60%-70% of their capacity in the first half of the year. OAO Naftan reached its design capacity in September 2010, and OAO Mozyr NPZ oil refinery first used 100% of its capacity only in late October. The profitability of oil processing kept falling: according to preliminary estimates, OAO Mozyr NPZ’s total net profit for the year 2010 reached USD 15 million, down from USD 68 million in 2009.

On the domestic market, oil product prices were raised three times in 2010 (in the first half of the year); the resulting increase in prices was between 15% and 20%. Despite the supplies of duty-free Russian crude, the prices of diesel fuel and gasoline kept rising in order to keep the refineries profitable. AI-95 gasoline price ultimately increased to around USD 1 per liter, which is the highest price in the CIS.

The decisions to increase oil product prices domestically were made contrary to the government’s general policy to keep fuel prices low. Firstly, the country is interested in having transit haulers fill their tanks in Belarus (rather than in Poland or Lithuania), which means even if return on sales were low, Belarus would still generate substantial profits by selling additional volumes. Secondly, the Belarusian side had hoped until very late that the duty-free quota of 6.3 million metric tons would be revised if the country increased sales of oil products on the domestic market.

The intrigue around the privatization of the refineries after all came to nothing. Despite the fact that the deterioration of the terms of oil deliveries affected the profitability of both Belarusian refineries, the country kept insisting not only on very high prices of their assets, but also on additional conditions that potential investors were supposed to meet. Although Russia is still interested in having control over the Belarusian refineries1 , the price and terms of the acquisition of control laid down by the Belarusian authorities discouraged the Russian side. To promote the competition for its refineries, Belarus repeatedly mentioned that its oil assets might be sold to Venezuela, a new partner. In 2010, oil transport by Belarusian oil mains amounted to around 80 million metric tons. The government forecasts a reduction in the volume of transit by 25% starting 2011 because of Russia’s successful efforts to build oil pipelines bypassing Belarus. To minimize losses and keep potential investors interested in the Belarusian pipeline networks, the country is getting ready for privatization of its oil pipes. On December 29, 2010, Gomel city executive committee registered OAO Gomeltransneft Druzhba, and on December 30, 2010, Novopolotsk city executive committee registered OAO Polotsktransneft Druzhba.

Gas sector

In early summer, Belarusian-Russian relations in the gas sector were once again compromised by yet another case of “gas embrace” (a term coined by Russian Ambassador to Belarus Alexander Surikov2 : the two countries accused each other of non-performance of obligations. Since the start if 2010, Belarus had been paying for Russian gas the price that it had set independently without having the supplier’s agreement, which resulted in a USD 190 million debt accumulated by early summer. The Russian side had warned Belarus that gas supplies could be limited unless Belarus had repaid the debt by June 21. Belarus failed to pay on time, and Gazprom started limiting deliveries at 10:00 on June 21.

According to the Belarusian side, Gazprom’s debt for natural gas transit through Belarus had reached USD 260 million. Belarus claimed the pipe should not be shut while the two sides had mutual debts: Gazprom owed Belarus USD 260 million, and Belarus owed the gas giant USD 190 million. Gazprom insisted that it had nothing to do with the gas transit debt, because it was ready to pay for transit at previous rates, but Belarusian colleagues would not accept such payments3 . The fifth “gas war” lasted for three days. On June 20, Gazprom made claims, on June 21 it cut gas supplies to Belarus by 15%, on June 22, deliveries were further cut by another 15%. After Gazprom issued an ultimatum that supplies might be reduced by 85% if Belarus failed to pay immediately4 , Belarus paid up late on June 22. On June 24, Gazprom transferred to Belarus USD 228 million for gas transit at the old rate of USD 1.45 per 1,000 cubic meters. The remaining issues were resolved a bit later: Beltransgaz’s wholesale markup was set at USD 11.09 per 1,000 cubic meters and the transit rate was raised to USD 1.88 (the decisions were backdated to January 1, 2010).

In 2010, Belarus imported 21.6 billion cubic meters of natural gas, up 23% year-on-year, or by 4.03 billion cubic meters. Since the natural gas price for Belarus is pegged to the price of the oil basket, and the latter is adjusted on a quarterly basis, Belarus saw quarterly changes in the gas price. The average annual gas price came to USD 185 per 1,000 cubic meters, an increase of 15.6% from 2009. Gas price fluctuations are presented in Figure 1.

Figure 1. Dynamics of gas import prices, 2011-2010

Note: VAT not included
Source: BelStat statistical committee

Gas transit remained almost unchanged in 2010 compared with previous years, at 43.2 billion cubic meters, down 3% from the 2009 level. It is the maximum transit volume that the Belarusian gas transport system can deal with. The government expects a reduction in Russian gas transit through its territory by around a quarter in the next few years because of the projected launch of Nord Stream and South Stream gas mains. Transit by Yamal-Europe gas pipeline amounted to 27.9 billion cubic meters in 2010, down 8% year-on-year, and by Beltransgaz pipelines reached 15.3 billion cubic meters, up 7%.

Tariffs for consumers
In February 2010, natural gas rates for corporate consumers and individual entrepreneurs were raised by 25% to USD 217 per 1,000 cubic meters from USD 174, and in summer, rates were additionally increased by 13.2% to USD 240 per 1,000 cubic meters (VAT not included). Gas tariffs for households remained unchanged, at around USD 158 per 1,000 cubic meters. The gap in tariffs thus widened, and subsidies of households by industrial gas consumers became even stronger.

Electricity sector

The Belarusian power grid includes six independent regional republican unitary enterprises, or RUPs5 , also called oblenergos and HV power lines connecting them to power grids of neighboring countries (Russia, Ukraine, Lithuania and Poland). This system is governed by Belenergo concern, which is accountable to the Energy Ministry of Belarus. The power grid of the country is a vertically integrated company, in which generation, transfer and distribution are not separated.

Electrical power generation in Belarus totaled 34.5 billion kilowatt-hours (kWh) in 2010, a rise by 14% from 2009. Import of electricity fell 34% year-on-year in 2010 to 2.97 billion kWh because of tariff disagreements with Russia. Ukraine provided most of the country’s imports, with 2.94 billion kWh, whereas Russia delivered only 30.3 million kWh of electricity. In 2010, Belarus exported 270 million kWh of electricity, mostly to Lithuania (there were no electricity exports in 2009). The low volume of export may be attributed to difficult conditions of supplies to the Baltic States. In 2010, electricity tariffs for households remained unchanged, at USD 0.05 per kWh. In 2010, electricity rates for industrial consumers were raised twice, in February and August. The combined increase in prices was at 33%, to USD 0.144 from USD 0.114. Therefore, despite relatively cheap natural gas, which is currently the key raw material used to generate electrical power, and low costs (labor, etc.), Belarusian electricity rates for industrial companies are close to those European and highest in the CIS. There are a few reasons for this: there is cross-subsidy to compensate for lower rates for households; some of the costs to generate heat are passed on to electricity producers; the sector remains inefficient and non-transparent; there are many consumers enjoying reduced rates (lower tariffs are compensated by the electricity sector itself rather than the Finance Ministry).

The fact that natural gas prices were growing faster than electricity tariffs resulted in a dramatic deterioration of the situation in the electricity industry. Return on sales fell to 2.8% in 2010 from 5%-7% in previous years, mostly owing to the increase in tariffs in the second half of the year (in January-June 2010, the electricity sector reported losses).

Strategy for the development of the energy potential of Belarus for the period to 2020 6 .
The Strategy envisages at least USD 18-19 billion in investments in modernization of the energy system during that period. Spending on energy saving and promotion of the use of local fuel and energy resources is estimated at USD 16.9 billion. The strategy will be financed through state programs from the state support fund, private and Public Private Partnership (PPP) funds, funds borrowed from international financial institutions and loans of domestic banks.

It is planned to invest at least USD 1 billion in the electricity industry annually. Most of the investments will be channeled into the Belarusian nuclear power plant – projected investments total USD 9.334 billion within 10 years.

Furthermore, it is planned to gradually reform the Belarusian energy system in the next five years (restructuring and tariff reform), which will be crowned by the creation of the national wholesale market of electricity (capacity) and privatization of electricity suppliers. The energy system will be reformed in three phases by 2015.

Conclusion

In 2010, the energy sector continued providing substantial currency and budget proceeds, however, the volume of revenues markedly decreased. The transition to market prices in energy trade with Russia affects both the macroeconomic stability in the country and the sustainability and competitiveness of the energy sector. The shortage of funds to finance modernization in the Belenergo system, limited financing capacity of the state budget, as well as regulated prices and tariffs reduce the efficiency of energy enterprises. Furthermore, the current privatization strategy and approach to the engagement of technical assistance from specialized international organizations restrains the capacity of the sector to attract foreign investments.