Energy Sector: Energy rent plummets

Summary

The drop in crude oil prices, which began in the summer of 2014, produced a profound negative impact on the financials of Belarusian oil-processing companies in 2015. Other negative factors that affected the Belarusian oil sector remained unchanged — the ongoing depreciation of the Russian ruble and the ‘tax maneuver’ in the Russian oil-extracting sector. The price of Russian natural gas for Belarus decreased following the plummeting oil price; however, this time, lower natural gas prices implied more threats than benefits. Prices fell even for European consumers, and the comparative advantages of Belarusian companies based on lower energy prices almost came to naught.

In 2015, the work to phase down cross-subsidies slowed, and the deadline for Belarus to do away with cross-subsidies was postponed from 2017 to 2020.

Trends:

• Oil-processing terms seriously deteriorated in the wake of crude oil price drops, which poses a threat to the financial stability of Belarusian oil refineries;
• Cheap energy-based comparative advantages of Belarusian companies were affected;
• Efforts to abolish cross-subsidies slowed.

Oil and oil products

In 2015, the Belarusian oil-processing sector was affected by the price shock in external crude oil markets, because supply markedly exceeded demand. Throughout 2015, global Brent blend prices dropped from USD 50 per barrel to USD 35, or by around 30%. Since June 2014, when oil prices started falling, a 69% decrease in prices was registered from USD 111.62 per barrel. The price of the Urals blend delivered from Russia to Belarusian oil-processing companies went down from USD 46.58 per barrel to USD 36.42, and since June 2014, the price dropped by 67% from USD 108.93 per barrel.

The decrease in crude oil prices naturally affected the prices of exported oil products, making the year 2015 the worst one in terms of export proceeds from foreign supplies of oil products in the past five years (see Table 1). In 2015, export revenues from oil products dropped by 30.7% year-on-year to USD 6.831 billion, despite the 22.4% increase in export deliveries in volume terms, to 16.581 million tonnes. On a per tonne basis, oil product prices fell by 43.4% to USD 403.5.

One reason behind the increase in foreign supplies of oil products in volume terms was the change in export destinations. Deliveries to the CIS dropped by 22.1% year-on-year, whereas supplies to consumers beyond the CIS rose by 52.5%. Belarus’s supplies to Russia were as low as 903,000 tonnes, although the country had committed to deliver 1.8 million tonnes of oil products to Russia in 2015. The reduction in supplies is attributed to the depreciation of the Russian ruble, which made Russia a less profitable destination for Belarusian oil products. Belarus’s default on its obligations to deliver oil products to Russia was not a material breach of the country’s contractual commitments, though, because the agreement signed back in 2014 enables Belarus to begin consultations over a temporary suspension of oil product supplies to Russia whenever the price of such commodities in Russia fell below the so-called ‘export parity’ (the export price minus transport costs and duties).

For its part, the Russian side is entitled to reduce the volume of crude deliveries to Belarus (by 5 tonnes per each tonne of oil products short of the agreed volume). However, in 2015, Belarus imported the entire volume of crude oil that it was supposed to receive under the original agreement (22.9 million tonnes at USD 247.3 per tonne). In value terms, import dropped by 35.7% to USD 5.669 billion, because the per-tonne price fell from USD 338.9 in 2014.

The decision of the Russian side not to reduce crude oil supplies to Belarus in 2015 must have been caused by the fact that Belarus held a presidential election and budget revenues were more important than ever before. Russia thus offered the incumbent president its political support once again — this time by ensuring favorable terms of bilateral trade in crude oil and oil products. The year 2015 was also characterized by a significant reduction in the share of processing on a tolling basis at the Belarusian refineries — it dropped to 24% of the total amount. The decrease in the processing volume was due to the negative impact of the Russian tax maneuver in the oil sector: export duties went down, while the mineral extraction tax rate went up, which makes export of crude oil more profitable than domestic processing in Russia.

In 2015, the tax maneuver amid falling crude oil prices affected the profitability of the Belarusian oil-processing sector. The reduction in oil prices not only impacted the price of exported oil products, but also resulted in a cut in the amount of oil duties that the country managed to keep in its budget according to the agreement signed in October 2014 — to approximately USD 1 billion.

In 2015, Belarus exported 1.6 million tonnes of its domestic crude oil at USD 358.6 per tonne, down from USD 695.1 in 2014. One of the most important developments for the Belarusian oil sector was the discovery of a new oil deposit in the Homiel Region, estimated at around 700,000 tonnes.

Natural gas

In 2015, Belarus saw a reduction in natural gas import from Russia. In volume terms, gas deliveries amounted to 18.79 billion cubic meters, down from 20 billion cubic meters in 2014, or by 6.3%. The average annual gas price for Belarus decreased by 15.1% from the 2015 level to USD 144 per 1,000 cubic meters. In value terms, the import of natural gas dropped by USD 700 million to USD 2.71 billion.

The reduction in the average annual price was caused by the fall in global oil prices, to which the natural gas price is pegged under the applicable agreements on gas supplies. The gas price drop caused a much narrower gap between the prices effective for European and Russian domestic consumers (Belarus is regarded as a domestic buyer). The difference in natural gas prices in Belarus and on the German border shrank to USD 115 in 2015 from USD 211 in 2014. Given that the average oil price in 2016 will be even lower than last year, the gap between the prices for Belarusian and European consumers of Russian natural gas will further narrow. An additional factor will thus affect the competitiveness of Belarusian manufacturers.

Although Belarus receives Russian natural gas at prices that are considerably lower than in other countries, it is the price that became the main reason why gas import fell in 2015 in volume terms. The economic predicament caused the Belarusian authorities to save on energy purchases and use fuel oil instead of natural gas to generate power. Despite relatively low prices, the Belarusian budget was faced with numerous failures to pay for gas in 2015, with combined debts amounting to BYR 5 trillion, or USD 269 million at the official exchange rate in December 2015.

Electricity and tariff policy

In 2015, Belarus imported 2.8 billion kilowatt-hours (kWh) of electricity, down by 26.4% from the level reported in 2014. Electricity import has gone down since 2012 due to the need for diversifying the fuel and energy balance. In 2016, electricity import is projected at 2.5 billion kWh, which will represent a decrease by 10.7% from 2015.

In 2015, electricity fees for households were raised three times: in January, March, and December. The benchmark tariff was increased to BYR 942.5 per kWh in January and to BYR 990 per kWh in December, i.e. the growth in electricity rates was at 4.8% in 2015 alone, and since late 2014, the rate had grown by 13.3% (December on December). However, despite its plans, the government never managed to increase rates to a level, where households would be paying 80% of electricity costs, and in early 2016, the figure stood as low as 25%.

No appreciable progress towards the complete abolition of cross-subsidies was made in 2015, although the original plan was to do away with it by 2017. Moreover, in March 2016, the deadline for the cancellation of cross-subsidy of electricity tariffs was shifted to 2020 by Resolution No. 169 of the Council of Ministers.

As a result, as of December 2015, electricity fees for Belarusian households were markedly lower than those in neighboring European countries. Belarusian consumers were paying EUR 0.0507 per kWh, whereas Estonian households were paying EUR 0.13, Polish consumers EUR 0.144, Lithuanian buyers EUR 0.126, and Latvian households EUR 0.164.

Electricity rates for the real economy increased in the BYR equivalent to BYR 1,972 per kWh from BYR 1,237 (for companies with capacities exceeding 750 kVA) and to BYR 2,519 per kWh from BYR 1,580 (for companies with capacities below 750 kVA). Given changes in the ruble exchange rate, in December 2015, Belarusian companies were paying EUR 0.0963 and EUR 0.123 per kWh (depending on their capacity). Therefore, in the euro equivalent, electricity rates for the real economy fell from 2014, when they averaged EUR 0.137. However, European rates for manufacturers remain much lower: in 2015, Polish companies were paying EUR 0.088 per kWh, and Lithuanian producers were paying EUR 0.099. As we forecast in the previous issue of Belarus Yearbook, cross-subsidies were reduced at a very low pace in 2015.2

Conclusion

In 2015, the profitability of the Belarusian oil-processing sector decreased even more than in 2014, and now threatens the financial stability of the oil refineries. Oil price forecasts show that in the medium term, the Belarusian oil-processing sector will not be capable of ensuring the same high level of currency earnings as before.

The lower prices for Russian natural gas did not make it easier for Belarusian companies: the budget was affected by mass non-payments for energy. The comparative advantages that Belarusian companies used to have due to the price differences with European consumers were almost neutralized.

The aggravated problems in the Belarusian economy and reduction in household incomes make the abolition of cross-subsidies quite unlikely in the foreseeable future, even given the postponement of the deadline for its cancellation to 2020.