Energy Sector: Temporary stabilization without clear prospects

Summary

In April 2017, the Belarusian-Russian oil and gas dispute was settled, and supplies to Belarus were back to normal. The sides agreed on a lower price for Russian natural gas after 2017. Belarus was finally allowed to keep the oil products, which it had to send to Russia under previous agreements. Compared with 2016, revenues of Belarusian oil refineries grew thanks to higher oil prices.

The oil and gas conflict was over, but little time passed until a new kind of conflict emerged, this time regarding oil transportation. The benefits that Belarus received in this confrontation are likely to be very unstable, whereas the probability of a series of new flare-ups is very high.

Trends:

• Improved situation in the Belarusian oil and gas industry in the medium term;
• Growing divergence of interests of Belarus and Russia when it comes to choosing the routes to transport oil and oil products;
• Continued transition to the hundred-percent electricity fee for households, although there is no clear tariff policy.

Oil and gas

In the first quarter of 2017, the Belarusian-Russian oil and gas dispute was finally settled. In 2016, Belarus refused to pay the gas price set by Russia, considering it ‘unfair’ given the fall in the prices for Europe and Belarus’ growing debt to Gazprom.1 Belarus said that payments would be resumed if the price was lowered from USD 137 to 73 per thousand cubic meters.

Seeking to enforce the contract, Russia cut oil supplies to Belarus in the third and fourth quarters of 2016 by a total of 5 million metric tons (20.8% of the planned volume), and by 30% to 40% in the first quarter of 2017. Belarus failed to achieve the desired price. Moreover, in 2017, the price was raised 7% against 2016 to USD 146 per thousand cubic meters.

After several rounds of talks in April 2017, the sides signed a package of documents on the terms of oil supplies to Belarus for the period until 2024. According to Russian Prime Minister Dmitry Medvedev, the documents were supposed to “minimize the risks of price disputes.” Under the reached agreements, Belarus will receive 24 million tons of oil a year until 2024, of which 18 million will go to Belarusian refineries in 2018 and the remaining 6 million will be re-exported. Belarus will keep the customs duties for itself. Also, Belarus was relieved from the obligation to supply at least 1 million tons of oil products to the Russian market.

The sides also agreed on discounts and reduction factors applied to the gas price. The formula for calculating the base price of a thousand cubic meters of gas did not change and was still pegged to the price of gas for the Yamalo-Nenets Autonomous District of Russia. Based on the reduction factors, Belarus will receive Russian gas at USD 129 per thousand cubic meters in 2018 and USD 127 in 2019. It was also agreed that by the end of 2017, Belarus would receive gas at USD 130 despite a 7% rise in accordance with the previous calculation formula.

Although the conflict allowed Belarus to reduce gas prices in the medium term and obtain guarantees on the volume of oil supplies until 2023, the year 2017 was a no-win year for the Belarusian oil industry. Belarus exported 12.3 million tons of oil products in total (a 5.5% decrease against 2016 in physical terms). In value terms, imports increased 32.1% to USD 5.34 billion.2 Oil imports in 2017 amounted to 18 million tons. There was a 34.4% increase in the oil price against 2016 from 192 to 294 dollars.

The import of natural gas grew by 2% to 19 billion cubic meters worth around 2.5 billion dollars. The difference in the prices of Russian gas for Belarus and Western European countries dropped considerably over the past five-year period (although it increased against 2016).

This confirms our last year’s outlook for the energy sector development:5 the period of super-profits is over, and the indicators (provided that the existing oil supply contracts with Russia will be executed) will largely depend on the oil price on foreign markets and the ability of Belarusian refineries to switch to the production of higher quality oil products. The latter, in turn, depends on the feasibility of plans to upgrade the Belarusian refineries scheduled for 2019. The difference in the Russian gas prices for Belarus and Western Europe, which allowed increasing competitiveness of Belarusian enterprises for quite a while, is also at an all-time low.

The oil and gas conflict was over, and another one was not long in the making, this time over oil transportation. In 2017, the Russian government began to insist on the redirection of the transportation of Belarusian oil products to Russian ports instead of Baltic terminals. This was substantiated by the fact that oil products are made from subsidized Russian oil, and, therefore, Russia should derive benefits from their transportation.

In March 2017, Russian Railways doubled the discount from 25% to 50% on transportation in tank-cars from Barbarov (Mozyr refinery) and Novopolotsk stations to north-western ports of Russia–Ust-Luga and St. Petersburg. However, even with this discount, the transportation through the Baltic ports was still cheaper because of the shorter haul distance. Besides, there was no need to pay for extra services in Russian ports (for example, heating of tanks and de-icing of the ports in winter), and, no less importantly, Baltic ports offer better servicing, technological infrastructure and legal terms, not to mention that Belarusian oil companies have long-term contracts with the Baltic ports.

The exact costs of the transportation via Baltic and Russian ports are not available in the public domain. According to some estimates, Russia should grant an extra discount of 36% to make the costs even with the Lithuanian railways.6 But still the cost of transportation of Belarusian oil products to Russian ports will be higher due to the much longer distance and extra costs mentioned above.

In August, the conflict reached the level of the Russian president. Russian Railways chief Oleg Belozyorov complained that Belarus refused to redirect trade flows to Russian ports regardless of the offered discount. Vladimir Putin proposed to tie oil supplies to Belarus with obligations to transport oil products via Russian ports, saying that ‘the refineries process Russian oil and it is highly unlikely that they will get it somewhere else’. In mid-August, Russian Minister of Energy Alexander Novak intervened as well. He announced proposals on the mandatory use of the Russian transport infrastructure by Belarusian oil companies.

In late August, Sergey Tugarinov, Vice CEO of the Russian Railways’ Center of Corporate Transportation Services said that in the event of a redirection of Belarusian oil products to Russian ports, Russian Railways will be able to transport up to 8 million tons of Belarusian oil products a year, and dropped a delicate hint that it was ‘not easy’ to execute the agreement on Russian oil supplies to Belarus in 2017. About a month later, Russian Deputy Energy Minister Kirill Molodtsov told media reporters that conditions for the redirection ‘had been created’ and the required paperwork ‘was being done’.

The potential conflict does not go further

The dispute over the tied supplies of Russian oil and the mandatory use of Russian ports for the transshipment of Belarusian oil products demonstrates an important feature of Belarusian-Russian oil and gas trade relations: as long as money is not involved, but is based on trade asymmetries, the extent of contracts and the probability of price disputes leave room for new conflicts. As long as foreign policy loyalty is exchanged for subsidized energy commodities, one of the parties will always be able to find ‘injustice’ in existing agreements and initiate a new conflict in an effort to improve the terms.

The year 2017 was quite good for domestic crude oil producers. Several oil fields were discovered in Belarus. It was announced in early January that the Ugolskoye field has 1.7 million tons of oil in place. In late April, another deposit 350,000 to 800,000 tons of recoverable oil in capacity was discovered in the Zhlobin district. In late December, Belorusneft reported two deposits in the Rechitsa district. The first one was said to have 389,000 tons of recoverable oil. As for the second field, only geological and geophysical parameters were published, and the volume of extracted oil remains unknown. The total amount of extracted oil in the discovered fields ranges from 150% to 180% of oil exported by Belarus in 2017.

Electricity and tariff policy

In 2017, electricity tariffs were raised once in September. The base tariff rose to 0.188 from 0.1287 rubles per kilowatt-hour. According to the government, households covered 70% to 79.8% of the energy cost. Charges will be raised gradually to 100% starting from 2018. As against 2016, the population was not that outraged by the rise in tariffs and did not resist as much. In 2016, public discontent at a 20% rise in electricity bills caused the authorities to bring them down. Discontent was not observed in 2017, although, according to Council of Ministers’ resolution No.1035 of December 16, 2016, the tariffs were not supposed to be raised in 2017. Our forecast made in the previous Belarusian Yearbook7 was wrong: we believed that the government would refrain from raising energy fees in 2017 to avoid public turbulence.

However, the gradual approach to a hundred percent cost recovery for electricity in Belarus paradoxically does not mean a reduction in cross subsidies or their complete abolition. Normally, an increase in tariffs for households should be accompanied by a simultaneous decrease in tariffs for the industrial sector, which did not happen in Belarus: the tariff for industrial enterprises in 2017 (10.79 US cents per kilowatt-hour) was almost twice the tariff for households (5.49 cents).

For comparison: in 1H17, the electricity tariff for households and industrial consumers in Estonia was set at 12.1 and 8.7 eurocents, respectively; 15.9 and 11.8 in Latvia; 11.2 and 8.4 in Lithuania, and 14.6 and 8.8 in Poland.8

Despite a thirteen percent increase in electricity imports in 2016 and unchanged electricity imports in 2017 (around 7 billion kilowatt-hours), an important event occurred in 2017: in late December, Energy Minister Vladimir Potupchik said that in 2018, Belarus will stop importing electric energy completely. Most likely, Belarus just wants to synchronize its energy system with those of the neighboring countries (EU members) that will enable to export energy from the Belarusian nuclear power plant.

Conclusion

The losses incurred due to the oil and gas conflict in 2016 were carried over to 2017. Russia cut oil supplies to the level of 2016. Although increased prices of oil products on foreign markets allowed Belarus earning more, the decreased oil supplies could not but affect the profitability of the Belarusian oil industry, which would probably be able to reach the level of 2015 in 2018 at best.

The oil and gas conflict also allowed Belarus to achieve better terms of Russian oil and gas supplies by applying reduction factors for gas and the re-export of 6 million tons.

The conflict very clearly showed how easily (despite seemingly resolved contradictions) Belarus and Russia could enter a new conflict based on their own understanding of ‘fairness’. The agreements reached therefore look very fragile.