Energy Sector: Nearing a phase of uncertainty

Summary

The agreements on Russian oil supplies reached in 2017 turned out to be short-lived. The second half of 2018 was marked by a heavy strain in relations with Russia, as Belarus strongly objected the change terms of oil supplies due to the Russian tax maneuver.

The year was much calmer in the gas sector, mostly because a revision of the price of Russian gas for Belarus under the operating contracts is scheduled for the end of 2019. The continuing disagreement on a compensation for the losses Belarus is incurring as a result of the tax maneuver can significantly affect the 2019 gas talks.

However, despite the tension in relations with Russia caused by the disagreements over the oil and gas supply terms, the Belarusian government does not reconsider its approaches to reducing imbalances in the energy sector.

Trends:

• Accumulation of contradictions regarding the compensation for the Russian tax maneuver and the transfer of the conflict to the area of Union relations and compliance with bilateral agreements;
• Increasing consumption of Russian gas;
• A moderate increase in electric energy tariffs and uncertainty in the electricity sector after 2019.

Gas

In 2018, Belarus imported 20.3 billion m³ of natural gas, which is 6.9% more than a year before (19.014 billion). Import volumes have been growing since 2013. In 2018, the cost of 1,000 m³ of natural gas for Belarus was set at USD 129, which is a little lower than in 2017. Gas imports grew basically because the price of Russian gas for Belarus has gradually decreased by 22.1% from USD 165.5 to USD 129.0 since 2013, and this allows increasing consumption.1

The low price of Russian natural gas in comparison with the price for Western Europe is an important element of support for the Belarusian economy. In 2018, this price difference (by the general benchmark of the gas price on the German border) increased significantly despite a slight decrease in the price for Belarus (see Table 1). The reason was a rather cold winter, which affected the growth of gas consumption in Europe.

2018 was relatively calm in terms of stability of gas supplies to Belarus, their volumes and prices thanks to the absence of conflicts and the signing of a contract for supplies of natural gas to Belarus in 2018–2019 in April 2017. The only display of nervousness was Belarus’ hectic yet futile attempts to sign a new gas supply contract with Russia.

The reason for this rush was probably the nearing date of the formation of the common energy market of the Eurasian Economic Union (EEU) planned for 2025. According to the agreements in force, by July 1, 2019, Belarus and Russia are supposed to reconsider the price of gas for 2020–2024 to be factored in when designing the common gas market.

Belarus hopes that by the time of the launch of the common market, the gas price will equal or nearly equal the price set for the Smolensk region, which is unlikely, since both Russia and Kazakhstan want the difference in tariffs for internal and external consumption maintained.

Oil

The year was much more stressful in the oil sector, primarily due to the increasing contradictions over the tax maneuver in the Russian Federation. As of late 2018, these contradictions were still far from being resolved.

The tax maneuver provides for a gradual reduction in export duties on oil products from 30% to zero and a simultaneous increase in the mineral extraction tax (MET). This will lead to a drop in Belarus’ revenues, because the collected export duties remained in the Belarusian budget. Belarus also profited handsomely from the so-called “customs re-clearance” of oil. As the mineral extraction tax replaces the export duties, the price of oil supplied to Belarus goes up. Russia supports its refineries by compensating growth in oil prices above a certain level, whereas Belarus is not ready to do the same.

The preferential price of Russian oil secured by intergovernmental agreements has been a source of significant revenues for the Belarusian national budget and Belarusian oil producers for years. As can be seen in Table 2, the difference between the price of oil for Belarus and the price on world markets (Urals grade) ranged from USD 172 to USD 481, and Belarus sold oil products made from it at world prices. As a result, savings on oil supplies alone from 2011 to 2018 ranged from USD 1.76 to USD 8.5 billion (3.7% to 13.7% of Belarus’ GDP).

According to the government estimates, the tax maneuver will cost Belarus USD 300 million in 2019 alone, and from USD 2 to 12 billion by the end of the maneuver in 2024. The timeframe of the maneuver and its justifiability caused heated debates at the government level in the second half of 2018.

On top of this, Russia decided to cut supplies of duty-free oil products, so that Belarus only meets domestic demand. The point is that Belarus re-exported Russian oil products to Ukraine and Western Europe, boosting the import of oil products from Russia in the first half of 2018. The import of liquefied hydrocarbon gas more than doubled, and the import of other duty-free oil products (gasoline, diesel and black oil fuel) increased almost 50%. As a result, the Russian budget incurred substantial losses.

Also, Russia suspended payments in the re-clearance scheme that was actually a subsidy for the Belarusian budget in the form of direct transfer of duties on 6 million tons of oil that, in fact, was not supplied to Belarus. Russia also wants Belarus to return the unpaid duties to the Russian budget.

The conflict over the re-export of Russian oil products was resolved in early October when the Russian energy minister and the Belarusian vice premier signed the protocol on amendments to the intergovernmental agreement of 2007 that will extend for the period to 2019. The protocol prohibits supplies of liquefied gas and light and heavy oil products to Belarus, which, in fact, terminates the re-export scheme. Oil products not produced in Belarus are the only exception. The compensation for duties through re-clearance was reinstated. By the end of 2018, Belarus practically stopped the import of Russian oil products.

The issue of a compensation for the losses from the tax maneuver was not resolved in 2018. The negotiations that took place in November and December did not bring the positions closer to each other. Judging by the statements made by Dmitry Medvedev and Anton Siluanov, a compensation for the tax maneuver is possible in case of a deeper integration of Russia and Belarus under the Union State Treaty.

Although the talks on the compensation are still far from being completed, some conclusions can already be drawn.

First of all, the conflict over the re-export of Russian oil products (and the reaction to the long-standing “solvents scheme”) showed that Russia will not give Belarus an opportunity to re-export energy commodities except for those specified in bilateral agreements. This means that Belarus will not be able to compensate the budget losses resulted from the tax maneuver by means of other trading schemes, and their use would provoke new conflicts between the two countries.

Belarusian officials discuss the plan to buy oil from other countries, which treads on infirm ground, since no other supplier can compete with Russia in terms of profitability. Belarus was mulling over supplies from Kazakhstan, Iran and “through Baltic ports”. In 2016, the country imported 560,000 tons of oil from Azerbaijan, but the acute issue of the price and logistics still stands, as well as pipeline infrastructure of the Baltic ports.

The difference in the advantages of oil supplies from Russia and other countries is clearly seen on the example of supplies from Venezuela in 2010, which followed the routine Belarusian-Russian conflict over the amount of duties (see Table 3).

According to the EEU Treaty, energy supplies from Russia to Belarus in the transition period (i. e. until the launch of the common energy market) are regulated by bilateral intergovernmental agreements. This enables Russia to declare the tax maneuver its internal affair, and, therefore, Belarus’ appeals that the maneuver breaches the EEU agreements are ungrounded. If Belarus does not agree to deeper integration with Russia, the chance of a positive outcome of the negotiations on the compensation for the tax maneuver is minimal. Belarus needs comprehensive reforms in the energy sector and the economy as a whole.

Electric energy and tariff policy

In 2018, electricity tariffs rose once in January. The base tariff increased from BYN 0.1287 to 0.1433 per kWh, but the reported coverage of energy costs by households did not change and remained at around 80%. The difference between the tariffs for households and industrial enterprises did not change either, although the government stays committed to phasing down cross subsidies, which is now planned for 2019. This plan provides for higher tariffs for the population and lower tariffs for industrial consumers.

For comparison, in 2018, the tariff for households and industrial consumers stood at 7.05 and 12.31 eurocents, respectively. In the first half of 2017, those tariffs were at 12.07 and 8.65 eurocents in Estonia, 15.3 and 10.3 eurocents in Latvia, 10.9 and 8.3 eurocents in Lithuania, and 14.1 and 8.7 eurocents in Poland.

In the next few years, the Belarusian government will most likely face the problem of adequate tariff regulation, and will have to take measures to regulate energy consumption in order to achieve the targets set by the policy documents. The first power unit of the nuclear power plant will be put into operation in late 2019, which, supposedly, will lower the electricity tariffs for the real sector at least.

Development of the electric energy sector in Belarus is regulated by the industry development program for 2016–2020.3 One of its main goals is to reduce electricity consumption. In August 2018, the Council of Ministers issued resolution No.579,4 which approves the inter-sectoral package of measures to increase electricity consumption by 2025. This means that Belarus has two policy documents that contradict each other.

Although the inter-sectoral package covers a longer period, this discrepancy indicates the lack of clear understanding of the ways to develop the energy industry. In fact, for the first time in many years, Belarusian regulators abandon the goal of reducing electricity consumption (which would hardly happen, provided that the tariffs would be reduced after the launch of the Belarusian NPP, and this puts the attainability of the objectives of the sectoral program into question), and, in the future, may experience difficulties in shaping the development strategy of the entire sector.

The inter-sectoral package features a series of measures to increase electricity consumption, which mainly focus on an upgrade of existing boiler stations, continued electrification and construction of oil refining infrastructure facilities. In other words, the authorities seem to have no idea what to do with the energy that the Belarusian NPP will generate, and substantial funds are needed to solve this problem. The whole inter-sectoral package of measures provides for the allocation of around USD 3.5 billion at the 2018 exchange rate.

Conclusion

The year 2017 was quite tense for the energy sector due to the oil and gas conflict that affected oil supplies. The year 2018 was even worse in a way, primarily because of the growing uncertainty regarding the future of the energy sector in Belarus.

At the moment, there are no distinct possibilities for Belarus to obtain an adequate compensation from Russia for the tax maneuver, unless the government surrenders something for a ‘deeper’ integration with Russia. In less than a year, the sides will enter into a new gas supply contract, and any serious disagreements regarding oil supplies may affect their bargaining positions on gas supplies, as 2017 showed. In 2018, Russia clearly demonstrated its unwillingness to maintain its support at the same level, unless Belarus meets certain additional requirements, and, for the first time, the politicization of EEU buildup was so disappointing for Belarus.