Energy Sector: From the resource supplying rentier state to the consumer state

Summary

The 2020 events in the Belarusian energy sector continued the trend of the past three years, and finally made the oil and gas industry primarily worry about its at least minimum acceptable efficiency and profitability, rather than continue ensuring a large part of national budget revenues. The industry has ceased to be a source of income and the oil rent previously used to achieve political goals. The tax maneuver in the Russian oil industry, the Russian leadership’s firm stance on the linking oil and gas subsidies with greater integration of the two countries, and political events of the second half of 2020 put an end to the economic efficiency of Belarus’ oil industry (and, even more so, the stably large oil and gas subsidies) in the current configuration of the Belarusian-Russian relationship.

Trends:

• Belarus’ bargaining position in the oil and gas supply talks with Russia is getting weaker;
• Simultaneously, no progress has been achieved in Belarus-Russia integration, which would have an impact on the terms of supplies of energy commodities;
• An attempt was made to actuate the Venezuelan oil scenario, which, among other things, weakened Belarus’ bargaining position.

Gas

Belarus imported 18.766 billion cubic meters of natural gas in 2020, down 7.3% year on year. Despite the rise of the average annual price of gas, the import also contracted in monetary terms to USD 2.45 billion.

The average annual benchmark price of Russian natural gas at the German border stood at around USD 111 per 1,000 cubic meters. The average annual price of Russian gas for European consumers was for the first time below the price set for Belarus (see Table 1). More recent statistics shows the same.

This difference is not a consequence of an overpricing of Russian gas for Belarus. The low price for Europe resulted solely from external factors. First of all, the fairly warm winter (both at the beginning and at the end of 2020) made it possible to fill the storages outside the peak periods. Besides, the SARS-CoV-2 pandemic led to a considerable decline in the gas consumption in Europe. Among Europe’s top ten importers of Russian gas, only the Netherlands and Slovakia increased their consumption in 2020, largely because of the big number of gas-fired power plants. The low gas prices enabled them to increase the export of relatively cheap electric energy.

Belarus was expectedly unhappy about the gas price, considering it “unfair” in comparison with the price set for Europe. However, the gas pricing agreements with Russia never de jure implied a price for Belarus lower than for Europe. The price for Belarus is calculated by the formula applied since 2000: the price for the Yamal-Nenets Autonomous District of Russia based on the calorific value (which may vary) adjusted for annual inflation plus the pipeline delivery cost.

In 2000 and many years afterwards, this formula did significantly reduce the gas price for Belarus, but the energy market environment has changed. Once the pandemic is over, gas prices will go up in Europe, while in the years to follow, the gas subsidy for Belarus will either be very small compared with the prices for Europe, or it will be a subsidy relative to the gas prices Belarus would pay without political agreements with Russia.

Given the domestic socio-economic and political situation, Belarus has virtually no bargaining chips in gas formula talks. In fact, a lower price of gas is now only possible in exchange for greater integration, lower gas transportation costs, or if Belarus is equaled to the Smolensk Region of Russia in business terms.

Oil

Belarus failed to enter into long-term contracts for supplies of Russian crude oil in early 2020 due to disagreements over the amount of the so-called “bonus” paid to Russian oil producers. Only small companies of Russia signed contracts with Belarus, but the volumes were many times smaller than those required to fully load the refineries. Belarus even stopped exporting its own oil in the first quarter of 2020 to fill up the gap.

In April, Belarus and Russia reached an agreement on oil supplies, but long-term contracts were still not achieved, so the Belarusian refineries received Russian oil under monthly contracts until the end of 2020. See Table 2 for the 2020 Belarusian oil refining statistics.

Belarus not only reduced its import of oil in 2020, but also was significantly short of oil product export revenues, which, in many respects, stemmed from a decline in demand caused by the pandemic and, consequently, a price downfall. Also, for the first time, it was impossible to estimate the size of the Russian oil subsidy: as of this writing, the data on the physical volume of oil imported from Russia had not been published, and the final volume indicates the total import from all countries that supplied oil to Belarus in 2020.

In order to substitute Russian oil, Belarus procured small amounts of oil from other countries, particularly from Azerbaijan, the United States, Saudi Arabia, and Norway. The exact amounts per country are unknown. It is known that the largest volume (according to some estimates) – about 1 million metric tons – was purchased from Azerbaijan, while the rest came in small sea tankers.

The promptness of the signing of oil supply contracts and the relatively large number of the supplying countries in early 2020 gave grounds to assume that Belarus had finally endeavored to diversify its oil import in the long term. However, structurally, the situation did not differ from 2010–2012, when Belarus imported oil from Venezuela. By purchasing oil from sources alternative to Russia, the Belarusian leadership rather sought to demonstrate that it can do without Russian oil, if necessary. As for the profitability of Venezuelan oil, for example, Belarus lost over USD 500 per ton compared with supplies from Russia in 2012 (Table 3).

The assumption that Belarus set to diversify oil supplies in the long term is de facto incorrect, since supplies from outside Russia can only be profitable for Belarus in case of steadily low oil prices. Meanwhile, Moscow would by no means agree to supply oil when the prices are high, and let Belarus procure it wherever it wants when the prices are low. Belarus stopped purchasing oil from other countries in April 2020, once Russia had decided to cover oil producers’ premiums by means of inter-budget transfers. Importantly, this inter-budget compensation was only in force in 2020 without further extension, and the parties did not even discuss the future compensation.

Electricity and tariff policy

The basic electricity tariff for households in Belarus rose considerably in 2020 from BYN 0.209 to BYN 0.389 per kWh, which was one of the biggest increases in years. For the first time, the straight-line rate for households was above the tariff set for industrial consumers (BYN 0.286). The maximum tariff for households reached 14.4 euro cents in equivalent, while industrial consumers paid 10.59 euro cents.

As a result, the price of electric energy for Belarusian households exceeded the tax-inclusive price of electricity for households of some neighboring countries, members of the European Union. For comparison, in 2020, the price of one kilowatt-hour in Estonia stood at 12.9 euro cents for households and 8.3 euro cents for the real sector; Latvia – 14.3 and 10.2 euro cents, respectively; Poland – 15.1 and 10.3 euro cents; Lithuania – 13.2 and 3 euro cents.

The first power unit of the Belarusian nuclear power plant, the launch of which had been repeatedly postponed, began functioning in October 2020, and was connected to the national grid in November. The export of electricity generated by the NPP to Europe or even Russia is in question, though. Although Lithuania purchased small amounts of electricity in 2020 (because of the peculiarities of electricity trading on the exchange), at the initiative of Lithuania, the Baltic States are working on electricity procurement rules based on the location of the generating source. Once (if) these rules have been agreed upon, the export of electricity from Belarus to Europe will be effectively blocked after the events of August 2020.

Conclusion

As we predicted in the previous Belarusian Yearbook,3 the year 2020 was extremely difficult for the Belarusian oil industry due to the decreased revenues, which resulted from the tax maneuver in the Russian oil industry and changed demand and prices of exported oil products.

Belarus tried to compensate for the insufficient amount of oil received by purchasing oil from sources alternative to Russia, benefitting from favorable oil prices, but the previous import volumes were not achieved. In fact, with low prices, good opportunities to enter into lucrative long-term contracts, and available infrastructure (reverse supplies of oil from Poland, modernization of the oil pipeline string running from Latvia, the accelerated upgrade of the Belarusian refineries and their interconnection by a pipeline), the diversification of oil supplies to Belarus was limited to mere declarations while waiting for a resolution of the conflict with Moscow.

Given the domestic political crisis in Belarus in the second half of 2020, oil and gas wars between Russia and Belarus are highly unlikely in the years to come. The Belarusian leadership will try hard to avoid any conflicts, and will agree to supply terms should they be “a little better than they could be.” The oil and gas rent can no longer be utilized as an internal political mechanism, as the oil and gas subsidies from now on become exclusively a matter of refinery economics and of staying afloat by recharging the national budget.