Energy Sector: Restoration of Rent

Summary

In 2022, Belarus faced sanctions imposed on its oil-processing industry, but was nevertheless able to reap significant oil-related benefits from the restrictions applied to the Russian oil and gas sector. The gap between the prices of natural gas that Russia charged Belarus and European buyers resulted in a significant subsidy, while the use of Russian seaports and hikes in global prices of oil products made refined oil export unprecedentedly profitable. This trend, however, is unlikely to remain even in the medium term.

Trends:

• increased profitability of the oil and gas sector;

• politically — insufficient growth of oil and gas rents to ensure the population’s stronger loyalty to the authorities;

• uncertainty in the electricity market.

Natural gas

The year 2022 was notable for the fact that Belarus had classified the volumes of imported Russian natural gas. The price of supplies was the only thing known to the public — $128.52 per 1,000 cubic meters, but the total volume was available neither in the official compilations of the Belstat statistics authority, nor in the Comtrade database.

Nevertheless, supplies can be estimated in volume terms based on press releases of Gazprom Transgaz Belarus. According to one of them,1 in value terms, natural gas supplies were estimated to reach $2.44 billion in 2022, which implies that natural gas deliveries had been projected at 18.98 billion cubic meters (bcm) last year. Actual deliveries remain unknown, but we will be using the estimated volume in comparisons below.

It can be assumed that natural gas import went down by 4.1% year-on-year in 2022, while the price was unchanged per 1,000 cubic meters. Belarus failed yet again, for the sixth time in a row, to procure a significant reduction in the annual price of Russian natural gas. Nevertheless, the situation in the European market for natural gas that emerged following Russia’s invasion of Ukraine brought about unprecedented benefits to Belarus due to a de facto natural gas subsidy.

As shown in Table 1, in 2022 the difference between the price that Belarus was paying for Russian natural gas and the benchmark price for European countries (aggregate indicator) on the border with Germany exceeded $1,000 per 1,000 cubic meters, which is a new all-time high. The unparalleled gap is attributed to sanctions imposed by the EU on Russia’s oil and gas sector in the wake of Russia’s invasion of Ukraine, which entailed a dramatic reduction in natural gas supplies to the European market in volume terms.

For the European Union, one of the strategies was to reduce Russian gas consumption and switch to other energy sources or gas imports from other countries, in order to reduce political dependence on Russia, as well as the amount of funds from which Russia can finance military operations. Furthermore, in the run-up to the heating season, European countries sought to rapidly increase the volumes of natural gas in underground storage facilities (UGSF).

This process took time. Given that Russia used to be the largest supplier of natural gas to the EU at the beginning of 2022 and operated the most stable and extensive infrastructure for gas transportation, the decision to curtail purchases of Russian natural gas naturally spurred prices in the European market. In addition, Russia significantly reduced pumping volumes through its gas mains, citing the fact that gas was resold under long-term contracts at higher prices in the reverse mode and, later, the newly imposed sanctions. This also pushed natural gas prices in European countries.

By the end of 2022, the share of import from Russian in the EU’s market for natural gas had dropped from 48.7% to 12.9%,4 whereas gas prices had fallen considerably due to the concerted actions of European countries that were switching to alternative suppliers, significant volumes stored in underground facilities, and the very warm winter. Nevertheless, the rapid leap in natural gas rates in the EU countries enabled Belarus to benefit from the import price gap, which de facto formed a natural gas subsidy.

However, Belarus will be unable to enjoy the same subsidy in 2023, as European consumers quickly contracted natural gas supplies from alternative sellers, pushing natural gas prices downward. Russia will be charging Belarus the same price for its supplies of natural gas, fixed at $128.5 per 1,000 cubic meters, for at least three more years, and Minsk currently has no leverage to revise it.

Oil

In 2022, statistics on Belarus' oil refining volumes, import and export of crude oil and refined oil products were completely classified, whereas in 2021, data were available only for a brief period. It is not known where Belarus was buying crude oil, but it is quite obvious that the largest seller was Russia.

Calculations performed by BEROC experts suggest that in 2022 Belarus imported 10.3 million tonnes of Russian crude oil at $504 per tonne, which compares to the Brent blend price of $604.2 per tonne.5 Their estimates are used to outline changes in volumes of crude oil import in Belarus and Belarusian export of refined oil products since 2016 (Table 2).

As can be seen from the table, in 2022, the decline in the volume of Russian crude oil imports to Belarus was more than 150% compared to 2020. This can be attributed to the European sanctions applied to Belarus' export of crude oil and oil products: Belarus did not need as much crude oil as before, whereas its own crude was most likely used for domestic refining. The per-tonne crude price doubled, and revenues from the export of Belarusian refined oil soared.

Despite the significant increase in the price of Russian crude oil, the Belarusian oil industry reported profits. Firstly, Russian crude was still much cheaper for Belarus than what foreign consumers paid. Secondly, even though sanctions were imposed by the EU and the lucrative Ukrainian market was unavailable, Belarus was still able to generate more revenues from sales of refined oil products than back in 2019. One of the reasons is probably the agreement reached in 2021 on the transshipment of Belarusian oil products via the seaports in Ust-Luga and St. Petersburg (instead of the Baltic seaports), which facilitated the export of Belarusian oil products to third countries.

It appears that the sanctions applied to the Russian oil sector helped the Belarusian oil refining sector to survive amid limitations on the import and export of Belarusian oil products imposed by European countries. However, we cannot say that Belarus regained its status of a typical beneficiary of the oil rent, as was the case in the second half of the 2000s. There are three reasons for this:

1. the high revenues from the export of oil products will not remain in the long run, as Western consumers managed to replace Russian crude deliveries;

2. the super profits generated by foreign supplies of refined oil products last year against the backdrop of sanctions only enabled Belarus to get by and make up for the inaccessible markets of Ukraine and European countries;

3. for countries living off rent the main issue is how to invest it,6 but in 2022, unlike in previous year, the Belarusian authorities failed to transform the excessive incomes from foreign deliveries of oil products into additional loyalty inside the country.

In 2023, Russia’s oil supply and transportation conditions for Belarus will presumably remain in place, but profits will be limited.

Electricity

The complete disconnection of Ukraine from the Belarusian energy system became the pivotal event for the electric power industry. What was originally a scheduled disconnection (to test both the operation within the power grid of mainland Europe and to test isolated operation) eventually became permanent.

Belarus was therefore unable to continue exporting electricity to Ukraine, losing one of its largest buyers. Electricity export statistics were classified in 2021, but in 2020 Belarus exported 1.1 billion kilowatt-hours to Ukraine, while meeting 70% of its own requirement. The Ukrainian market will remain inaccessible for Belarus for both political and technical reasons: in 2022, Ukraine was fully connected to the European power grid, whereas the massive shelling of the energy infrastructure by Russian troops made it obvious that the Ukrainian grid is capable of effective operation even if it is partially isolated.

The relevance of the construction and operation of the Belarusian Nuclear Power Plant becomes even more questionable. Although it stood idle for half of 2022, now that the second power unit has been commissioned, the challenge of exporting the surplus becomes increasingly complex. Russia does not look like it can act as a major buyer: the Russian electricity market does not have a deficit to cover, so supplies are only possible at a significant discount. The most likely scenario is to encourage Belarusians to increase electricity consumption while lowering tariffs.

Conclusion

The Belarusian energy sector has been able to adapt to the sanctions imposed by the West, which brought it considerable profits. The situation in the European natural gas market resulted in a significant gas subsidy for Minsk due to the price gap, whereas revenues from sales of refined oil products increased as well.

However, Belarus will not reinstate its positions as a petrostate feeding off the oil rent. The super profits of the oil and natural gas sector have not been translated into political loyalty, and the economic effect of the adaptation is likely to be short-lived, so next year we will most likely observe a significant decrease in the profitability of Belarusian oil refining and a much narrower gas subsidy. The only thing that can prevent this is a revision of the terms of oil and natural gas trade which, however, seems extremely unlikely.