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№ 11 (November 2010)

Minsk Sets Course for Energy Independence from Russia

   Energy independence has became a core political goal for most CIS countries. Belarus perhaps is the most successful among them in achieving energy independence. Currently, the country is seeking alternative crude suppliers – not long ago, Russia was Belarus’ sole supplier of crude. In the wake of a number of disagreements with Moscow (“gas wars”, Russia's introduction of export duties on crude and oil products), Belarus is trying to line up more suppliers.

By Vladimir Shlychkov

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   Alternative oil suppliers would help Belarus resolve economic issues as well as eliminate the Kremlin instrument of political pressure. Belarus has not been left on its own in its struggle; Ukraine, and surprisingly, the Baltic States, have become its partners.

Venezuelan Barter

   The initial plan was to supply Venezuelan oil to Belarus (see OGE #5/2010). At the time, many believed this was mostly propaganda and bluff, but the plan worked. Tankers with Latin American crude arrive at the port of Odessa on a regular basis (CIF delivery) and test loadings of crude have been delivered to Belarus via ports in the Baltic.

   In light of the export duties imposed by Russia, the price of Venezuelan oil is not be significantly higher than the price of the Russian oil. In May 2010, Belarus reported that Minsk paid $656 per ton for Venezuelan oil compared to $500 per ton of duty-free Russian oil. However, pursuant to a Russian government resolution which came into effect on Jan. 1, 2010, only crude for Belarussian domestic use is exempt from duties. This amounts to 6.3 million tons (out of 21.5 million tons of total planned exports in 2010).

   Belarus Oil Company general director Vladimir Zubkov told OGE that Venezuela’s Santa Barbara light crude is better quality than Russian oil and consequently requires less processing and provides oil products of a higher quality.

   The cost efficiency of the Venezuela crude purchase project could be improved by improving transportation efficiency, specifically by using the Odessa–Brody pipeline. Moreover, Ukraine and Baltic States have declared their intentions to discount transit tariffs if sufficient volumes and regular crude supplies are promised.

   Still, the most important factor for the success of the project is that Belarus is paying for the Venezuelan crude not in cash, but with goods and services. During his March 2010 visit to Caracas, Belarussian President Alexander Lukashenko signed construction contracts worth $600 million. Contracts for purchasing Belarussian machinery, potassium fertilizers and food-products are underway. Belarus and Venezuela have also executed contracts on military and technical cooperation. Most of the long-term contracts are beneficial to Venezuela, regardless of who will be in power in the country.

   During his recent visit to Minsk, Venezuelan President Hugo Chavez promised that his country would supply Belarus with some 30 million tons of oil over a three-year period, starting in 2011.

The Odessa – Brody Pipeline: A Second Wind

   It seems that the long-suffering Odessa-Brody pipeline will finally get a second wind.

   On Oct. 12, the Ukrainian government made a decision on pumping a test batch of Venezuelan oil to the Mozyr refinery via the Odessa-Brody and Druzhba pipelines. The test is scheduled for November/early December 2010, and the pipeline will operate in the averse direction. The test volume is expected to be about 80,000 tons.

   Belarus’ Mozyr refinery currently receives Venezuelan imports through Ukraine by rail from Odessa. Total volumes of transit by this route in 2010 could be up to 4 million tons.

   Only half capacity of the Druzhba pipeline is used for transit of Russian oil to European countries. One of leg of the pipeline will be used to supply Belarus and this should have no effect on Russian oil transit. Minsk plans to completely switch from rail transportation to pipelines by the end of December 2011. Ukrainian experts believe that delivering the crude to the Mozyr refinery by pipeline would cut costs by 50 percent compared to rail deliveries.

   On Oct. 18, Ukrainian President Viktor Yanukovych said Ukraine would ensure the transportation to Belarus of all Venezuelan crude delivered to its Black Sea ports. “Presently we transport oil in tankers, but soon it will be transported via pipelines. This is what was planned, and we are dedicated to closely following our agreements with Venezuela and Belarus. In the future, we plan to solve these issues together,” Yanukovych said.

   Initially agreed transit tariff of $0.27 per 10,000 tons per kilometer could be lowered when the volumes of transported oil reach the declared amounts. The Belarus Oil Company is also considering possibility of transporting oil via the Polotsk–Ventspils pipeline in the reverse mode.

Will the Chinese Construct an LPG Terminal at the Baltic Sea?

   A plan to construct a Belarus sea port and LPG terminal in Latvia was announced in June at the Andrius Kubilius and Sergei Sidorsky, Latvian and Belarus prime ministers, meeting. The announced terminal capacity was 8 billion cubic meters a year. This project wold also require the construction of a 285-kilometer pipeline to Belarus.

   Experts estimate the project would cost over $1 billion. Belarus does not have sufficient funding, though a new potential partner has showed up. САМСЕ, a Chinese engineering Company, affiliate of the SINOMACH, one of the major Chinese state owned companies, announced its interest in the project participation. No details are available yet, though Sidorsky said that this project would enable Belarus to participate in the European spot markets.

“The Route from the Persians to the Varangians”

   In 2009, the Dnepropetrovsk-based Privat Group took control of the Kremenchug refinery, a major Ukrainian facility, from its Russian owners. Russia responded by terminating crude supplies through the Pridnestrovsky pipeline system (PPS). In turn, Ukrtransnafta reversed the flow of the PPS and started supplying Azerbaijani oil from the Odessa to the Kremenchug refinery.

   The distance from Mozyr to Kremenchug is only 100 kilometers more than from Mozyr to Brody. From Kremenchug, oil could be transported to the Mozyr refinery via railroad or the PPS; alternatively, it could be processed at the Kremenchug refinery, significantly improving the efficiency of that project. Most of the oil products from the Venezuelan crude are still sold in Ukraine.

   Belarus would like to use the PPS, but only under certain conditions – foremost the cost of using the pipeline. Belarus wants Ukraine to pay for the construction of the pipeline connection between Kremenchug and Mozyr. Such a connection would ensure continuous pipeline oil transits from Odessa to Mozyr. Ukrtransnafta is already working on technical and economic due diligence for building the pipeline.

   “Kiev’s willingness to accept Belarus’ conditions could be explained not only by Ukrainian interest in the Venezuelan project, but also by the opportunity to extend the PPS and create a pipeline route from the Black Sea to the Baltic Sea. This route is of primary interest to Azerbaijan and Kazakhstan and later, Iran and Turkmenistan might join. Thus, Kiev could generate revenue from the transit of Caspian oil without putting at hazard Russian oil transit via the Odessa–Brody pipeline,” said Stas Ivashkevich, an independent Belarus analyst.
The plan to construct a Kremenchug – Mozyr pipeline could actually work out. Previous plans to transport oil from Black Sea ports came to naught because of uncertainty that there would be sufficient volumes of crude. The Belarussian president has promised to use the full capacity of a pipeline pumping Venezuelan, Iranian or Azeri oil.

   Azerbaijan also lacks transportation capacities and Baku would like to diversify its crude transportation routes. Recently, U.S. Energy Information Administration experts said that Azerbaijan oil production capacity is estimated to be from 10 to 12 million tons per year above the country’s transportation capacities. Moreover, Turkey’s monopoly on Caspian oil transit keeps transit costs high. Kazakhstan even had to halt transit via the Baku–Tbilisi–Ceyhan pipeline because of extremely high transit costs. It is expected that in the next decade Kazakhstan production capacities will exceed its transportation capacity by 40 to 60 million tons per year.

   To make this “route from the Persians to the Varangians” economically viable, Ukraine, Belarus, Poland, Georgia, and later Latvia should all decrease their pipeline tariffs. Top-level negotiations are already underway, strengthening the political ties of the countries.

   There are several option for the northern part of the route. If Poland does not decrease pipeline tariffs or refuses to deploy a Gdansk–Plotsk pipeline, Belarus could send oil via Latvia by buiding an Unecha–Ventsplis pipeline connection.
With competition among oil suppliers, Belarus could also benefit from the transit of Caspian oil by attracting investments to upgrade its refineries.

   In 2004, Belarus, Ukraine and Latvia were developing plans to construct a new oil route bypassing Russia. The plan was to build the Odessa–Brody–Mozyr–Polotsk – Ventspils oil transport corridor. However, at that time Belarus did not want damage its relations with Russia and the pipeline was not built.
It is unlikely that the CIS states would form a Black Sea -Baltic Alliance, as it was discussed a while ago. Though it is clear that the more pressure Russia puts on CIS countries, the more consolidated an effort they make in searching for alternative energy supply routes.

   Belarus purchased 9.41 million tons of Russian oil in from January to September 2010, or 6.69 million tons less than in the same period in 2009, the Central Control Administration of the Fuel and Energy Complex reported.

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