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ENERGY SECTOR: END OF THE OIL AND GAS RENT
Alexander Autushko-Sikorski
Summary
The events in the energy sector that took place in 2019 clearly showed that the period of external energy subsidies finally came to an end. 2018 was a year of growing uncertainty about supplies of cheap energy commodities from Russia, while 2019 and the beginning of 2020 brought up a completely new energy agenda.
At this stage, the Belarusian oil refining industry is looking for a way to maintain profitability, and the Belarusian government needs a strategy to respond to the termination of the oil and gas rent.
Trends:
• Deepening disagreements on the framework and peripheral terms of supplies of Russian crude oil to Belarus;
• Increasing uncertainty about the terms of Russian gas supplies to Belarus;
• Deteriorating foreign market environment for Belarusian oil products.
Gas
In 2019, Belarus imported 20.261 billion cubic meters of natural gas from Russia, almost the same as in 2018 (20.3 billion). The price also remained almost unchanged: USD 127 against USD 129 per 1,000 m3. At the same time, the difference between the price of Russian gas for Belarus and Europe (at the German border) decreased significantly (Table 1).
Table 1. Dynamics of prices of Russian gas for Belarus and at the German border, 2012-2019
2012 2013 2014 2015 2016 2017 2018 2019
For Belarus, USD per 1,000 m3 165.50 165.50 170.00 144.00 137.00 130.00 129.00 127.00
At the German border, USD per 1,000 m3 435.23 413.30 386.00 268.63 160.63 197.90 269.42 156.00
Difference, USD per 1,000 m3 269.40 247.80 216.00 124.63 24.63 67.90 142.42 29.00
Source: Belstat1, IMF2, author's calculations.
The price for Europe decreased primarily due to the abnormally warm winter and, accordingly, the absence of necessity to take gas from storage facilities. As a result, in February 2020, the monthly price of gas dropped by another 30% compared with the average annual price in 2019. Besides, there were plenty of gas suppliers that offered gas to Europe, first of all, suppliers of liquefied gas, including American.
The comparatively low gas prices set for Belarus have been a factor of stability of its economy for years. However, the last contract on stable supplies of Russian gas to Belarus was signed for 2018-2019, and the government had to put forth considerable efforts to enter into a new contract on more favorable terms, which were a matter of discussion at various levels throughout the year. Belarus mostly insisted on the gas price set for the neighboring Smolensk Region of Russia, arguing that the terms should be equal for Union State entities. Belarus considered USD 70-90 per 1,000 m3 a "fair" price.
1 Hereinafter: «Внешняя торговля.» Национальный статистический комитет Республики Беларусь, https://www.belstat.gov.by/ofltsialnaya-statistika/realny-sector-ekonomiki/vneshnyaya-torgovlya/.
2 Hereinafter: "Primary Commodity Prices." International Monetary Fund.
https://www.imf.org/en/Research/commodity-prices.
Theoretically, the gas price for Belarus could be lowered to the price for the Smolensk Region, provided that Belarus agrees to greater integration with Russia, but this is highly unlikely in the foreseeable future given the shrinking export revenues of Russian gas monopolist Gazprom, an increase in the mineral extraction tax in Russia (MET) and, therefore, the impossibility to subsidize domestic gas prices in Russia.
In late 2019, Belarus signed a protocol on a Russian gas pricing procedure for January-February 2020, which was later extended to the end of 2020. The protocol maintains the volume and the price of Russian gas at the level of 2019 (USD 127 per 1,000 m3).
European gas prices continued to fall in early 2020 to USD 104 per 1,000 m3 in February, which prompted the Belarusian authorities to initiate a revision of the operating gas contract in April 2020. It is hard to predict the result of the revision talks until the expiration of the current protocol.
Oil
The year 2019 saw heated debates on crude oil supply terms. The parties failed to reach a long-term agreement as of early 2020.3 Belarus not only sought to maintain the volumes of supplies at a price considerably below the world price, but also demanded compensation for the tax maneuver in the Russian energy sector.
The tax maneuver aims at the gradual zeroing of the export duty on oil products and a simultaneous increase in the mineral extraction tax in Russia. This suggests a much higher oil price for Belarus, which also loses the export duty that it previously
See also Anatoly Pankovski, "Belarus - Russia: Two decades of regressive integration" in this Yearbook.
kept for itself. As a result, Belarus' budget loses revenues, and the Belarusian oil refineries, which used relatively cheap Russian oil, lose revenues from the sale of oil products at world prices.
As can be seen from Table 2, the volume of exports of Bela-rusian oil products refined from Russian oil and export revenues declined last year, among other things, due to a decrease in the difference between the prices of Russian oil (Urals grade) for Belarus and on world markets.
Table 2. Rates of exports and imports of Russian oil and Belarusian oil products on world markets, 2013-2019
2013 2014 2015 2016 2017 2018 2019
Oil import in physical terms, million metric 21.7 22.5 22.9 18.1 18.0 18.2 18.0
tons
Import cost, USD billion 8.188 7.625 5.663 3.475 5.292 6.800 6.580
Oil price, USD per metric ton 386.8 338.9 247.3 192.0 294.0 373.6 365.5
Price of Russian oil on
the world market, USD 826.9 820.0 720.0 363.9 388.7 513.7 468.5
per metric ton
Oil product export in physical terms, million 13.56 13.76 16.58 13.00 12.30 11.90 10.50
metric tons
Oil product export revenue, USD billion 10.15 9.85 6.83 4.04 5.34 6.50 5.20
Oil product price, USD per metric ton 748.76 715.98 403.50 311.00 434.14 546.20 495.23
Source: Belstat, IMF, author's calculations.
Belarus stated several times in the first months of 2019 that the tax maneuver was inadmissible, and that Russia breached the EEU Treaty. The Belarusian government announced that the country would find alternative sources of oil, to which Russia answered something like "suit yourself." After that Belarus announced a rise in the tariff for Russian oil transit through its territory.
The economic results of Belarus' attempts to diversify oil supplies are well illustrated by the attempt to import oil from Venezuela in 2010-2012. More expensive oil became even more expensive due to the haul distance and high transportation costs (Table 3).
Table 3. Cost of supplies of Venezuelan oil to Belarus, price difference with supplies of Russian oil, 2010-2012
2010 2011 2012
Venezuelan oil price including transportation costs, USD per metric ton 656.00 847.75 939.30
Price of Russian oil for Belarus, USD per metric ton 460.00 459.00 398.00
Price difference, USD per metric ton (Venezuelan minus Russian for Belarus) -196.00 -388.75 -541.30
Source: Belstat, author's calculations.
In late April, Belneftekhim reported the supply of Russian substandard oil contaminated with organochlorine compounds through the Belarusian pipelines. Russia first said that it was an incident, and later accused its small oil suppliers of oil theft concealment through diluting oil in the pipeline. However, taking into account the tension caused by Belarus-Russia quarrels over oil supplies, the costly upgrade of the Belarusian oil refineries, dependence of the Belarusian economy on the petrochemical industry and the details of what was happening (organochloride is too expensive to conceal theft), the incident looks more like a deliberate act of sabotage of the Belarusian oil industry. Contaminated oil damaged equipment at the Mozyr refinery and led to suspension of Russian oil supplies to Europe, the export of Belarusian oil products and, accordingly, to a slowdown in the latter's GDP growth.
The parties held a series of talks at various levels on the terms of further supplies of Russian oil to Belarus, but failed to achieve
a positive result. As of the beginning of 2020, Belarus and Russia did not even enter into an annual oil supply agreement, and only coordinated a supply plan. Besides, Russia completely abolished the so-called "customs re-clearance", which enabled Belarus to keep export duties on 6 million metric tons of Russian oil.
Russia is reluctant to provide Belarus with oil at a reduced price, linking preferential supplies (which the Russian leadership began to call "direct subsidies" to the Belarusian economy) with greater political and economic integration under the Union State Treaty. Intergovernmental ad hoc groups reportedly made an official list of integration roadmaps, but their work came to a standstill by the end of 2019. The events that took place in that period and statements by Belarusian officials made it clear that profound integration by the Russian scenario was impossible, since the price for continued preferential oil supplies is too high.
Russia suspended oil supplies in early 2020, so the Belaru-sian refineries began to take process oil from "Druzhba" branch pipelines to avoid refinery interruptions. Also, Belarus began to purchase oil from sources alternative to Russia, but the volume remained too low to ensure the full utilization of the refineries' capacities.
Electric energy and tariff policy
Electricity tariffs in Belarus changed twice in 2019 (in January and July). A new price differentiation scheme was introduced in July: prices were separately set for the peak hours of the day, evening and night.
The base rate increased from BYN 0.1484 to 0.209 per kWh. The difference between the tariffs for households and the real sector significantly decreased by the end of the year compared with previous years: 7.05 U.S. cents for households and 12.31 for the real sector in 2018 against 7.1 and 10.0 cents, respectively
in 2019. Although cross-subsidization of electricity tariffs did not fully stop, this was, perhaps, the most noticeable decrease in the difference in the tariffs for households and the real sector in recent years.
A complete abolition of cross-subsidization requires an even greater reduction in tariffs for enterprises and their increase for households. For comparison, there is no cross-subsidization in the neighboring countries of the European Union, where the tariff for households is significantly higher than the tariff for the real sector: 11.90 and 7.32 eurocents (net of taxes and duties), respectively, in Estonia, 11.7 and 7.5 eurocents in Latvia, 8.6 and 7.36 eurocents in Poland, and 7.9 and 7.2 eurocents in Lithuania.
The launch of the first power unit of the Belarusian nuclear power plant, which was initially scheduled for the autumn of 2019, was postponed to the first quarter of 2020 and then to July 2020 due to delays caused by the COVID-19 pandemic. Other important changes regarding the NPP operation primarily concerned the electricity sales markets. Estonia, Latvia and Ukraine made purely declarative statements on the possibility of procurement of electric energy to be generated by the Bela-rusian NPP.
Conclusion
The year 2020 will be hard for the Belarusian economy due to a sharp reduction in the difference between oil and gas prices for the region and Belarus, as budget revenues fall caused by a decrease in export duties and the abolition of the customs re-clearance scheme. A decrease in profitability of the Belaru-sian oil refineries will produce a multiplier effect on related industries in addition to export and import shocks of 2020 and subsequent production and employment problems.
The Belarusian energy sector is mainly affected by a global decline in prices of oil and oil products, the coronavirus pandemic and foreign policy hardships, first of all Russia's unwillingness to continue oil subsidies to Belarus without deep integration against the backdrop of increasing problems in the Russian economy.
Belarus tried to diversify oil supplies in early 2020, but the terms will undoubtedly be much less beneficial, as evidenced by the import of Venezuelan oil.
Belarus will grab the opportunity to procure the required amount oil at low prices for a while in 2020 and demonstrate Russia its ability to diversify oil imports. However, favorable supply opportunities will hardly last long. By the end of 2020, Belarus may achieve a compromise short-term agreement with Russia on oil supplies at a price higher than before, but lower than it could be.
It would be the best choice for Belarus to continue diversifying supplies and build infrastructure. Belarus can pump oil from Poland in the reverse mode, which is technically possible, modernize the pipeline that runs from Latvia, accelerate the upgrade of the oil refineries, connect them with a pipeline, and cut oil purchases to maintain profitability of the oil refining sector, because the current volumes purchased for processing are impractical due to high logistics costs.
Belarus was rightly called a "rentier" given its dependence on Russian oil and gas, which, in many respects, secured stability of the political regime. However, the relative stability of preferential supplies distracted from considering the prospects for the political regime, taking into account the peculiarities of its 'financing.' In fact, the oil and gas rent shock that occurred in 2019 and early 2020 makes Belarus some kind of a late-rentier state, in which the rent generation infrastructure (not only physical) becomes an infrastructure for supporting development and diversification of the economy as a result of changes
in the behavior of the political regime following a number of economic shocks and growing socio-economic contradictions within the country.4
4 Gray, Matthew. "A Theory of 'Late Rentierism' in the Arab States of the Gulf." Georgetown University School of Foreign Service in Qatar, 2011.
