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ENERGY SECTOR:
THE HEYDAY BEFORE THE SALE
Tatsiana Manionak
Summary
The beneficial terms of the four-year oil deals with Russia signed at the end of 2011 failed to become a guarantee of a serene relationship between the two countries in 2012. The year will be remembered as the heyday of the "solvent and diluent" business, which enabled Belarus to shore up its gold and foreign exchange reserves and achieve acceptable foreign trade figures at the end of the year, while underpaying the Russian budget an estimated USD 1.5-2 bn. Although Moscow never expressed a word of complaint, there was some bad "aftertaste," which resulted in a marked reduction in crude oil supplies from Russia in the fourth quarter of 2012 and problems with the signing of the 2013 oil supplies balance.
Despite the considerable reduction in Russian natural gas prices for Belarus, energy rates for Belarusian producers were above those in Europe, which is why Belneftekhim concern admitted that it was too risky to launch large-scale investment projects while electricity fees remain that high.
Trends:
• Total dependence on Russia in the supplies of fuel and energy;
• Increased dependence of Belarus' GDP and export revenues on the export of oil products and quasi-oil products;
• Pegging crude oil import supplies to export deliveries of oil products back to Russia;
• Additional complications with payments for thermal power and electricity by Belarusian consumers despite preferential natural gas rates;
• Timid attempts by the Belarusian authorities to bring down cross-subsidies in the energy sector.
Oil: the heyday of the "solvent" business
Belarus and Russia agreed new terms of Russian crude oil deliveries to Belarus for 2012 — 2015 two weeks prior to the official kickoff of the Common Economic Area (CEA) on December 15, 2011. The document stipulates a new oil price formula for Belarus in line with the Agreement on the organization, management, operation and development of the common oil and oil product
market of Belarus, Kazakhstan and Russia,1 signed as part of the package of accords to establish the CEA. The agreement has it that the three countries will not apply quantitative limitations and export customs duties, as well as equivalent duties, taxes and dues in mutual trade.
In accordance with the protocol to the agreement, the subsidiaries of Gazpromneft, Lukoil, Rosneft, OJSC Surgutneftegaz and TNK-BP are entitled to process up to 50% of their oil supplies to Belarus at the Belarusian oil refineries every month depending on the transportation schedule. For its part, Belarus guarantees that Russian oil traders will be free to sell the oil products refined from their crude supplies at the filling stations that they own and operate in Belarus.
The Energy Ministry and Economic Development Ministry of the Russian Federation and the Economy Ministry of the Republic of Belarus on December 15, 2011 agreed the balance of crude oil and oil products of the Union State of Belarus and Russia for 2012. The oil balance guaranteed that the Belarusian oil refineries would be using 100% of their capacities and envisaged supplies of 21.5 million tons of crude to Belarus by pipeline transport, an increase by 3.5 million tons from 2011, and 2 million tons annually by rail (when necessary). Back in 2011, Russia delivered oil to Belarus subject to a USD 45 — 47 premium per ton (to netback Rotterdam), whereas in 2012, Russia not only cancelled the premium, but also cut the crude price by USD 30 per ton.
The results of the oil and gas talks with Russia were positive enough for Lukashenko to estimate the combined effect of the preferences for the Belarusian economy at USD 4 bn. The Belarusian oil sector reached all-time highs in 2012 owing to the concessional deliveries of crude oil and natural gas. The favorable situation in external markets also helped, including in Ukraine, which is logistically the most lucrative destination for Belarusian oil products. However, it was the "solvent and diluent" business, which resulted in most of the benefits for the Belarusian oil sector.
Russian Federal Antimonopoly Service. Retrieved from http://fas.gov.ru/ international-partnership/common-economic-space/documents/ documents 30785.html
In 2012, Belneftekhim recorded the largest foreign trade surplus ever, at USD 5.3 bn (the figure was at USD 1.9 bn in 2010). Belarus also increased oil products export to 17.454 million tons (up from 15.742 million tons in 2011); in value terms export supplies of Belarusian fuel rose from USD 12.732 bn in 2011 to USD 14.533 bn in 2012. Belarus paid USD 3.85 bn in export duties to the Russian budget in 2012 (USD 3.07 bn in 2011).
Furthermore, there were some gaps in the CEA laws that enabled Belarus to increase the share of dubious exports — in 2012, Belarus trebled foreign supplies of lubricants year-on-year in value terms from USD 334.5 million in 2011 to USD 1.029 bn in 2012). In volume terms, export supplies reached 1.639 million tons. In 2012, the export of solvents and compound diluents amounted to 3.252 million tons worth USD 2.781 bn (supplies totaled 2.078 million tons in 2011, worth USD 1.571 bn).
The year 2012 turned out to be very successful for the Belarusian oil refineries as well. The Mazyr-based refinery processed 11.09 million tons of crude oil, a new record high since 1994. The refinery processed more raw materials (including the diesel fuel delivered by rail for recycling) than originally planned. Naftan, the other oil refinery, based in Navapolack, also reported excellent performance indicators.
In 2012, the situation in foreign markets for oil products was quite favorable for Belarusian producers. Although European markets were less attractive than they used to be before the crisis, fuel prices remained high. Ukraine remained the most attractive market for Belarus. According to the State Customs Service of Ukraine, in 2012, that country imported USD 3.726 bn worth of oil products from Belarus, almost half of all imports of oil products to Ukraine in 2012, at 7.615 million tons worth USD 7.607 bn. Belarus accounted for 60% of Ukraine's diesel fuel imports, according to market experts. Belarus also accounts for up to 30% of Ukraine's gasoline imports, and this share keeps growing.
In 2012, the energy balance between Belarus and Russia for the first time included supplies of 5.8 million tons of high-quality Belarusian-made oil products to the Russian market. Belarus supplied only 2% of the agreed amount, which dissatisfied the Russian Energy Ministry and resulted in a major reduction in crude deliveries to Belarus in the fourth quarter of 2012.
Belarus had guaranteed Ukraine to transit 4 million tons of oil annually using its pipeline transport in 2011—2012 as part of its contracts with Azerbaijan to swap Venezuelan crude oil supplies. However, a bit more than 1 million tons of oil were delivered to JSC Mozyr Oil Refinery via Ukraine in 2011, instead of 4 million tons, whereas in 2012, not a single ton of alternative oil from Azerbaijan was transported to Belarus via Ukraine. In 2012, Belarus imported 330,000 tons of Venezuelan oil via the Estonian seaport of Muuga. According to First Deputy Prime Minister Uladzimir Siamashka, "the supplies of crude oil from Venezuela became the support that a brotherly nation provided for Belarus in time of need," and if it were not for those supplies, "there would have been no agreements on the common oil and oil product market with Russia and Kazakhstan signed in 2011."2
In 2012, the export of Belarus' own crude oil decreased both in volume and value terms, as sales amounted to 1.645 million tons, down from 1.675 million tons in 2011. In value terms, foreign supplies of crude oil produced in Belarus reached USD 1.288 bn, down from USD 1.319 bn in 2011). In 2012, Belarus produced 1.66 million tons of oil, which compares to 1.681 million tons in 2011). Motor fuel prices went up four times in Belarus in 2012, whereas in 2011, there were 11 price increases.
Natural gas: energy bonuses did not help
In 2012, Belarus enjoyed an "exemption" from the European gas price formula. This became possible after the country signed all of the CEA accords in late 2011 and Gazprom consolidated 100% of shares in Beltransgaz in the autumn of 2011. The Agreement on the procedure to form prices (tariffs) of the supplies of natural gas to the Republic of Belarus by pipelines located in the Republic of Belarus3 introduced the new procedure for Belarus to pay for the import of Russian natural gas.
The integrated positive effect on the Belarusian economy of the new terms of cooperation in the gas transport sector was
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estimated at USD 10 bn. The total included USD 2.5 bn that Gazprom paid for 50% in JSC Beltransgaz and USD 7.5 bn resulting from lower gas prices in 2012 — 2014.
In 2012, the gas price for Belarus went down to USD 165.6 per 1,000 cubic meters from the average price of USD 265 in 2011. We should compare this to what other consumers pay in order to see the real scope of that gas gift — Russian consumers pay USD 106—107 per 1,000 cubic meters, Ukraine pays USD 414, and European importers pay about USD 400.
However, despite the lowering of the "entry" fee, gas prices for the domestic industrial consumers remained unchanged compared with 2011, at USD 275 per 1,000 cubic meters. The only exceptions were JSC Grodno Azot and Belenergo companies, which were paying USD 218 and USD 245 per 1,000 cubic meters of gas, respectively. JSC Beltransgaz was selling natural gas in the domestic market with a markup of USD 15.95 plus the VAT per 1,000 cubic meters in 2012, up from USD 11.09 in 2011. Starting 2013, the markup is set based on consumer inflation in Belarus (21.8% in 2012).
Furthermore, since January 2012, industrial producers have been paying for gas in U.S. dollars. Once JSC Beltransgaz became a subsidiary of Gazprom, the foreign exchange risks associated with payments for natural gas in the local currency were passed on to the regional gas distribution networks, which were taking loans to pay for gas. Belenergo companies have been chronically short of money to pay regional gas suppliers. In 2011, their debt amounted to 1 trillion rubles. In 2012, the situation with the gas debt aggravated. As of December 1, 2012, overdue debts for fuel and energy resources stood at 984.6 bn rubles.
Electricity: inconspicuous erosion of the monopoly
Belarus remains the only FSU country with a vertically integrated electricity sector. There is no separation between power generation, transfer and distribution. Such a production pattern rules out economic cost-cutting mechanisms, and prices are set on a "cost plus" basis. Cross-subsidy schemes that prevail in the country prevent households from understanding the real value of electricity, lead to ineffective consumption and become a
hidden tax imposed on the sector, thus affecting its competitiveness.
The devaluation of the national currency in 2011 along with the burden of cross-subsidies produced a major negative impact on Belenergo companies, which have not made profits in three years. Meanwhile, Belarusian producers have been paying increasing fees for electricity for the last few years, despite the fact that Belarus imports natural gas that it uses to generate power at the lowest possible rates.
The gap between electricity rates for industrial producers and household is exceptional, compared with the neighboring countries. As of January 1, 2012, the average electricity fee for industrial consumers stood at USD 0.1373 per kilowatt-hours (kWh), while households paid an average USD 0.0256 per kWh. In the European Union, manufacturers paid an average USD 0.128 per kWh in the first half of 2011, and households paid USD 0.259 per kWh. In Poland, the rates were at USD 0.118 and USD 0.213 per kWh, in Lithuania USD 0.146 and USD 0.176 and in Russia USD 0.083 and USD 0.072, respectively.
In early 2013, the fee for industrial consumers in Belarus increased to USD 0.1382 per kWh, and for households, to USD 0.0353. According to Belenergo estimates, if the cross-subsidy schemes were abolished, industrial producers would be paying USD 0.09-0.095 per kWh.
The Belarusian government has announced plans to phase down cross subsidies in power engineering and abolish it completely by the end of 2015. However, if the government succeeds, only one half of the problem will be resolved, because energy fees should not only take into account the economic interests of producers, but also create incentives to energy-saving at all of the production and consumption phases. Otherwise, the situation in the Belarusian power engineering system will remain essentially unchanged.
In order for economic incentives to become effective in the power engineering system, the entire sector must be reformed. Back in 2003, Belenergo prepared four scenarios for the restructuring of the domestic energy sector, but some time later, the Presidential Administration tabooed the very words "energy sector reform." It is not clear when the reform will be introduced.
Belarus has no regulatory framework for such changes — the parliament has not yet passed the bill on electricity, although it has been discussed for years.
The government believes that the state monopoly in the energy sector has been somewhat shaken by the law on renewable energy sources. From now on foreign companies and joint ventures will be able to build power plants working on local fuels — water and solar plants, boiler houses and mini-TEC ("teplo-elektrocentral" ['thermal power plant']) cogeneration plants that fire wood and peat, etc. The state monopoly in power engineering will be done away with as soon as the law on electricity has been adopted, for it is this law that will apply the same terms to generating facilities. In other words, private investors, including those foreign, will be able to build and operate large systemic plants in Belarus to generate power.
However, the government is still undecided on the reform in the energy sector. Many officials have concerns that the separation of generation, transportation and sales, envisaged in the law on electricity, will decentralize energy sector management, which will compromise the efficiency of the Belarusian energy system.
Also in 2012, Belarus tried to expedite the ambitious project to build its first nuclear power plant. On July 18, 2012, Russia and Belarus signed the General contract for the construction of Belarusian Nuclear Power Plant in Astraviec, Hrodna Region. The chief designer and contractor is the unified company Atom-stroyexport JSC (ASE JSC). The nuclear plant will comprise two units with a combined capacity of up to 2,400 megawatts. The first unit is expected to be launched in November 2018, and the second unit is projected to become operational in July 2020. The project is based on the AES-2006 design by St.Petersburg-based Atomenergoproject, which is currently used to build Leningrad Nuclear Power Plant-2 and Baltic Nuclear Power Plant in Kaliningrad. Rosatom corporation is also using the same design for power units in Russia.
In October 2012, an IAEA mission submitted to the Belarusian government the findings of an infrastructure study for the future nuclear plant. The report says that the creation of a "strong regulating body is of critical importance to Belarus." It is recom-
mended to improve regulations in the treatment of nuclear waste and irradiated fuel. The report contains 16 recommendations and 22 special proposals.
Importantly, it is planned to build three nuclear power plants in the Baltic region — Belarusian Nuclear Power Plant, Baltic Nuclear Power Plant in Kaliningrad region and Visaginas Nuclear Power Plant that is expected to be built in Lithuania. Lithuania did not recognize the Environmental Impact Assessment (EIA) for Belarusian Nuclear Power Plant as valid and lodged a complaint with the IAEA that the EIA for the Belarusian project was missing (Vilnius is located just 53 kilometers away from the Astraviec site for Belarus' nuclear power plant).
Conclusion
There will be no oil "miracle" for Belarus in 2013 — in late 2012, the country had to stop its "solvent and diluent" business under strong pressure from Russia. Minsk had to introduce an additional condition to the Customs Code Treaty of the Customs Union, which put an end to the dubious export scheme.
In the meantime, Russia pegged its crude oil supplies to Belarus in 2013 to the fixed volume of oil product deliveries back to Russia. Belarus is supposed to supply 3.3 million tons of oil products to Russia in 2013, and Russia will see to it that Belarus meets its obligations this year. The year 2013 started with Belarus having no specific contract with Russia for oil supplies for the entire year, and crude is now delivered depending on whether Belarus fulfills its obligations.
Further, there is a tacit agreement between Belarus and Russia that oil deliveries in 2013 will depend on the progress of Russia's integration projects in Belarus, including in sectors other than power engineering. These include the projects pursued by Rostec State Corporation and JSC Integral, JSC MZKT and the Russian defense and industry complex, Roscosmos and JSC Peleng, JSC EuroChem and JSC Grodno Azot, and the JSC Rosbelavto holding, which will incorporate KamAZ and MAZ.
Russia is playing the oil card to attain its goals, but acts quite mildly without causing any conflicts, albeit very persistently. Minsk will have to accept the terms imposed on
it, as it has no alternative to the import of strategic raw materials.
The lack of market mechanisms in the energy sector and the burden of cross subsidies in the formation of energy fees, which has already resulted in conflicts between energy agencies (for instance, the dispute between Belneftekhim concern and Belenergo), may compromise the investment appeal of the leading companies in the key industries, as well as a general decline in competitiveness. One issue that will obviously have a high profile in the future is consensus over the reform of the Belarusian energy system
