9 Jan 2020 15:52

SUMMARY: Belarus sees New Year in without Russian oil

MOSCOW. Jan 9 (Interfax) - The terms for oil and gas supplies, the thorniest issue in Russian-Belarusian integration in the Union State framework, were not resolved in their entirety before 2019 drew to a close. Belarusian refineries stopped receiving Russian crude almost as soon as the bells rang the New Year in. A stop gap solution was found, but the sides have not yet managed to cut the Gordian knot.

A difficult December

Belarusian President Alexander Lukashenko and Russian President Vladimir Putin discussed oil and gas issues on several occasions during December. The contacts intensified as the year drew to a close. The two leaders held a telephone conversation on December 30, on Minsk's initiative, and spent more than an hour discussing specific volumes, the timing and terms of supplies of raw hydrocarbons and other commodities. They also agreed to instruct their governments to organize the work of commercial entities in the coming days with a view to signing oil and gas supply contracts.

The telephone discussions continued the next day, this time on the Russian side's initiative. "If we don't have enough time to resolve these issues before January 1, according to the agreements reached between the two heads of state, government members will draw up an accommodating interim draft on the terms of oil and gas supply to our country, until final decisions can be reached by the presidents," Lukashenko's press office said.

The sides were able to agree to keep the price at which Russia supplies gas at the 2019 level of $127 per thousand cubic meters in January and February, although Russia did, according to the Belarusian side, suggest raising this to $152. But no compromise could be reached on oil. "Yesterday, the presidents tasked their economic actors or, in plain Russian, their companies, with continuing to discuss prices. The effort has not been successful so far," Russian presidential spokesman Dmitry Peskov said on December 31. "There is no need to exaggerate the risks, although we have actually not reached an agreement as of yet," Peskov said in response to the question whether oil transit via Belarus might be suspended on January 1. "We suggest that such apocalyptic scenarios [as the suspension of transit] not be discussed for now. The dialogue will continue," he said.

Druzhba alternative

On New Year's Eve, Belarusian President Alexander Lukashenko gave orders to start importing oil from sources other than Russian in the coming days. "Primarily these are shipments by rail from Baltic ports and the use of the Druzhba pipeline for alternative deliveries," the BelTA News agency quoted the presidential press office as saying. Lukashenko also gave orders to wrap up talks on oil supplies with Russia and sign contracts to supply Belarusian refineries with crude oil in the coming hours.

Einars Semanis, the Latvian ambassador to Belarus, had earlier visited one of the two Belarusian oil refineries, JSC Naftan, which is located in Novopolotsk, in the Vitebsk region, and discussed with management there how alternative crude imports might be organized via Latvian ports. It is technically possible to transport oil to Baltic countries, to Orlen Lietuva in Lithuania and the Ventspils port in Latvia, via the northern branch of the Druzhba pipeline, making use of the Polotsk-Birzai - Mazeikiai and Polotsk-Ventspils pipelines. These pipelines could also be used to pump oil, including from Ventspils, the other way.

Lukashenko told the Ekho Moskvy radio station on December 24 that Belarus may consider the possibility of operating two of the three lines of the Druzhba oil pipeline in reverse, in order to pump American or Saudi oil to Belarus from Poland, a move which could cause Russian oil transit via Belarus to Europe to drop from 60 million tonnes a year to 20 million tonnes a year. This will be done if no agreements on energy supplies from Russia are reached, he said. "Give us your prices - we will pay. But take no offense if the Russian market of oil and gas [in Belarus] goes somewhere," he said.

No sooner had Lukashenko made his New Year's Eve statements than Minsk said the Belarusian president had reached an agreement with Russian Prime Minister Dmitry Medvedev and Russian Energy Minister Alexander Novak on concrete supplies of oil to Belarus in the absence of oil and gas contracts. "Working issues were discussed in continuation of the talks with Vladimir Putin and in view of the fact that there are still no signed contracts that would regulate work in the oil and gas sphere from January 1 onwards. The discussion has resulted in an agreement on organizing a specific effort on shipping fossil fuel resources to Belarus," BelTA reported.

Low speed

Oil market sources said the sides had been unable to resolve their differences over the price of crude. Belarus managed to Belarus managed to secure the cancellation of a premium to the price for oil shipped duty-free, arguing that crude has become more expensive due to a tax maneuver in Russia's oil industry. Russian companies had suggested keeping the 2019 conditions in place.

"The reason for the absence of agreed contracts to supply oil lies in the reluctance of Belarusian refineries to pay the market price for crude. In the last few years, Belarusian refineries have been buying oil on terms similar to those for independent Russian refineries, that is the export price plus a small premium," a highly placed industry source told Interfax. "If oil is supplied to Belarus from other countries it will cost $70-$80 more than from Russia because it will be purchased at the full world price plus transport as far as Belarus," the source said. "This means it works out at least $1.6 billion cheaper to buy 24 million tonnes of oil from Russian on 2019 market terms than to buy it on the world market," the source said.

Belarus has two refineries. The other is Mozyr, a part of Slavneft, controlled by Rosneft and Gazprom Neft , the latter with 42.58%. Both this and the Naftan refinery said as the New Year approached that there were no contracts with Russian oil companies to supply crude and that the supplies came to a halt on January 1. Both refineries continued to work, processing stockpiled crude. "The situation compared with December 31 was unchanged, but there are no supply contracts," a spokesperson for one of the refineries said. The refineries said they had enough crude to keep them operating on a technologically acceptable level until the middle of January, but that throughput had been reduced to the technological minimum.

Igor Dyomin, spokesman for Russian pipeline operator Transneft , told Interfax that it had received no requests from Russian companies to pump oil to Belarus, but that there were no restrictions on transit of Russian oil via Belarus. The schedule for crude shipments to Belarus in the first quarter has been approved. "We can start delivering to refineries at any moment, as soon as we get requests," he said. Planned shipments to Novopolotsk are 2.6 million tonnes and to Mozyr - 3.2 million tonnes.

Belorusneft, the country's biggest filling station operator with 570 stations, said no gasoline shortages were expected due to the suspension of crude deliveries from Russia. However state petrochemicals concern Belneftekhim has published an order to suspend exports of petroleum products from January 1. Belneftekhim spokesman Andrei Bunakov said this was a temporary step. He also said Belarus intended to honor all its export-related obligations. "We have some leeway as far as the time to honor our commitments is concerned. Our partners will not be affected as we deal with issues in the course of negotiations. The measures we are taking will allow us to honor the commitments," he said.

Gutseriev to the rescue

An oil industry source told Interfax that Belarus had suggested one-off oil deliveries by independent suppliers in order to top up crude inventories at refineries while talks were in progress. Belneftekhim said in January 4 that it had signed a deal to receive a first batch of oil from a Russian company without paying a premium. It also said the volume of crude Belneftekhim is expected to get soon and the stockpiled resources would keep Belarusian oil refineries working without interruptions through January 2020. The concern declined to name the supplier of the first batch of crude.

Transneft has been asked to pump oil through its system to the Naftan refinery in Novopolotsk. "We have received an instruction to transport 133,000 tonnes of oil to Naftan. We will do this in the near future," Transneft's Dyomin told Interfax.

RussNeft and Neftisa, both part of Mikhail Gutseriyev's Safmar Group, have filed a bid for delivering oil from Russia to the Belarusian oil refinery Naftan, sources familiar with the situation told Interfax. Gutseriev's company Slavkali is currently building the Nezhinsky mining and processing complex in Belarus, which is to become the second potash ore and potash fertilizer producer in the country. The overall cost of the project exceeds $2 billion. The construction started in 2016, and the complex was to begin commercial operations in early 2020 and reach full capacity in 2021. Belarusian President Alexander Lukashenko said at a recent meeting with Gutseriev that Belarus was determined to become the world's leading potash fertilizer producer.

RussNeft has not yet been able to confirm information about oil supplies to Belarus.

First oil

The delivery of oil to Belarusian oil refineries has resumed, Vladimir Sizov, deputy CEO of the Belarusian state petrochemical concern Belneftekhim, said on January 4, the day the first contract to ship oil to Belarus was signed. "The pumps were activated at 5:05 p.m. today, and oil deliveries toward OJSC Naftan have been started," he said. Naftan has so far received 26,500 tonnes of oil from Russia and is maintaining full capacity. Crude supply to the Mozyr refinery, which is in the Gomel region, has not yet begun.

Belneftekhim expects the delivery of 650,000 tonnes of oil from Russia in January, about 40% of the average monthly volume. "For the agreements to materialize, oil companies have to confirm that they can allot this resource for shipping it to Belarusian territory. We agreed that such technical capabilities do exist, and work is being done now to make sure that this volume would be bought from oil companies to be shipped namely to Belarus," Sizov said.

Belneftekhim intends to resume exports of oil products in January, Sizov said. "The resumption of [exports] is expected in January," he said. The resumption of exports "depends on how rhythmically and quickly the contracts are concluded," he said. "We expect that all possible restrictions will be lifted by the end of January - at least this is an optimistic scenario," Sizov said.