BELARUS NEWS AND ANALYSIS

DATE:

09/01/2007

Russia digs in its heels in oil dispute with Belarus amid European alarm

MOSCOW (AP) _ Russia dug in its heels Tuesday over a two-day-old pipeline transit dispute with Belarus that has interrupted Russian oil shipments to Germany and much of eastern Europe as well as the former Soviet republic, amid mounting European Union criticism of the disruption.

The second Russian-related energy stoppage to affect the EU in 12 months has intensified European concerns about reliance on Russian oil and gas.

But President Vladimir Putin's calculation appears to be that Belarus's authoritarian leader, Alexander Lukashenko, will have to step down in a matter of days when his country runs out of oil reserves, analysts said.

Putin on Tuesday ordered his cabinet to consider a possible reduction in oil output _ an indication the standoff could drag on. Russia has a limited capacity for refining oil and would have to cut crude output if its exports decrease suddenly.

Once close allies, the two former Soviet nations' relations have grown increasingly tense amid impatience in Moscow at subsidizing the economy of Belarus's isolated regime through cheap energy.

The ongoing spat was sparked by a Russian decision late last year to impose duties on oil exports to Belarus. Last week, Minsk said it would slap duties on Russian oil pumped across Belarus to Europe as Lukashenko lashed out at what he called the Kremlin's "shameless'' conduct.

On Monday, Russia stopped pumping oil to Europe via the Druzhba _ or Friendship _ pipeline that crosses Belarus, accusing its neighbour of siphoning off oil, and by Tuesday, the stoppage had pinched supplies to Ukraine, Germany, Poland, Hungary, the Czech Republic and Slovakia.

The dispute also rattled Russian equity markets, with the U.S. dollar-dominated benchmark RTS index dropping 6.4 per cent Tuesday. OAO Lukoil, one of Russia's largest oil producers, was hit hard with shares dropping nine per cent.

As a delegation led by Belarusian Vice-Premier Andrei Kobyakov flew to Moscow on Tuesday for talks, Deputy Foreign Ministry Andrei Yevdochenko accused Russia of making unreasonable demands.

"Everything should be placed on the negotiation table without any preliminary conditions or preliminary demands. We are ready for dialogue,'' Yevdochenko told a news conference at the Belarusian Embassy.

Russian officials say talks could resume only if Belarus annuls the oil transit fee.

"These are our unconditional demands, and we will not enter into talks until these conditions are satisfied,'' Trade and Economics Minister German Gref told reporters after meeting with Kobyakov.

Trade and Industry Minister Viktor Khristenko said state-controlled pipeline operator OAO Transneft had filed a lawsuit against its Belarusian partner.

Khristenko also said Russia could cope with the shutdown in the medium term, but noted that other pipelines were filled to capacity and that Russia could try to compensate for the shortfall only by shipping more oil by railways and river transport.

"If these measures aren't enough, it could be necessary to reduce oil output,'' he told a news conference.

Russia would also try to expand its pipeline network in the northwest and the Baltics from 68 million tonnes annually to 100 million tonnes over the next two to three years, he said. And officials would try to speed up construction of new pipelines in Eastern Siberia and under the Baltic Sea _ outlets that would give Russian oil exports more access to foreign markets.

Belarusian experts say the country has at most enough oil reserves to last a week, although the government refuses to disclose such statistics. The country's state-dominated economy depends heavily on subsidized Russian energy.

"Belarus's reserves of cheap oil will last a few days, a week at most. After that it will have to buy oil (at a high price) taking into account Russian export duties,'' said independent economist Yaroslav Romanchuk.

Natalia Leshchenko, an analyst from the Global Insight think-tank, said the Kremlin had "reduced itself to bullying tactics.''

"Russia takes the Belarusian leader so seriously that it is ready to face the indignation of five European states for the sake of bringing him into obedience,'' she said in an e-mail.

The disruption of Russian oil to Europe came a year after a price dispute with Ukraine led to a natural gas cutoff for Kyiv and brief shortages of Russian gas pumped to several EU nations. The incident alarmed European officials and led to calls for energy diversification. Russia currently supplies a quarter of the EU's oil and more than two-fifths of its natural gas.

In unusually harsh language, EU Commission President Jose Manuel Barroso and German Chancellor Angela Merkel said Tuesday that it was "not acceptable'' for energy transit or supplier countries to halt deliveries without consultation.

Merkel also said Germany must find ways to cut its dependence on a single source of oil and gas, from conservation to renewable energy and must take a fresh look at nuclear power.

The 4,000-kilometre-long Druzhba pipeline pumps an average of 1.2 million barrels a day to Eastern and Central Europe. The pipeline has two branches, one of which runs to Poland and Germany, the other to Ukraine, Hungary, Slovakia and the Czech Republic.

Poland relies on the pipeline for around 96 per cent of its oil consumption. Russia is Germany's top supplier of oil, accounting for roughly a third of its imports. About two-thirds of Russian oil for German consumers comes through the Druzhba pipeline.

The dispute came days after Belarus and Russia reached a last-ditch agreement on a doubling of gas prices that avoided a New Year's cutoff of natural gas for Belarusian consumers and potential supply shortages in western Europe.

But Russia is also determined to stop Belarus from re-exporting lucrative, value-added petroleum products that are refined from Russian oil bought cheaply under the duty-free regime.

Source:

http://www.oilweek.com/news.asp?ID=6922

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