The Lithuanians tried it more than a decade ago. The Belarussians are trying it again - no one in Moscow believes it can be done. In fact, the Russians say it's childish to try. When the Russian noose goes round your neck, they say, you either beg forgiveness, or you choke to death. If the President of Belarus Alexander Lukashenko weren't regarded more negatively than the Russian leadership in the Anglo-American press, there might be more geopolitical interest in what is happening - or more curiosity about who gains commercially.
The breaking news is that Lukashenko's government is testing tanker and rail delivery alternatives for the crude oil the Belarussian refineries need. The source of this crude is Venezuela, whose President, Hugo Chavez, agreed in mid-March with Lukashenko on a trial shipment of up to 70,000 tonnes.
The first of these, a 4,400-tonne cargo, was tankered through the Atlantic, the Mediterranean, and the Black Sea to Odessa, Ukraine, last month; and then despatched by rail to the Mozyr refinery, where it arrived on Sunday. Mozyr has output capacity of 95,000 barrels daily, while the second Belarus refinery, Novopolotsk, has 88,000 bd capacity. Depending on the petroleum products refined, that output would require at least 180,000 bd of crude oil feedstock. In annual terms, that amounts to about 9.5 million tonnes of deliveries.
But Belarus media are forecasting inward shipments of up to 10 million tonnes per year (206,000 bd) for domestic consumption, refining for export, and apparently re-export as crude. The Belarus prime minister, Sergei Sidorsky, was in Lithuania last week to consider whether the Venezuelan cargoes may be delivered via the Baltic Sea to the Lithuanian ports of Klaipeda and Butinge, and then sent on by rail from there.
Last year, Belarus reportedly imported 21.5 million tonnes of crude from Russia; that is roughly one-third of the total 60 million tonnes which has been piped annually through the Soviet-era Druzhba ("Friendship") pipeline, and across Belarus to Poland, Germany and other central European markets. In the past, most of that oil has been charged a maintenance fee as it was pumped across Belarussian territory. That was until December 2006, when Belarus announced it was imposing an extra transit fee. That move was triggered by a Russian move to impose an export duty on the oil Belarus kept for its own refineries. And that in turn was done because, according to the Russian claims, the duty-free regime on the eastern Belarus border (with Russia) required Belarus to share with Russia the proceeds of its re-export of oil at the western Belarus border (with Poland).
At the time, Moscow argued that Belarus aimed to charge too much for transit, and pay too little for the crude it took, refined, and then re-exported as petroleum products.
In January of 2007, the two presidents, Lukashenko and Vladimir Putin, agreed to resolve this dispute by preserving some of the new charges each had forced on the other that month, while allowing discounts to reduce the pain, and permit crude deliveries to resume on the Druzhba pipeline, after Transneft, the state controlled Russian pipeline company, had halted pumping and imposed a blockade.
After a fortnight of haggling, Russia agreed to reduce its export duties on crude shipments to Belarus, preserving the official rate of $180/tonne but giving a discount that lowered the effective tax to $53/tonne. The transit fee was cut to a percentage of the export tax, amounting to about $2.10/barrel this year. At the same time, it was agreed that Russia would receive 70% of all export duties on oil products produced by Belarus refineries from Russian crude in 2007, and then re-exported. The annual bill to the Russian oil companies, which were obliged to pay the compromise transit fee, came to $85 million, compared to $131.4 million demanded under the Belarus proposal. The premium for exporting oil to Belarus for refining there was thus significantly reduced.
Taking all these terms together, this deal meant that the commercial advantage of shipping oil to market through Belarus dropped significantly, making other routes more attractive. But Transneft, then run by Semyon Vainshtok, said it was opposed to building a new 1,015-km pipeline to bypass Belarus. Two reasons were given - there was no crude to pump through the new line, and the $4.5 billion financing appeared to be too costly.
But Vainshtok was replaced by Nikolai Tokarev (right figure at desk) in September 2007, and the commercial calculation began to change. Especially so for Gunvor, the leading Russian oil trader owned by Gennady Timchenko. For Gunvor proposed to load the Belarus bypass oil at the new tanker terminal it was building at Ust-Luga, just 80 kilometres across the Gulf of Finland from Primorsk, Russia's main Baltic oil outlet. In December 2008, Putin signed an order for Transneft to start construction of the Baltic Pipeline System BPS-2, in order to pump the oil around Belarus to Ust-Luga. A report by Troika Dialog investment house the same month said this was "politically-driven:It is unclear where Transneft intends to find oil for the new pipeline, given declining oil production and exports and already ample spare capacity in the pipeline system. Moreover, some 450,000 bpd of West Siberian crude will be re-routed to fill the first phase of the Eastern Siberia - Pacific Ocean (ESPO) pipeline. Transneft therefore faces the prospect of paying up to $5 bln for a project that would bring no additional revenues."
In July 2009, Timchenko agreed through his London lawyers to settle a libel suit he had initiated against the Economist magazine. According to the retraction which the Economist agreed to publish, "we are happy to make it clear that when we referred to the "new corruption" in today's Russia, we did not intend to suggest that either Gunvor or Mr Timchenko obtained their Russian oil business as a result of payment by them of bribes or like corrupt inducements. Rosneft sells only 30-40% of its oil through Gunvor rather than the "bulk" of Rosneft's oil (as we described it). We accept Gunvor's assurances that neither Vladimir Putin nor other senior Russian political figures have any ownership interest in Gunvor. We regret if any contrary impression was given."
In February of this year, Tokarev of Transneft told an oil industry publication in Moscow that he plans to complete BPS-2 by December of next year. He described the priority for building the pipeline as bypass. "Everyone knows in which connection we decided to build it: Russia and the European oil consumers were already tired of all this transit trouble. We don't want to depend on someone in this matter. And for the EU these are completely unnecessary problems. Negative points accumulate and create a very unpleasant atmosphere. Okay if it was for the atmosphere, but we suffer direct economic losses, and it is true not only for us, but for the oil companies and European consumers as well. BPS-2 is built to ensure, first and foremost, Russia's export interests.
"But we are not planning to leave our traditional markets in southern Europe, Germany and Poland. That would be quite wrong. Many plants in Europe are technologically oriented to processing Russian oil, and it would be unwise, un-businesslike to abandon these markets. All of these Druzhba pipelines will be loaded the same way as they are now. The only thing that is realistic is the reorientation of the volume from foreign ports - Yuzhny [Ukraine], Gdansk [Poland] - to our site in Ust-Luga."
As for the previous charge that the bypass was duplicating the delivery of oil to Primorsk, and would lack throughput, Tokarev now says: "the Primorsk port is overloaded. Its design capacity is 70 million tonnes a year, and currently it pumps 74 million tonnes a year. We cannot operate the facility for a long time in this mode. About 7 million tonnes per year could be removed and redirected to Ust-Luga."
In the text of his interview, Tokarev is also reported by Petroleum Argus as resuming the earlier criticism of Belarus's positions during the January 2007 conflict. "Russia has fairly and liberally supplied oil and oil products to Belarus: The budget of Russia for just the last three years was missing $10 billion due to the fact that the coefficient on the export duty on oil deliveries to Belarus amounted to 0.33. This is a serious amount of big money. Belarus certainly would like to continue to live in such a comfortable position:But we also have retired people, social programs, and thousands of problems to solve that need money. It's time to bring the situation into line with reality. As a result, an agreement was signed which provides for delivery from January 29, duty-free, of 6.3 million tonnes of oil for domestic consumption in Belarus. These volumes are likely to be delivered evenly. A clear timetable for the year will be drawn up, and this amount will be distributed in equal quantities. Here we will work together with Customs. Consideration will now be organized at two levels - the first, duty-free oil, the second, with duty. One chart, but it will all be provided."
This is no plan of blockade, although the numbers indicate deliveries of much lower volumes of Russian crude than Belarus would like to receive on the old terms. But Transneft spokesman Igor Dyomin goes further than Tokarev to deny there is no dispute with Belarus, and no intention to bypass the country. "We do not want to lose clients in Belarus," Dyomin told Fairplay today. "By putting BPS-2 in operation we are reaching the following goals: we stop using the services of transit third-party states, for example the [Polish] port of Gdansk, and instead develop our own infrastructure at Ust-Luga; also, the BPS-1 pipeline is currently overloaded, and launching BPS-2 will allow us to decrease the volume at BPS-1."
Some Russian analysts in Moscow believe the Belarus-Venezuela link is "comic", and will end in costly failure, just as Lithuania's attempt to feed its Mazeiku refinery with non-Russian crude ended up a decade ago. But Alexei Bezborodov, head of Infranews.ru, a maritime specialist, says Belarus may be able to free itself of the Russian chokehold. "It is quite logical to work through Klaipeda. There are no hopeless situations. This is the way the Polish and Lithuanian refineries operate, to some extent. So everything is possible. Except for the loss of profit margin [that was earned on] Russian oil. With that money Batka [Lukashenko] was feeding the retired."
The existing oil pipeline network (Druzhba) running across Belarus (solid red line)
The new BPS-2 route bypassing Belarus (red dotted line)