BELARUS NEWS AND ANALYSIS

DATE:

02/08/2007

Will Gazprom cut gas supply to Belarus?

European Commission says energy supply dispute is "of serious concern"

By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- The threat of having its gas supply cut by Russia's Gazprom hung over Belarus Thursday, fueling concerns that consumers in West European countries might also be affected and further raising questions about Russia's reliability as an energy supplier.

It was unclear Thursday whether Russian state-controlled energy giant Gazprom will go ahead and cut daily gas supply volume to Belarus by 45% starting at 10 a.m. on Friday, as it threatened to do on Wednesday citing Belarus' failure to pay $460 million for gas delivered in the first half of this year. Belarus is a key transit route for Russian gas exports in Europe and a potential cut of gas supplies by Gazprom might affect customers in Poland, Lithuania and Germany. Belarusian President Alexander Lukashenko said Thursday that his country will pay $460 million to settle its gas debt in the next few days, the Interfax news agency reported Thursday. "I don't think this [Belarus saying they'll pay their debt] confirms that the issue is resolved," said Tanya Costello, analyst at the Eurasia Group. "It's important to highlight that there could be a gas cut," she said. "It's not certain to happen. Gazprom wanted to make a threat to show that they are serious, but they still seem ready to negotiate." Belarus and Russia had been discussing a loan from Russia to cover Belarus' obligations to Gazprom, but the talks seem to have fallen apart. "The debt in question amounts to a non-trivial 1.5% of Belarus' GDP, and Russia is demanding that its neighbor shift to 100% cash payment from now on," said Rory MacFarquhar, analyst at Goldman Sachs New Markets Economic Research, in a note Thursday. "Belarus might have been able to raise private sector financing to cover its debt, but the recent credit market turbulence means that it would now likely have to pay a considerably higher spread than even a few weeks ago," MacFarquhar said. A delegation from Belarusian pipeline operator Beltransgaz left for Moscow Thursday for negotiations with Gazprom over the gas dispute, Interfax reported. "The perception is important," Eurasia's Costello said. "It doesn't really matter which side is right and which side is wrong. This will serve to increase concerns in Europe about Russia's reliability as an energy supplier regardless of what the actual dispute is about."

EU calls for quick settlement "A safe and undisturbed supply of energy is of key importance for Europe's economy," the European Commission said in a statement Thursday. Energy supply disputes in the European Union's direct neighborhood are "of serious concern" to the European Commission, it said. "The Commission calls on both sides of the dispute to find swiftly an amicable settlement, to respect contractual obligations, to react in proportionate manner to disagreements and in any event not to disturb, neither directly nor indirectly, the gas supply to EU member states," the Commission said. The Commission plans to call a meeting of its Gas Coordination Group next week to review the gas supply situation given the dispute between Russia and Belarus. "Many people ask if there's something political about what Gazprom is doing," Costello said. "Gazprom is negotiating these price increases with all of their CIS [Commonwealth of Independent States] neighbors over the last couple of years." Counties such as Ukraine, Belarus, and the Baltic states, which previously paid below-market prices, are now facing price increases, she said. "There is a political angle in that of course Gazprom is state-controlled," Costello said. "There is overlap between what Gazprom wants and what the Kremlin thinks is a good thing. You can't really separate one from the other."

Gazprom has cut supplies before

Gazprom has cut off gas supplies to Belarus on several occasions in the past. In January this year, Russia halted oil exports to Belarus over a pricing dispute and accused the government in Minsk of siphoning off oil from pipelines that run through the country.

In January 2006, Gazprom briefly cut off supplies to the Ukraine after the latter balked at price increases. The move disrupted deliveries to Gazprom clients in the European Union and reminded the global community of how vulnerable consumers are to a sudden break in energy supplies.

"The Russian side has clearly learned the lessons of recent history, and is embarking on a much more mild form of pressure on its neighbor -- a partial cut-off in mid-summer -- than the full mid-winter cut-offs of gas to Ukraine in January 2006 and of oil to Belarus in January of this year," said MacFarquhar of Goldman Sachs.

"Nonetheless, if the cut-off goes ahead, it is likely to rekindle discussions in the EU about diversifying energy sources and reducing dependence on Russia," he said.

Gazprom is expected to supply 21.8 billion cubic meters of natural gas to the domestic market in Belarus in 2007, while another 20 billion cubic meters of gas should transit Belarus in 2007 to reach end customers in Poland, Lithuania and Germany, totaling 20% of Gazprom's total gas exports to Europe.

Costello, who was on a conference call Wednesday with a Gazprom public relations representative, said that the representative claimed that Gazprom has concrete plans to make sure that its end customers are not affected.

"They argue that they will use bypass pipelines," Costello said. "I don't know what their capabilities are in that regard."

Russian gas for both domestic use in Belarus and for exports in Western Europe is transported via the Yamal-Europe pipeline, owned by Gazprom, and Northern Lights pipeline owned by Beltransgaz. Last December, Gazprom and Belarus agreed that Gazprom would pay $2.5 billion for a 50% stake in Beltransgaz within four years.

"If there is a cut to Belarus, you're likely to have a situation where Belarus continues to use gas that's meant for exports to Europe," Costello said. "That's the risk. On the upside, it's summer and the impact might be less acute." End of Story

Polya Lesova is a MarketWatch reporter based in New York.

Source:

http://www.marketwatch.com/news/story/gazprom-cut-gas-supply-belarus/story.aspx?guid=%7B8A5106DA-F867-41A5-8F73-284C574F39F5%7D