BELARUS NEWS AND ANALYSIS

DATE:

15/03/2007

Russia: Working Around Belarus

Summary

Russian state oil firm Transneft is planning to redirect half of the oil normally shipped to Europe via Belarus to the Baltic Pipeline System, which will carry it to the port of Primorsk for waterborne shipping. This decision will not only strip Belarus of transit fees, it also will broaden Russia's oil export market. Thus, while Russian oil shipments to Europe might become more reliable, they might also become smaller.

Analysis

Russian state oil firm Transneft's president, Semyon Vainshtok, said March 13 that the company plans to redirect half of the nearly 2 million barrels per day of crude normally shipped to Europe via Belarus to the Baltic Pipeline System (BPS) near St. Petersburg, opting for more expensive (but more secure) waterborne shipments. The line extension to do this will stretch from the Russian city of Unecha, near the Belarusian border, to the port of Primorsk, near Finland. The extensions and port upgrades probably will not take more than 18 months to complete, since this is a relatively inexpensive plan that does not require approval of any non-Russian entity.

Transneft's decision works out well for Russia in several ways. First, it will end Moscow's dependence on Minsk to ship oil to Europe while stripping income from Belarus, a country whose ties with Russia are fraying. Second, using the port of Primorsk will allow Russia to ship crude to the United States, since Primorsk will have the capacity to handle supertankers. Third, since Russian oil will be available to more customers, Moscow can stop automatically selling its oil to Europe and allow bidding for its product. This means that even though Russia will be able to show its European energy customers that it can, in fact, be a reliable supplier, oil sales to Europe might decrease -- which means Europe needs to start shopping around for other energy suppliers soon.

Until Jan. 1, to reward Belarus for its historical loyalty, Russia sent it subsidized oil -- and more oil than it needed so Minsk could sell the excess to Europe at market rates and pocket the profit. However, Russia called off that deal in January. In retaliation, Belarus increased the transit fees for the oil Russia shipped across Belarus to Europe. This led to a dispute that interrupted oil flow to Poland and Germany for several days. If Russia can bypass Belarus and send its oil via tanker to Europe, Belarus will lose about $1 billion a year in transit fees, potentially crippling its economy. Economically and politically marginalized, Belarus paradoxically would be forced to rely on Russia even more than before.

The beauty of the BPS plan is that the system is easily expandable and the plan is economically possible -- though not necessarily as profitable as existing export options -- since Russia will no longer be paying increased transit fees to Belarus and will expand its market for oil exports beyond Europe. Russia will fork over an estimated $3 billion for the project; however, this is a price Russia is willing to pay for its energy security. The pipeline's capacity will expand to about 8.2 million barrels per year -- about a third of which will be filled by oil diverted away from Belarus. Also, the port of Primorsk will be deepened to accommodate very large crude carriers with a 1.5 million to 2.2 million-barrel capacity -- more than double the 733,000-barrel capacity of the largest tankers it handles now.

Sending oil to the port of Primorsk also literally opens up a world of possibilities for Russian oil exports. After Primorsk is deepened, Russia will be able to ship its oil via supertankers to a broader customer base that includes the United States. This, in turn, means that buying Russian oil will become more competitive. Until now, the Russians have had no choice but to sell their Urals crude to Europe, and the dearth of purchasers has forced the Russians to sell at a discount. If Russian oil is shipped out from an expanded Primorsk port, Transneft will be able to better ply the international market, weakening the Europeans' buying power.

The BPS expansion will broaden Russia's energy customer base and end the country's dependence on Belarus as an oil transit state. However, once the project is complete, Russia will have to take full responsibility for the security of its oil exports.

Source:

http://www.stratfor.com/products/premium/read_article.php?id=285845&selected=Analyses