Belarus, Russia head for new oil pricing row

By Gleb Gorodyankin

MOSCOW, April 4 (Reuters) - Belarus's struggle to pay rapidly mounting Russian oil bills will probably lead to a new oil pricing dispute with Moscow as early as October, potentially jeopardising huge oil and gas flows to Europe.

Russia, which has been trying to wean former Soviet states off subsidised energy supplies, last month caved in to a plea from Minsk to cut the price of oil deliveries to its refineries, whose output is a key source of Belarus's hard currency revenue.

But the pricing formula for Belarus is still based on global prices, which have risen well over $100 per barrel due to civil unrest in the Middle East that has engulfed North African oil producer Libya.

Pricing rows on energy supplies to Belarus and Ukraine, the two former Soviet republics that handle overland pipeline transit to Europe, have repeatedly cut Russia's vast oil and gas flows to Europe, often as annual pricing deals have run out at midnight on Dec. 31.

Prime Minister Vladimir Putin has promised Belarus $4.1 billion in subsidies this year on up to 21.5 million tonnes of oil for its refineries. They are unlikely to buy that much, but if prices keep rising, they could run out of the subsidy anyway.

"Even if the rate of subsidy increases, they could use it up before the end of the year," an oil industry source said. "October is the best case scenario. As far as I'm concerned, autumn is better. I am tired of spending New Year's at work every year."

Belarus, short of hard currency, is seeking $3 billion in loans from Russia and a bailout fund set up by a group of ex-Soviet states.

The country is likely to start new talks on oil supplies to bring price levels down to a more manageable level.

"I don't think they will be tough," an oil trader said. "When there is no money, nobody is going to make any particular demands."


The average price of benchmark Brent crude for the first three months of 2011 rose to $104.95 per barrel, up $25.38 compared with the average price for 2010.

Belarus must pay for Russian oil in dollars but also earns dollar revenue on exports of motor fuel from its large, relatively advanced refining complex.

With the rise in prices, Russian subsidies to the two Belarussian refineries -- relatively modern plants that are key exporters of diesel to Europe -- may still not be enough to help them cope, however.

Belarus, a command economy led by President Alexander Lukashenko since 1994, also subsidises domestic retail fuel prices and has already imposed a rationing system to cut the cost and prevent black-market export to neighbouring companies.

In January, Russia and Belarus put an end to a three-week halt to crude sales, which left Europe unaffected, by agreeing to a price formula based on world crude prices, Russia's oil and oil product export duties minus a standing discount per tonne.

The formula was constructed following a deal under which crude deliveries to Belarus were free of export duties.

In exchange, Belarus agreed to give Russia all the duties it collects on product exports.

Under the complex subsidy system introduced in January, Russian oil companies who ship to Belarus should have premiums on the deliveries.

In March, Belarus asked, and Russia agreed, to give the country a lower oil price, which will cut into suppliers' premiums even while global oil prices and exports duties rise.

But there may be a light at the end of the tunnel for Russian companies: The second phase of the Baltic Pipeline System (BTS) will start deliveries by the end of this year.

BPS will provide expanded capacity to export Russian crude to Europe, and the world's largest oil exporter will no longer be bound to deliver to Belarus refineries via the Soviet-era Druzhba pipeline.

"The launch of BPS-2 will to some extent weaken Russia's dependence on Belarus as a transit country," an oil industry source said.

(Writing by Melissa Akin; editing by Jessica Bachman and Jane Baird)


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