The Prospects of Belarus Joining in the Exploitation of Odessa – Brody Pipeline
Total Page:16
File Type:pdf, Size:1020Kb
THE PROSPECTS OF BELARUS JOINING IN THE EXPLOITATION OF ODESSA – BRODY PIPELINE Valeria Kostiugova BISS SA 4/2008-EG SUMMARY Odessa – Brody oil transportation project is given much prominence from the perspective of the EU energy safety. The route is viewed as a core element of the programme to diversify oil delivery to Europe and give Caspian oil access to European markets bypassing Russia. Although the construction of Odessa – Brody pipeline was finalised in 2003 and the European Investment Bank promised to subsidise its extension to Płock ‘on special terms’ (http://www.oilcapital.ru/info/projects/63395/private/71862.shtml), the pipeline is still working on the reverse basis, the prospects of its direct use being rather vague. If Belarus participated in the project alongside Central European oil transiting countries, it could strengthen the project and contribute to the EU energy safety. The research examines the prospects of Belarus joining in Odessa – Brody project. For this purpose, we analyse the way the Belarusian oil transportation complex functions and the place it takes in the country’s energy safety and economic security, as well as the role it plays in oil delivery to the EU. We also study the steps the government is planning to take in the field of oil transportation. The conclusion summarises the factors that can both nudge the Belarusian government towards joining in Odessa – Brody project and motivate it to decide on alternative ways of maintaining the country’s role in oil transit via its territory. CONTENTS 1. Introduction……………………………………………………………………………………….……………….2 2. The Place and Structure of Oil Industry in the National Economy…………………..2 2.1. Supply, Transit and Refining………………………………………………………………………..3 2.2. Oil Transit and Supply Problems………………………………………………………………….6 3. Possible Solutions……………………………………………………………………………………………….7 3.1. Selling the Pipelines………………………………………………………………….………………….7 3.2. Alternative Oil Transportation Routes: Joining in Odessa – Brody Project and the Lithuanian Proposal……………………………………………………………………….8 4. The Prospects and Factors of Decision-Making……………………………………………….10 5. Conclusion…………………………………………………………………………………………………………12 1. INTRODUCTION At present, Russia is an exclusive supplier of crude oil for the Belarusian oil industry, which makes up to 40 per cent of the country’s exports. Russia used to offer the Belarusian oil industry such huge preferences in oil trade as compared to the other countries of the region, that diversifying oil delivery to Belarus did not look financially viable. However, since the terms of oil trade with Russia changed in 2007, considering that Russia is going to have equalised the energy prices for the whole region by 2011, Belarus has shown interest in alternative sources of oil supply. According to the Complex Programme to Modernise the Belarusian Energy Industry’s Basic Production Assets by 2011, approved of by the President in November 2007 (http://pravo.by/webnpa/text.asp?start=1&RN=P30700575) by 2010 20 per cent of the total annual oil supply to Belarus could be provided from alternative sources. At the same time, the fact that the favourable terms of supplying Russian oil to Belarus are bound to be sustained up to the end of 2009 essentially discourages the Belarusian government from seeking alternative sources. Besides, there is also a chance that the preferences could be extended further into the future. For this reason, the Belarusian government has to be careful in its negotiations on alternative routes of oil transportation to Belarus. The research assesses the viability and studies the prospects of Belarus joining in Odessa – Brody project. Part 2 analyses the way the country’s petrochemical industry is functioning in terms of maintaining stable and economically viable oil supply. It also looks into the changes the petrochemical industry might undergo if Russia chooses to use alternative oil transit routes. Part 3 focuses on measures to make the Belarusian oil industry profitable in connection with the expected alterations in the oil transportation routes in the region. Part 4 examines the factors that influence decision-making on the existing oil transportation options and affect the chances of Belarus joining in Odessa – Brody project. The conclusion contains recommendations on energy policies from the perspective of strengthening the region’s energy safety. 2. THE PLACE AND STRUCTURE OF OIL INDUSTRY IN THE NATIONAL ECONOMY Oil refining, exporting petrochemicals and oil transit make the foundation of the Belarusian national economy, since a number of key economic indicators such as GDP growth, etc. to a great extent depend on oil industry. However, up to the late 1990s oil industry played a much less important role in the country’s economy. But from 1999 onwards, the Belarusian government has taken action to stimulate petrochemical exports and oil transit. Thus, the profits from exporting petrochemicals have allowed for the partial compensation for the increased cost of purchasing oil. In 2004 for the first time in the country’s history the oil export revenues exceeded the cost of purchasing oil (i.e. the revenues from selling oil on the domestic market became the oil industry’s net profit). As a result, the share of oil and petrochemicals in the country’s exports has considerably grown. For example, it made only 8 per cent of the total exports in 2000, 18 per cent in 2002, 25.4 per cent in 2004 and 40 per cent in 2007 (source: the Ministry for Statistics and Analysis, http://belstat.gov.by). The Belarusian oil transportation industry has its market share of about 30 per cent in the transit of Russian oil to the EU. Of 197.345 m tons of oil that Russia exported to the EU in 2007, 72 m tons were transported via Belarus. 2.1. SUPPLY, TRANSIT AND REFINING The Belarusian oil industry consists of oil transporting facilities and refineries. Oil is supplied to Belarus via the Druzhba pipelines, which make an integral part of the Russian (Soviet) pipeline network beginning at the Russian oil fields near Surgut. The Druzhba oil main network, some parts of which run through Belarus, is the core transit route for Russian oil exports. The Druzhba Central Despatch Service is located in the vicinity of Unecha town, Russia. All Belarusian oil facilities come under the state-owned umbrella concern called Belneftekhim. It includes: - Homieltransneft Druzhba national unitary enterprise, which operates the Druzhba southern line. Oil is transported in two directions: Unecha – Homiel – Mazyr – Kobryń – Adamowo (Poland) and Unecha – Homiel – Mazyr – Brody (Ukraine). In addition, the enterprise is in charge of tuning, putting into operation, diagnosing, exploiting and maintaining all basic and subsidiary equipment, technical facilities and control units for the oil mains. It also deals in buying, storing and selling crude oil and petrochemicals (http://www.transoil.by/about). - Druzhba oil transporting national unitary enterprise in Navapołack, which operates the Druzhba eastern branch: Unecha – Połack – Vientspils (in Połack it forks off towards Mažeikiai). It also deals in buying, storing and selling crude oil and petrochemicals. - Belorusneft national unitary enterprise, which produces oil and sells it both on the domestic and international markets. - Naftan oil refinery in Navapołack, a joint stock venture, which produces a wide range of petrochemicals, buys crude oil and sells petrochemicals. - Mazyr Oil Refinery, a joint stock venture, which produces a wide range of petrochemicals, buys crude oil and sells petrochemicals. Belarus buys and sells Russian oil exclusively. Oil purchasing and transportation are regulated by the following Belarus – Russia agreements: - Belarus – Russia Agreement of 13 November 1992; - The Agreement between the Governments of the Russian Federation and the Republic of Belarus on the Energy Industries’ Co-operation and Development of 15 September 1994 with annual protocols; - The Agreement on the Customs Union of the Russian Federation and the Republic of Belarus of 6 January 1995; - The Protocol on Introducing Free Trade without any Exceptions or Limitations between the Russian Federation and the Republic of Belarus of 6 January, 1995; - The Agreement on Price Policies of 27 February 1996; - The Russian Federation’s Energy Industry’s Profit and Loss Account with annual protocols signed by the Russian and Belarusian Governments from 1997 onwards; - The Agreement between the Russian and Belarusian Governments on Regulating Commercial Co-operation in Oil and Petrochemical Exports of 12 January 2007. Balanced tariff policies, efficient export duty manipulations, co-operation with Russian oil companies, political loyalty and the favourable geographical position allowed Belarus to have augmented its oil transit and refining. The share of Belarusian routes in Russia’s total oil exports increased from 28 per cent in 1999 to 45 per cent in 2004. Russian oil supplies to the Belarusian refineries grew from 10 m tons in 1998 to 18.5 m tons in 2004. Table 1. The Belarusian Oil Industry Performance, 2001–2007 (m tons) 2001 2002 2003 2004 2005 2006 2007 Transportatio 98.9 93.45 100.7 103.7 106.18 98.282 89.27 n Transit, of 85.1 74.2 84.2 84.2 87.7 78.7 72 which: Druzhba, 70.9 70.1 72 71.3 72.9 70.9 72 Homiel Druzhba, 14.2 4.1 12.2 12.9 14.8 7.9 0 Navapołack Supplies from 11.9 13.9 14.7 17.7 19.2 20.9 20.0 Russia Refining, of 13.27 15.2 15.6 18.533 19.714 21.542 21.363 which: Mazyr 6.021 7.5 7.5 9.399 9.476 10.763 10.671 Naftan 7.249 7.7 8.1 8.585 8.649 10.779 10.692 Extracting 1.84 1.78 1.77 1.76 1.78 1.76 Petrochemical 7.7 9.9 10.6 13.0 13.5 14.8 15.1 exports Sources: Prime-TASS. http://www.prime-tass.by, the Ministry for Statistics and Analysis, http://belstat.gov.by, personal archives.