Belarus has just bought two cargoes of Johan Sverdrup, the recently commissioned Norwegian oilfield and is in talks with several oil-producing countries from the Soviet Union to ramp up crude imports in the upcoming weeks. This in and of itself might not seem such a big thing yet considering that Belarus in the past years was 100 percent reliant on Russian crude (and has barely purchased any in 2020), it marks an unexpected escalation of what initially seemed to a technical issue, a transit fee discrepancy, that should have been sorted on a professional level, without the involvement of politics. Instead, the undeclared war between Belarus and Russia is now upending traditional lines of supply and wreaking havoc in the two states.
Let’s start with the chronology first. The roots of the conflict are to be traced back to the inability of the two sides to settle on a crude supply deal for 2020, one which would build on the previous years’ uninterrupted supplies whereby Belarus was buying 23-24 million tons per year, of this some 18 million tons per year for domestic usage in its 240kbpd Novopolotsk and 320kbpd Mozyr Refineries. Belarus rejects any Russian proposals that mirror the pricing practice of the past years as the Russian tax maneuver jeopardizes up to 5 percent of Belarus’ GDP. The Russian tax maneuver is a long-mooted step to phase out crude and product export duties and offsetting the balance by means of a Mineral Resources Extraction Tax (MRET) increase.
Graph 1. Russian Export Duty in 2014-2020, USD per metric ton.
Since Belarus has been receiving all crude oil duty-free up until the last days of 2019, Russia’s decision to move in the direction of harmonizing its oil sector taxation with the requirements of its post-CIS integration brainchild, the Eurasian Economic Union, renders it inadvertently one of its victims. The phasing out is not immediate as it is spread out over five years (2019-2024) yet Belarus does not want to sit idly whilst the margins and profits of its refiners shrink and their standing vis-à-vis Russia becomes unfavored. To complicate matters even more, 6mtpa of the 24mtpa Belarus annually purchased were only nominally related to the Eastern European state – the Kremlin used it as a political sweetener for purely political reasons, these volumes were customs cleared in Belarus (not Russia) so that the Belarussian budget gets some $600-800 million per year. Related: Expect A Strong Year For Oil Discoveries
This might seem as a tough nut to crack – thanks to the duty-free character of crude imports Belarus saved approximately $2 billion per year and now would be compelled to purchase crude at market level. However, the particularities of post-Soviet deal-making render it even more complicated. All of the crude agreements are inextricably linked to the two sides’ gas agreements (Belarus has paid 132 USD/MCm whilst the average European price of Gazprom was 242 USD/MCm in 2018 and 202 USD/MCm in 2019), Minsk’s manifold debt repayment schemes vis-à-vis Russian state banks and President Lukashenka’s erratic foreign policy.
Gas negotiations are palpably less toxic than the crude-related ones, owing in no small part to the fact that Gazprom controls Belarus’ gas transmission network, i.e. it cannot be used as a bargaining chip in bilateral negotiations/disputes. This is not the case with crude and one can see the result – as soon as the Belarussian-Russian dispute emerged, the Belarussian Trade and Anti-Monopoly Ministry declared that it seeks an immediate 16.6 percent hike on pipeline crude transit volumes (the crude which is supplied to Central and Eastern Europe via the Druzhba pipeline). The Belarussian President upped the ante by imposing a sudden 50-percent “environmental tax” on all crude and product transit volumes, needless to say that in a completely unannounced fashion.
Why Johan Sverdrup? The reason for buying Johan Sverdrup is fairly straightforward – the 28 degree API density grade is very similar in its product yield to Urals, the crude for which both Belarussian refineries were initially configured. According to market rumors, the Belarussian state company BNK bought two Aframax cargoes and will ship them home from the Lithuanian port of Klaipeda, delivering them to the Novopolotsk Refinery by rail. The vicinity of Norway’s continental shelf played no small part in this – MT Breiviken which will deliver the first cargo loaded January 19 and by January 23 it had already reached its final destination, i.e. the required voyage was really quick, coming in handy for Minsk’s bargaining position even if it overpaid it.
What does Russia seek? As much as Russia has garnered a rather adverse reputation for its energy sector-related dealings, with Belarus it faces a difficult dilemma – it wants to make sure that a powerful political message is made to President Lukashenka, all the while keeping Belarus’ oil sector out of the trouble. Its interests are by no means altruistic – Belarus’ largest refinery in Mozyr is co-owned by a joint venture of Rosneft and Gazprom Neft, meaning that Russian NOCs control 42.58 percent of the asset (the rest is controlled by the Belarussian state). Given that Belarus’ downstream was loss-making even in the “good” years of 2017 and 2018, primarily due to government-controlled fuel prices and currency devaluations, neither of the companies wants to incur even deeper losses.
What next? As wild as the current situation seems, this is not the first time such unbridled negotiations take place. Tariff hikes are a usual subject for the two sides’ disputes, moreover in 2010 Belarus has already tried to import Venezuelan crude to demonstrate that it can survive without Russian deliveries. Lukashenka’s cash-strapped regime needs further Russian loans and Moscow’s cooperativeness in keeping Belarus’ loss-making energy sector afloat, all the while Russia, seeking to enter a new period of détente with Europe, has no political interest in spoiling its geopolitical game by actions in Belarus. Hence, after the bombastic declarations and threats abate, Moscow and Minsk will curve out yet another modus operandi (which everyone knows will last only for a couple of years, only to repeat the entire process from scratch).