BELARUS NEWS AND ANALYSIS

DATE:

09/01/2007

Russia may cut oil output; Europe raps pipeline halt

(Adds Economy Minister Gref throughout)

By Dmitry Zhdannikov and Noah Barkin

MOSCOW/BERLIN, Jan 9 (Reuters) - Russia threatened on Tuesday to cut oil output, exerting pressure on Belarus to climb down in a trade dispute that has halted its main crude export pipeline and drawn Europe's condemnation.

European leaders deplored the escalation of a tit-for-tat trade row between Russia and Belarus, the erstwhile ally across whose territory the Druzhba ('Friendship') pipeline pumps a third of Russia's 5 million barrels per day exports.

But hopes of a quick resolution faded after Vladimir Putin, president of the world's No.2 oil exporter, said Russia may cut production and Economy Minister German Gref said no breakthrough was achieved at talks with Belarus on Tuesday.

Putin, looking calm and determined, told his government "to discuss with Russian companies the possibility of reducing oil output in connection with the problems arising from transit through Belarus."

Energy Minister Viktor Khristenko later told reporters Russia might have to cut production because it had no alternative routes to export crude bypassing Belarus. Moscow accuses Minsk of forcing the closure by stealing oil from the Druzhba pipeline.

Khristenko confirmed the shutdown was on Sunday night. It took out supplies to Poland and Germany, Europe's biggest economy. Flows dried up later to Slovakia, Hungary and the Czech Republic, which are served by a southern spur of the pipeline.

It is not acceptable for suppliers or transit countries to take measures without consultation. Of course this is a matter for concern," EU Commission President Jose Manuel Barroso said on a visit to Berlin.

Chancellor Angela Merkel of Germany, which imports a fifth of its oil via the Druzhba pipeline, backed Barroso.

"That hurts trust and it makes it difficult to build a cooperative relationship based on trust," she said, adding she would raise the matter with Putin in Moscow later this month.

OIL THEFT

Russia said Belarus had taken oil from the pipeline to secure payment in kind for a transit tariff imposed last week.

Russia had earlier slapped an oil export duty on Belarus to staunch annual losses of up to $4 billion it says it was suffering because Belarus has been refining duty-free oil at a steep profit, in violation of their customs union.

The oil shutdown echoes last year's bust-up between Russia and an increasingly pro-Western Ukraine that disrupted gas supplies to Europe.

This time, Putin is again gambling Russia's reputation as an energy supplier by taking on his closest ally, Belarussian President Alexander Lukashenko, shunned by the United States as Europe's last dictator.

"It will again revive talks about the reliability of Moscow as a stable energy partner of the West," said Valery Nesterov, an oil analyst at Troika Dialog brokerage in Moscow.

Moscow's rhetoric held out little prospect of compromise. Khristenko said Russia would build up alternative routes in the mid- to long-term to bypass Belarus.

Economy Minister German Gref told a news conference Moscow and Minsk had failed to reach a deal on Tuesday after talks with top Belarussian negotiator, Deputy Premier Andrei Kobyakov. Gref said talks might resume, but did not say when.

Analysts said both countries would have to find a compromise quickly to avoid taking a big economic hit. But crude oil futures -- depressed by an unusually warm U.S. winter -- fell by $1.65 a barrel to $54.43.

"The two sides will try to settle the dispute within a week. Otherwise the economic damage and damage to reputations will be huge," said Troika's Nesterov, warning of a possible supply glut on the Russian oil market.

'NO NEED TO CUT'

LUKOIL (LKOH.MM: Quote, Profile, Research), Russia's largest oil company with daily output of 1.8 million barrels, said it hoped no cuts would be necessary. "We hope a compromise will be found and there will be no need to cut production," said spokesman Dmitry Dolgov.

A trader with a Western major said he expected some firms to start declaring force majeure -- their inability to meet export commitments -- if no compromise was found this week.

The International Energy Agency said European oil markets would cope with the halt of the Druzhba pipeline, one of the world's biggest, as refiners have adequate reserves and could tap alternative supply sources.

One major customer, Shell's (RDAs.L: Quote, Profile, Research) PCK Raffinerie in Germany, said it was already pumping oil from a tanker docked at Rostock port. Total (TOTF.PA: Quote, Profile, Research) said earlier it had bought a cargo via Gdansk, Poland, to supply its refinery in Leuna, Germany.

Source:

http://today.reuters.com/news/articlebusiness.aspx?type=tnBusinessNews&storyID=nL0996750&imageid=top-news-view-2007-01-09-111032-RTR1KZSR_Comp%5B1%5D.jpg&cap=File%20picture%20on%20an%20employee%20walking%20across%20a%20bridge%20at%20an%20oil%20pumping%20station%20on%20the%20Druzhba%20pipeline%20in%20the%20Belarussian%20city%20of%20Gomel%20on%20November%2014,%202006.%20REUTERS/BelTA/Files&from=business

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