BELARUS NEWS AND ANALYSIS

DATE:

10/01/2007

Russia's Latest Energy Scuffle

Fresh Off Their Natural Gas Pact, Moscow And Belarus Lock Horns Over Oil, Underlining Europe's Reliance On Shaky Energy Relationships

When, at two minutes before midnight on New Year's Eve, Russian and Belarusian negotiators signed a new, five-year gas supply contract for the ex-Soviet republic of Belarus, it looked like a fresh energy supply crisis for Europe had been narrowly averted. The 11th-hour agreement meant that Russia wouldn't be turning off Belarus' gas at the stroke of midnight. European customers, mindful of the previous year's gas supply disruptions caused by Russia's price dispute with Ukraine, breathed a collective sigh of relief.

Yet, just over a week later, it turns out the relief was premature. This time it's Russian oil, not gas, causing the commotion. On Jan. 8, Russia halted oil deliveries to Central and Western Europe via the Druzhba pipeline through Belarus. The move resulted from Belarus' imposition of a transit tariff of $45 per metric ton, which Russia has called illegal and refused to pay. In retaliation for Russia's nonpayment, Belarus began confiscating gas destined for Western consumers.

By imposing a hefty transit tax, Belarus is clearly trying to get back at Russia for more than doubling the price Belarus must pay for natural gas at the start of the year. Belarus is also sore because Russia is imposing an export duty on oil of $180.70 per ton. That will cut out a lucrative trade, worth an estimated $4 billion, under which Belarus imported duty-free Russian oil before reexporting it to Western Europe at a significant markup.

EU in the Crossfire

What to make of it? The West can hardly blame Russia for wanting to eliminate this unjustified largesse. "Belarus has been making money hand over fist importing very cheap Russian oil and exporting it at world prices, and the Russians just got fed up with it," says Jonathan Stern, an expert on the Commonwealth of Independent States [CIS] at the Oxford Institute of Energy Studies. "In terms of what Russia should be doing -- moving toward market relations both in their own country and in their relations with other countries -- this is what they should have done years ago."

Few in the West will shed tears for the difficulties now caused for the regime of Belarus President Alexander Lukashenko, a belligerent anti-Western autocrat. But, as with last year's pricing dispute between Russia and Ukraine, customers in the European Union are caught in the crossfire, causing squeals of protest from Brussels to Warsaw.

Germany's Chancellor, Angela Merkel, has called "unacceptable" Russia's decision to cut off supplies unannounced. The European Commission, meanwhile, says that the dispute "has to be taken seriously." In a statement released on Jan. 9, Brussels noted that the drawing of emergency stocks represented "non-negligible financial costs" and "also reflects negatively on the image of the reliability of the two countries as energy partners for the Union."

Russia Compelled to Compromise?

True, the immediate impact on European energy markets is likely to be slight. According to the EU, emergency oil stocks in the Union represent at least 120 days of normal consumption, while the Polish government has said that it has 80 days' worth of emergency supplies. Customers such as Germany and Poland have simply been forced to dip into these emergency supplies until the conflict is resolved -- presumably within the next few days.

One possibility, says Jeffrey Woodruff, director of Fitch Ratings' energy team in London, is that Russia and Belarus may agree to share the revenues from the reexport of Russian oil from the country. That would represent something of a defeat for Russia and a victory for Lukashenko's stubborn and belligerent tactics. It's a sign of how conscious Russia has become of the negative international publicity caused by its energy tactics that such a compromise now seems possible.

Officials and analysts say the incident should still be taken seriously. "The big surprise is how quickly the situation deteriorated," says Woodruff. "People were expecting a dialogue before it reached the level that we're at right now."

Although Europe's oil imports are more diversified than its gas imports, Russia is still a significant supplier. Russian oil accounts for a quarter of the EU's oil consumption and 30% of its imports. Around half of that oil comes through Belarus via the Druzhba pipeline, which supplies 1.8 million barrels per day to Poland and Germany.

Impetus to Treaty Talks

And the latest interruption to Europe's energy supplies from Russia is yet another reminder of how insecure these supplies can be. While many in the West have voiced fears about Russia's potential use of energy as a geopolitical weapon, the real lesson of the latest dispute, argues Oxford's Stern, is that the stability of Europe's energy supplies depends just as much on [not-so-reliable] transit countries such as Belarus. "Europe has paid very little attention to Belarus, Ukraine, and Moldova," says Stern. "These are very important countries which require a significant amount of attention."

The incident also increases the urgency of long-running energy negotiations between Russia and the European Union. For months, the EU has been pressing Russia to ratify an international treaty, the European Energy Charter, which would establish much clearer guidelines governing the supply and transit of energy. But faced with Russian objections to key aspects of the charter, Brussels has been slow in formulating alternatives that could move the dialogue forward. "All of these episodes show what an absolutely essential piece of the international energy architecture it is," says Stern, who argues that Brussels now needs to soften its position to gain Russian acceptance of the treaty.

Energy analysts also expect the latest developments to accelerate moves in the EU toward greater diversification of energy supplies. Yet for all the talk about diversification, in practice the EU still has very few alternative options readily available. European consumers may have to rely on insecure Russian energy supplies for years to come.

Source:

http://www.wjactv.com/money/10712925/detail.html

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