The European market is about to get its first oil products from Venezuelan crude which is to be processed at the Mozyr refinery in Belarus. The Mozyr refinery has just started processing Venezuelan crude after recently receiving its first 80,000-ton "trial" shipment.
By Vladimir Shlychkov
The supply contract for Venezuelan crude shipments to Belarus was inked March 17 by heads of state Alexander Lukashenko and Hugo Chavez after the presidents wrapped up negotiations. According to the document, crude produced by the JV Petrolera BeloVenesolana will be supplied to the Mozyr refinery and the resulting oil products will be sold on European markets. The sides agreed to set up another JV by June 3 to supervise the sales. Venezuela is to have a 75 percent stake in the venture while giving Belarus 25 percent.
Venezuela and Belarus started their cooperation in the oil and gas sector when they set up the Petrolera BeloVenezolana joint venture between the Venezuelan state oil and gas company Petros de Venezuela Sociedad Anonima (PDVSA) and Belarusneft in the autumn of 2007. The company received an oil production license for the Junin-1 block in the Orinoco river basin.
The new deal is different from the earlier arrangement. Previously, the oil produced by the JV (some 1 million tons in 2009) was supplied to Latin American and U.S. markets. Minsk then used the cash it earned from these sales (2009 net profit reached $105 million) to purchase oil and oil products from Russia.
The new agreement puts the initial annual supply to the refinery at 4 million tons of Venezuelan crude. This is 18.6 percent of the same figure for Russia. And now, for the first time Venezuela has gained a foothold in European markets.
The countries' are already aiming for 10 million tons per year in 2011. This would make Belarus the fourth largest buyer of Venezuelan crude, after the United States, China and India.
Commenting on the agreements reached, Belarussian Prime Minister Sergei Sidorsky stressed that "Belarus currently imports 21.5 million tons of oil from Russia. Given this, 10 million tons is a very significant figure."
The Belarussian and Venezuelan heads of state have also put a lot of effort into developing cooperation in gas industry. During meetings in Caracas, Belarus received development and production licenses for six fields in Venezuela as well as an agreement on setting up an upstream servicing JV.
Petrolera BeloVenezolana will also get to operate natural gas fields adjacent to Anaco. Much of the preparatory work has already been completed, and Chavez has pledged an extra $1.6 million for investments in the infrastructure of these fields.
While the financial details of the agreements remain undisclosed, it is known that the sides plan to invest at least $8 billion into developing the oil fields by 2025.
Logistics and Finance
Opponents, including those in Russia, criticize both the logistical and financial aspects of the project. So far the supply chain goes as follows: the crude is shipped from Venezuela to Ukraine's Odessa port and then by the rail to the Mozyr refinery in Belarus. The sides are also studying the viability of using Ukraine's Odessa-Brody pipeline. Furthermore, Minsk is not adverse to partnering with Lithuanian (Klaipeda), Latvian (Ventspils) and Polish (Gdansk) ports which are close to the country's Naftan refinery (Novopolotsk). In that case, the country could theoretically use (in reverse mode) the Surgut - Unecha - Polotsk - Ventspils pipeline which has been idle since 2003.
Lithuanian Prime Minister Andrius Kubilius noted at a meeting with his Belarussian counterpart that he considered the project of transiting Venezuelan oil through his country to be "doable". He also said he was willing to discuss the issue of discounted tariffs.
Kiev is also ready to engage. "The issue of Venezuelan oil supplies to Belarus via Ukraine is an issue of mutually beneficial agreements between the two countries," first Deputy Belarussian Prime Minister Vladimir Semashko and first Deputy Ukrainian Prime Minister Andrei Klyuev said after an April 15 meeting of their countries' bilateral committee on economic development. The two noted that Ukraine is essentially ready to provide Minsk with significant transportation discounts for shipping crude by rail.
Vladimir Semashko noted that various transportation options are being discussed. So far the sides believe that railway or combined transportation is the best for this project. The project has no plans to use the Odessa - Brody oil pipeline until the project has sufficient volume to support sustainable pipeline pressure. Russia is currently using this pipeline to transport its oil to port hubs in the Mediterranean. Experts say that pumping in the averse direction is possible and would not entail technical changes or high costs. The only action required is to switch the pipeline into the averse mode. Last year, the averse mode was successfully used on one of the branches of the pipeline.
Still, Belarus itself remains undecided on the issue of the profitability of shipping of oil from Venezuela. Belarussian Oil Company general director Vladimir Zubkov told OGE that the issue of the project's efficiency will be cleared in late May.
Experts are currently engaged in calculating a detailed economic plan. Some argue that this is an unprofitable project, but the government believes that it is not only profitable, but would also boost the security of country's energy supply, while at the same time reducing its dependence on Russia by diversifying supplies. Sidorsky also notes that, "For any state, the economic factor is not always the paramount issue in energy strategy."
The first calculations by the Belarussian government show that processing Santa-Barbara high-quality light crude grade at the Mozyr refinery will result in earning an extra $61 per ton profit for the state. If all goes according to plan, and within a year Venezuela is supplying 4 million tons of oil a year to Belarus, the country could earn up to $244 million.
"We must not be frightened by the distance between Belarus and the production site," economist Alexei Belyaev says. "Oil tanker shipments cover vast distances, and is normal international practice. Even China, India and Japan buy Venezuelan oil, and these countries are geographically further from Caracas than Belarus. And in any case, the logistical component of supplying the oil did not turn out to be that high. Transportation from Latin America to the Odessa marine port and then by rail to Mozyr refinery is expected to be below 15 percent of the total contract."
The world knows Venezuela's heavy oil, which requires rather specific processing technologies. Anatoly Kupriyanov, general director of the Mozyr facility, said the refinery received Venezuela's low-sulfur Santa Barbara blend, which ensures a high yield of light oil products . "We've already had similar oil from some Russian deposits, in particular, from Stavropol Region and Kaliningrad Region. There won't be any problems with refining," Kupriyanov told OGE. 'The staff have the necessary experience, and in any case, the refinery is well-prepared technologically," he added.
Andrei Romanov, the head of Ukraine's Eximnefte-produkt which loads oil in Odessa port, is similarly not worried about the quality of Venezuela's oil: "We have to work with different blends, and in terms of its functional properties, the Santa Barbara blend is among the best. This blend can produce 20 percent more gasoline, kerosene, or diesel fuel than Russian blends, and these products are in high demand in Europe."
A New Strategy for Minsk
In an effort to diversify oil supplies, Minsk is looking for partners in other regions, too. Belarus continues its cooperation with Iran, it is also studying issues of oil supply from Kazakhstan and Azerbaijan. To all appearances, the strategy of unwavering orientation towards Russia is gradually disappearing.
Meanwhile, Russia's discounts on 2010 tariffs and duties would save the Belarussian fuel and energy complex more than $4.2 billion ($2.6 billion on the difference between the European price for Russian gas and $1.6 billion on duty-free oil supplies).
And yet, the terms of Russian oil deliveries to Belarus changed this year. Only 6.3 million of 21.5 million tons pencilled this year for Belarus will have the duty-free stamp on export papers. The remainder is subject to 100 percent duty, which would automatically double the price of the hydrocarbons.
"Working with such costly oil is economically unfeasible," says Deputy Belarussian Economy Minister Anatoly Filonov. "At this cost for feedstock, domestic market prices would have to jump some 70 percent, while refineries would have to increase refining depth to 93 percent. In the current conditions, neither of these is possible."