As much as Russia’s dealings with its neighbors are predominantly perceived as an exercise in brandishing the good old “energy weapon”, Moscow has been having a hard time with its neighbors ever since the collapse of the Soviet Union. Having incubated political elites that have based their personal wealth on the preferential conditions provided by Russian exporters of oil or gas, Russian authorities have been having a very difficult time in having the ‘near abroad’ (the term usually used for former Soviet Union nations) pay market prices. Ukraine is a splendid case in point of bilateral relations suddenly turning very sour, yet there might be another candidate in the makings, commonly known as the last dictatorship of Europe, Belarus. Heretofore Belarus had been a stable market outlet for Russian producers – its refineries are configured for Russian crude, one of them even co-owned by Gazprom Neft and Rosneft, moreover Belarus is part of the Eurasian Customs Union and thus qualified for duty-free oil trade. Yet the Russian tax maneuver – a set of measures created to maximize government revenue from domestic oil production, predominantly the country’s downstream utilizing the difference between USD-denominated world prices and RUB-denominated domestic prices – has changed all that. The gradual decrease of oil export duties, which will be lowered by 5% every year until the zero out in 2024, hits Belarus’ downstream sector directly as its discount to global prices, effectively a previous Russian cross-subsidy, starts to shrink.
Against this background, 2020 brought about the perfect storm in the Belarussian-Russian relation. With Moscow becoming increasingly tired of President Lukashenko’s antics and according to rumors even seeking to have a more constructive partner in Minsk, the Belarussian President struck back by refusing to sign onto a new oil deal with Russia. Thus, from January 1 onwards Belarussian refineries that usually refine some 1.5 million tons of crude per month have been refining some 0.3-0.4 million tons per month instead. All the major Russian oil companies were absent from the Belarussian market as the January-March 2020 tally amounted to a mere 1.04 million tons, a 77% year-on-year decline. Threats to confiscate oil transiting to Europe, revisiting last year’s organic chloride contamination story – all of this has been well known to Russian policymakers, yet Belarus’ reaction to the ongoing crude dearth went significantly beyond previous cases.
The past has seen several instances when Belarus bought seaborne cargoes from non-Russian buyers. President Lukashenko has had a brief romance with Venezuela in 2011-2012 which, however, wound down completely after the passing of Hugo Chavez. Then Iran was a personal favorite for a couple of years spearheaded by the Ahmadinejad initiative to produce Iranian cars in Belarus, Belarussian refiners even bought a cargo of Iranian in 2017. Yet this time the Lukashenko reaction seems different as it gradually evolves from a one-off tour de force into a conscious policy with the Belarussian President even declaring that he would want to limit Russian supplies to 30-40% of the total and that the rest would be provided via alternatives routes.
Graph 1. Belarus Russian Pipeline Crude Intake (in million tons per annum).
Source: data compiled by author.
Speaking of alternative routes, Belarus has exactly two. The first route is via the Lithuanian port of Klaipeda – with this, the Belarussian buyers would need to rail the crude as there is no functioning pipeline to link Lithuania and Belarus. There was a fully operational Mazeikai-Novopolotsk pipeline when Russian exporters still used the non-Russian Baltic branch, yet it had not been used since 2006 and despite a recent flurry of activity around it remains unusable. The second alternative route involves the Ukrainian route – the incoming vessel is to discharge at the main Ukrainian seaborne port of Odessa and using reverse flow on the Druzhba pipeline the crude is moved towards Belarus. This year’s seaborne deliveries have seen the usage of both, alternating in the function of the crude taken in.
The first non-Russian cargo of this year was Johan Sverdrup in January, two cargoes thereof to be precise – this was not surprising in and of itself since the yield composition of Sverdrup is similar to that of Urals. The only major difference between the two lies in the Norwegian grade’s sulfur content because of which it is assumed to wield some premium over Urals, i.e. it is costlier to buy per se, not to speak of the rail transshipment. Then came Azeri cargoes delivered via Ukraine, IMO 2020-compliant with an even lower level of sulfur content, which seems a bit counterintuitive for landlocked Belarus that traditionally refined heavier barrels. The third piece of the diversification strategy – a cargo of Saudi crude through the Baltics, with the Belarussians availing themselves of depressed differentials.
The apogee of the conflict, however, will come in Belarus buying its first-ever US cargo, reportedly an Aframax-worth of Bakken from United Energy Trading. The vessel, judging by early fixtures it would be NS Captain, would arrive in the 1st decade of June to Klaipeda in Lithuania and would be then moved via rail to the Novopolotsk Refinery. Coming after months of US courting of Belarus (including a Mike Pompeo visit and a forthcoming reinstatement of a diplomatic mission), this will be by far the lightest crude Belarus has ever taken. Further oddity to see Belarus buying US crude is that it happens in May 2020 of all times, when US crude exports to Europe have reached their lowest level since August 2017. All this takes place against the background of Moscow and Minsk already agreeing on the details of 2020 supplies – and one need not be a clairvoyant to predict the Russian response.
By Viktor Katona for Oilprice.com
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