The Belarusian oil sector encountered more challenges last year than in 2013, despite higher average performance indicators. A group of factors – including the fall in world oil prices, tax maneuver in the Russian oil sector, and the depreciation of the Russian ruble – affected the overall amount of the oil rent enjoyed by Belarus. In that context, the future of the oil-processing industry remained vague. At the same time, supplies of Russian natural gas became more lucrative for Belarus in 2014, because prices dropped in U. S. dollar terms.
In 2014, Belarus started making efforts to phase down cross-subsidies in the electricity sector; however, fees were cut only for a few selected sectors, and the process of eliminating cross-subsidies turned out to be much slower than originally planned.
- Significantly worse conditions in the oil sector following global price reductions and Russia’s tax maneuver;
- Slight improvement in the terms of Russian natural gas supplies;
- Commencement of campaign to do away with cross-subsidies in the Belarusian economy.
Oil and oil products
In 2014, Belarus managed to improve average performance indicators in its oil-processing sector and trade in oil and oil products. The country imported 22.2 million tons of crude oil, an increase by 6.5% from 2013. 1 Average contract prices amounted USD 339 per ton, down by 14% from 2013. Belarus also imported approximately 104,000 tons of crude oil from Kazakhstan for the first time ever. Export of Belarusian crude oil edged down by 0.1% year-on-year in 2014 to 1.617 million tons, with the average export price of USD 695.1 per ton, down by 9.3%. Most of Belarusian crude – about 1,800 tons – was produced at the Rečica oil shale deposit. 2 Export of oil products reached 13.8 million tons, an increase by 1.6% from 2013, of which 5.5 million tons were exported to Russia and Ukraine, up by 21.4% year-on-year. Export to foreign countries beyond the CIS amounted to 8.3 million tons, which represents a decrease by 8.4% from the level recorded in 2013. 3
In 2014, the Council of Ministers of the Union State resolved that the quarterly pattern of Russian crude oil supplies to Belarus would be extended throughout 2015. According to the new agreement, oil deliveries to Belarus will depend on quarterly balances of supplies of Belarusian gasoline back to the Russian market – a total of 1.8 million tons in 2015. If Belarus fails to supply the required volumes of gasoline, the ratio of the shortage to the required quarterly amount will be multiplied by 5 and the resulting multiplier will be used to calculate a reduction in Russian deliveries during the following quarter. This year’s schedule of supplies remains unchanged from 2014: 23 million tons of oil will be provided in 2015, of them 22 million tons by pipeline.
In 2014, Belarus continued using unauthorized export schemes (much like the notorious solvents/diluents scheme back in 2012) to avoid payments of export duties by way of reporting foreign supplies as if they were some commodities that are not subject to export duties. Russia grew suspicious because of the hikes in the Belarusian export of bitumen, because the country exported more bitumen in January–August 2014 – 658,300 tons – than it produced during the twelve months of the year. 4 Russia’s losses caused by the new “bitumen” scheme are estimated between USD 10 million and USD 145 million (the large spread of estimates is due to the fact that experts are not certain which products were exported under the label of “bitumen mixtures”). In October 2014, a Belarusian–Russian interdepartmental working group was put together to probe into Belarusian bitumen supplies, but the investigation will hardly have any tangible results. Anyway, the fact that Russia allowed Belarus to keep all export duties in its budget makes further debate about the use of unauthorized trade schemes irrelevant.
In August 2014, the Naftan and Mozyr NPS oil refineries were suspended for routine maintenance. The original plan was for the two refineries to have maintenance one after the other; however, the Mazyr-based refinery decided to suspend operations ahead of the schedule, which caused concerns about the country’s ability to meet its obligations to supply oil products. In early August, Belarusian Oil Company sent a notice to its Ukrainian partners to inform them that only 20% to 30% of their seasonal requirement for oil products would be met (slightly more than 1.5 million tons); however, during a conversation with his Ukrainian counterpart Petro Poroshenko on 4 August, President Lukashenka said that Belarus was ready to meet its commitments and supply the required amounts of oil products to Ukraine by way of re-exporting oil products from the Gdansk and Mažeikių oil refineries.
Despite our forecast, hostilities in the southeast of Ukraine did not result in a fiercer competition for Belarusian producers in the Ukrainian market for oil products. 5 We had expected a tougher competition following the anticipated launch of the Rosneft-owned Lisichansk refinery (the Russian company has an extended sales network in Ukraine). On 31 August, the Lisichansk refinery was damaged as a result of an artillery bombardment, which caused a fire, and the refinery had to be suspended for repairs.
Despite the initial implementation of plans to increase the productivity and profitability of the Belarusian oil refineries, the situation with oil prices and regulatory policies in foreign markets – primarily in Russia – pose serious risks to the Belarusian oil-processing sector. These risks are associated with the lower profitability of oil processing and lack of strategies to effectively address the risks in the medium term.
These risks are mostly caused by the so-called tax maneuver in the Russian oil exploration and production sector, which envisages a reduction in oil export duties all the way to the level currently effective in Kazakhstan (to USD 80 per ton from USD 385) and simultaneous increase in the mineral extraction tax. 6 The maneuver results in an increase in the price of crude oil delivered to the Belarusian oil refineries (by approximately USD 100 per ton), which cannot be compensated by the drop in world crude oil prices, because prices for oil products also fall. At the same time, the maneuver dramatically reduces the amount of export duties on crude oil that Belarus is allowed to keep in its own budget – to USD 500 million from USD 1.5 billion.
The bill on the tax maneuver passed its first reading in the Russian State Duma in November 2014 and was slammed by the Belarusian administration, which said that the bill ran counter to the principles of the Customs Union and the Eurasian Economic Union. The Belarusian side eventually managed to get compensation: according to bilateral arrangements, in 2015, Belarus is entitled to keep the entire amount of export duties on oil and oil products in its budget. Rules for distributing export duties in 2016 will be discussed later this year.
Although Belarus managed to make up for at least some of the losses caused by the tax maneuver in the Russian oil sector, budget revenues formed by export duties on crude and refined oil will decline this year because of the global oil price drop. The originally planned amount of revenues – USD 2.5 billion – would have been possible if oil prices had remained at or above USD 100 per barrel. However, based on current oil price forecasts, revenues will be at least 30% lower than the target in 2015, and the profitability of oil processing will plunge by up to USD 20 per ton. Lower budget revenues generated by oil export duties may thwart the modernization plans of the Belarusian oil refineries and the country’s capability to service the external debt: of the said USD 2.5 billion, USD 1 billion was expected to be spent on foreign debt, and the remaining USD 1.5 billion was expected to be invested in modernization.
The current situation in the oil market and the business environment in Belarus generate serious difficulties for the oil-processing sector of the country.
- Firstly, the profitability of the two oil refineries is affected by cross-subsidies, because the oil refineries supply raw materials to Belarusian oil and chemical companies at domestic prices, which are significantly lower than world prices.
- Secondly, the lower profitability of oil processing may lead Belarus into a “development trap”: insufficient profits make it hard to service previous loans originally taken to complete modernization projects, and without modernization efforts the refineries are incapable of increasing profitability by way of producing additional commodities with higher added value.
- Thirdly, the profitability of companies is seriously affected by the current excise policy; however, lower excise rates on fuel and oil products would produce a negative impact on budget revenues.
The scheme of quarterly supplies of Russian crude oil and firm peg of the volume of deliveries to supplies of gasoline back to the Russian market in 2015 will cut revenues from export of Belarusian oil products: the depreciation of the Russian ruble cheapens Belarusian export, while there is no possibility for Belarus to channel its oil products to European markets. The reduction in world oil prices and Russia’s tax maneuver cause additional problems by further reducing the profitability of the Belarusian oil-processing sector.
As for modernization of the Belarusian oil-processing industry, Belarus did not manage to sell the state interest in Mozyr NPZ, which was put up for sale in early 2014. Russian oil majors were eyed as the likeliest buyers, but they were not interested in the Belarusian assets, citing specific purchase terms. The Belarusian side said Mozyr NPZ was worth USD 4 billion, but additional terms applied: the future buyer is supposed to invest USD 400 million in modernization, build a new refinery cluster for up to USD 1.2 billion, double processing volume to 20 million tons a year, and make no staff reductions. Therefore, the sale of the state shareholding in the refinery has been postponed indefinitely.
In 2014, Belarus imported 20.05 billion cubic meters of natural gas, down by 1% from 2013. The average annual gas price amounted to USD 170 per 1,000 cubic meters, an increase by 2.6% from 2013. 7 Belarus paid a total of USD 3.4 billion for natural gas in 2014, 1.6% more than in 2013. Nevertheless, Belarus still enjoys the lowest natural gas price among all foreign consumers of Russian natural gas – In 2014, Lithuania paid USD 474 per 1,000 cubic meters of gas, and the price on the German border averaged USD 371 per 1,000 cubic meters.
On 17 September 2014, Belarus and Russia signed an agreement on transit of Russian natural gas through Belarus for 2015–2017. The contract provides for the same terms of gas supplies to Belarus as those stipulated by the previous contract: Belarus will import approximately 22 billion cubic meters of natural gas annually, and the maximum import volume may reach 24 billion cubic meters. Furthermore, gas prices for Belarus remain at the level effective for the Yamalo-Nenets Autonomous District of the Russian Federation, which means the average annual gas price for Belarusian consumers has been de facto reduced to USD 155 per 1,000 cubic meters from USD 168 because of the depreciation of the Russian ruble.
In April 2014, the Russian government decided to postpone the change to the so-called “equal-profit” prices for internal consumers, including Belarus. Russia had planned to change to “equal-profit” prices starring 2015, but the transit period was extended by two years to early 2017. The introduction of the new price-formation procedure would have meant a hike in natural gas prices for domestic consumers to the average export price, which in 2014 amounted to approximately USD 360 per 1,000 cubic meters, and a corresponding increase in fees for Belarus.
Electricity and tariff policy
In 2014, the Belarusian government began a campaign to phase out cross-subsidies, although the original plan to completely do away with cross-subsidies was never implemented. On 1 January 2014, the natural gas fee for companies and entrepreneurs was reduced by USD 7.25, and for industrial companies, by USD 10. Electricity fees were also reduced for major manufacturers – by USD 0.005 per kWh, whereas chemical companies had their electricity fees cut by USD 0.035 per kWh. At the same time, thermal energy fees for chemical and plastics companies were reduced by 15.8%. In order to reduce the energy intensity of GDP, a mark-up factor was introduced to increase gas and electricity fees consumed in excess of the standard amount by companies with state interests of 50% and more. The minimum mark-up factor was set at 2; it was first applied in February 2014.
In 2014, gas and electricity fees for households were raised four times in accordance with rules for indexing tariffs approved by presidential decree No. 550. Under the decree, tariffs are raised proportionally to the increase in personal incomes on 1 March, 1 September, and 1 December as well as on 1 January – by the fixed rate of USD 5 in BYR terms.
Owing to the rise in fees, the total volume of cross subsidies dropped by approximately USD 250 million; however, the reduction in cross-subsidies is taking a lot more time than originally planned. Furthermore, the most significant decrease in electricity fees for industrial producers was available only to a few selected industries. In 2015, efforts to phase down cross-subsidies will be limited by the economic crisis, which affected personal incomes, whereas reductions in cross-subsidies exclusively through cuts in fees for companies without respective increases in fees for households will call for significant subsidies. Even though the campaign for the cancellation of cross-subsidies has been underway for some time now, gas and electricity fees for Belarusian companies remain very high – Russian Smolensk Region-based companies pay USD 130 per 1,000 cubic meters of gas and USD 0.097 per kWh, whereas Belarusian producers pay USD 207 and USD 0.1375, respectively.
The profitability of the Belarusian oil-processing sector, which used to generate significant budget revenues, has been affected by Russia’s tax maneuver in the oil sector and reduction in world oil prices. The “local crisis” of oil processing has demonstrated the dependence of the Belarusian oil business on global oil prices and terms of crude supplies from Russia. During the next few years, the Belarusian oil-processing industry will call for a serious reform to increase the efficiency and profitability of oil-processing companies. The extension of the previous natural gas contract for Belarus means that the average annual gas price will be de facto reduced in the wake of the depreciation of the Russian ruble, whereas the change to equal-profit gas prices, which would have resulted in hikes in fees, was postponed until 2017. The future of the campaign to do away with cross-subsidies remains vague in 2015 because of the unfolding economic crisis.