[aaus-list] Ukrainian-Belarusian Relations: Prospects in the Energy Dimension

[Kostyantyn Mykhailychenko]

Research Update. Vol. 14, Ð 37/555, 27 October 2008

Ukrainian-Belarusian Relations: Prospects in the Energy Dimension

By Vitaliy Martynyuk, UCIPR analyst

Ukraine and Belarus, the main transit countries 
for Russian energies to the EU, do not have
relations in the energy area. Though these two 
countries face identical problems of ensuring
energy security, they solve them differently. 
Mutual cooperation could be beneficial for both
Ukraine and Belarus in guaranteeing their energy 
security and maintaining transit opportunities.
With regard to similar energy problems, a 
question arises, what are prospects on bilateral 
energy
cooperation?

For the time being, energy contacts between 
Ukraine and Belarus have been weak and marked
with the absence of energy interaction. Weakness 
of this aspect is also confirmed by the number
of bilateral actions on energy provided for in 
the Intergovernmental Program for Long-Term
Cooperation between the Republic of Belarus and 
Ukraine for 1999-2008. Yet, a perspective of
strengthening Ukrainian-Belarusian energy 
relations does exist. On October 7, 2008, the 15th
session of the Ukrainian-Belarusian 
intergovernmental commission on trade and economic
cooperation was held in Kyiv. Its agenda 
encompassed the issue of bilateral relations on 
energy.
Ukraine and Belarus determined an intention to 
complete, as soon as possible, the elaboration
and signing of the Memorandum on Energy 
Cooperation. This is apparently a positive signal 
but
let's consider major points of contract of 
Ukraine and Belarus on key energy sectors.

Gas Autonomy

Ukraine and Belarus simultaneously faced similar 
problems of natural gas supply from Russia in
2005 and 2006. Whereas the Ukrainian-Russian gas 
dispute has been lasting for years, Belarus
acted according to its own scenario and soon 
settled the issue. The main trump for Belarus was
declaring itself as a permanent strategic ally of 
Russia in exchange for cheap energies as
dividends. The price for gas for Ukraine in 2008 
was USD 179.5 per 1,000 m3, whereas that for
Belarus equaled USD 119 per 1,000 m3. Belarus's 
price for cheap gas also includes, under the
agreement of December 31, 2006, the sale of 50% 
of shares of Beltransgaz to Russian Gazprom
until 2011. However, according to conclusions of 
President of the Belarusian Center for Political
Education Andriy Lyakhovich, Belarusian 
authorities do not intend to completely implement 
the
agreement. Specifically, in September 2007, 
Deputy Minister of Economy of Belarus O. Tur
stated that the sale of 50% of shares may be 
problematic because of the disappearance of some
individual shareholders of Beltransgaz.

Belarus and Russia also continue cooperation in 
the framework of the Allied State: at the
parliamentary session of the Allied State on 
October 16-17, the Constitutional Act was adjusted
and the allied budget for 2009 was passed (around 
USD 184 billion). Belarusian President O.
Lukashenka has repeatedly used this cooperation 
for getting cheap prices for gas, having stated
that a price for gas must be the same for all the Allied State members.

Yet, potential problems with cheap Russian gas 
still remain. During his visit to Minsk on
October 6, 2008, Prime Minister of Russia V. 
Putin demonstrated that his country is not in a
hurry to economically support Belarus at the 
expense of cheap prices for Russian energies. He
did not give Belarusian power an expected answer 
about the price for gas in 2009 suggested to
be fixed at the level of USD 140 per 1,000 m3. 
According to Andriy Lyakhovich, such behavior
of Russia showed O. Lukashenka that volumes of 
Russian economic aid will be set depending on
results of a Belarus's dialogue with the West, 
first and foremost the EU. In other words, the
problem of natural gas supply and prices for it 
is still acute for Belarus but Belarusian
authorities persistently play the "ally card" to attain the goal set.

Ukraine and Belarus neither act in concert to 
ensure continuous supply of Russian gas nor pursue
consistent policies for gas transit to the 
European Union. Certain shifts towards deeper
coordination are unlikely to take place in the 
near future as well. Nevertheless, Ukraine offered
Belarus to stabilize gas supply. In November 
2007, Ukrainian Ambassador to Belarus Ihor
Likhovy said Ukraine can suggest Belarus, which 
consumes some 20 billion m3 per annum,
Ukrainian gas storages for temporary gas storage. 
Belarus has insufficient capacities for reliable
storage of natural gas (850 million m3 per 
annum). Ukraine voiced its readiness to reserve 
for
Belarus opportunities for gas storage in the 
volume of 5-8 billion million m3 in storages 
nearby
the Ukrainian-Belarusian border. Conversely, 
Belarus is intended to independently solve the
problem with gas storages. The third gas storage 
with the maximum capacity up to 1 billion m3 is
under construction in Mosyr. On October 6, its 
pilot exploration was started with pumping of 50
million m3 of natural gas. As of now, Belarus 
uses two less powerful gas storages. The maximum
volume of the Osypovyts storage is 360 million 
m3, while that of the Prybuzhske storage - 300
million m3 with a perspective of expansion up to 
600 million m3 until 2010. Yet, even the full
capacity of the Mosyr gas storage and the 
expanded capacity of the Prybuzhske one do not
ensure the creation of minimum necessary critical 
gas stock in Belarus, which have to be not less
than 20% of annual consumption volumes.

It means that in the gas area, Ukraine and 
Belarus still pursue autonomous inconsistent 
policies
for gas supply, though the consolidation of 
efforts could yield them considerable dividends in
negotiations with Russia and other suppliers. 
Belarus will take no actions in the gas area, 
which
could irritate Russia, including deepening of 
cooperation with Ukraine, unless prices for
Russian gas for Belarus are low and satisfy 
economic efficiency of the Belarusian industry.

Belarus and Oil Diversification

The share of oil and oil products in the total 
volume of Belarusian exports is considerable -
nearly 35%. Most of it goes to the EU Member 
States. In 2007, the country exported 15.1 million
tons of oil products, of which 14.4 million tons 
were exported to the EU. The oil sector is
important for the Belarusian economy and its 
profitability depends mainly on low prices for oil
imported from Russia. However, as it has been 
mentioned, Russia's attitude to a perspective to
continue supply cheap energies to Belarus is 
rather restrained. Besides, Russia is developing 
oil
pipelines bypassing Belarus: the Baltic Pipeline 
System (BTS-ß) with the capacity of 60 million
tons of oil per annum has been put into operation 
since 2006, while the BTS-II Project is being
actively developed. These cause the reduction of 
the use of the Druzhba oil pipeline via Belarus.
Therefore Belarus started considering alternative 
oil supply routes. Under the Comprehensive
Program for Modernization of Basic Production 
Assets of the Belarusian Energy System for the
period until 2011, 20% of the total volume of oil 
annually supplied to Belarus can be delivered
by alternative routes. The two major alternative 
directions are the southern, via Odesa, and
northern, via the Baltic Sea ports (Ventspils, Butinge and Klaipeda).

The northern option does not provide for new 
pipelines via the territory of Belarus but 
requires
the organization of reverse transportation of oil 
through existing pipelines and, according to
assessments of the Belarusian Institute for 
Strategic Studies (BISS), investment worth USD 40
million (see Valeriya Kostyugova, Prospects on 
Belarus's Participation in the Operation of the
Odesa-Brody Oil Pipeline, BISS SA 4/2008-EG). 
Moreover, at the Latvian-Belarusian investment
forum on October 17, 2008, President of DINAZ Holding Company M. Yermolaev said
Belarusian Belnaftakhim and Baltic Oil Terminal 
plan to jointly construct an oil terminal on the
territory of Riga Free Port.

The southern route provides for the commissioning 
of the Odesa-Brody oil pipeline in the
reverse mode. Oil can be supplied from Brody to 
Belarus, according to BISS, by the following
means:
*       Combinatorial: by the Odesa-Brody 
pipeline with transshipment in car tanks in Brody 
and
then by railway (additional investment is not needed);
*       Use of existing supply pipelines - the 
construction of the Bobovichi-Kostyikovichi part 
of
the oil pipeline 205 km in length (investments 
worth USD 120 million are needed);
*       Construction of a new part of the oil 
pipeline 800 km in length (investments worth USD
530 million are needed).

In case of supply by railway, the southern route 
is cheaper than the northern. Though Belarus can
join the Odesa-Brody Project on several 
conditions: Ukraine ultimately decides on its 
reverse
use; the pipeline's filling is guaranteed by 
Caspian oil producers; Russia's attitude to 
deliveries
of cheap energies to Belarus considerably and 
irreversibly worsens; and the Project ensures oil
supply at economically beneficial for Belarus 
prices. In other words, prices for Caspian oil 
must
not exceed those of Russia and oil processing 
with further exports of oil products to the EU 
must
be profitable for Belarus. As estimated by the 
BISS, other important factors include volumes of
transit of Russian oil via Belarus and capacity 
of Belarusian refineries to process Caspian oil
with low content of sulfur.

Now Belarus is not negotiating the joining to the 
Odesa-Brody Project but its interest might
sharply grow in case of the decrease of volumes 
of oil transportation via the southern branch of
the Belarusian part of the Druzhba pipeline and 
in case of the increase of prices for Russian oil
for Belarus. Under such conditions, Belarus could 
join the Odesa-Brody Project and the initiative
on the creation of the Baltic-Black sea-Caspian 
energy transit corridor. Belarus's joining this
initiative would essentially enhance the 
importance and attraction of the Project in 
general as
well as the possibility of its implementation.

Belarus - a Consumer and Transit County of Ukrainian Electric Power

In 2006, Belarus started purchasing electric 
energy in Ukraine in the amount of 2.5 billion
kilowatt/hour. Yet, in 2007 deliveries ceased. 
Belarus informed the cessation of supplies from
Ukraine is not critical for the country's power 
industry. According to Belenergo, Belarus
annually consumes about 36 billion kilowatt/hour 
of electric power, whereas it produces around
33 billion kilowatt/hour.

Participants in the 15th session of the 
Ukrainian-Belarusian intergovernmental commission 
on
trade and economic cooperation in Kyiv agreed to 
renew deliveries of electric power to Belarus
and other countries via Belarus, namely the 
Baltic States. By the end of 2008, energy 
agencies of
Ukraine and Belarus must resolve supply and 
transit issues. Vice Prime Minister of Belarus V.
Semashko informed the next year Belarus can 
organize transit of Ukrainian electric power to 
the
Baltic States and renew its imports (see 
http://news.liga.net/news/N0853890.html). In
confirmation of the afore-mentioned, Belarus 
suggested Latvia to use Belarusian transit
opportunities for electric power supply. At the 
meeting with Latvian Minister of Economy
Kaspars Gerhards, V. Semashko said, "We have a 
real perspective on transit and supply of
(Ukrainian - author) electric power to Latvia" (see
http://news.belta.by/ru/news/econom?id=289259).

Meanwhile, Belarus started working actively 
towards independent supply with electric power. In
January 2008, the President of Belarus approved a 
resolution on the construction of the 1st
Belarusian nuclear power station (NPS) with the 
gross output of 2,000 megawatt, the first of two
blocks of which must be built before 2016. The 
NPS, as estimated by Director General of the
Joint Institute for Energy and Nuclear Research 
"Sosny" Anatoliy Yakushev, will enable Belarus
to reduce expenses for electric power production 
by 60-70% and save about USD 1 billion on
gas purchase. At present, Belarus is selecting a 
site and a construction company. The
construction is to start the next year. In its 
turn, Ukraine suggested Belarus services on the
development of nuclear power industry through 
providing experts on the construction and
servicing of the NPS. Though, their attraction 
will depend on a company that will win a
construction tender. Russian AtomStroyExport is 
the most probable winner. After putting the
NPS into operation, Belarus will be able to 
cooperate with Ukraine either only in the area of
transit of electric power to the Baltic States or 
continue importing Ukrainian electric power for
its own needs to reimburse electric power volumes 
to be exported to the Baltic States from
Belarus.

Summarizing the afore-mentioned, it is safe to 
state that in the near future, Ukraine and
Belarus will not actively cooperate in all energy 
sectors. The only real direction of their
cooperation in the short-term perspective is 
exports of Ukrainian electric power to Belarus
and its transit to the Baltic States. In the 
long-term perspective, it is possible to predict 
in
the gas area - the conclusion of an agreement on 
the use of Ukrainian gas storages in the
interests of Belarus; in the oil area - supply of 
oil to Belarus via the Odesa-Brody pipeline; in
the area of electric power industry - transit of 
Ukrainian electric power to the Baltic States,
which may be gradually reduced after the 
commissioning of the NPS in Belarus and 
construction
of a NPS in Lithuania.
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