Belarus is waiting for another negotiation over oil theme by the end of the year. The price of the issue accounts for billions of dollars, considering that we need to agree with Moscow on oil duties and the terms of Russian oil supply to Belarus for the coming four years.
Negotiations include several fundamental issues: export duties on oil products in 2016, terms of oil supply for the next four years and rules of the game on the common Eurasian market of oil and oil products.
A “Serious Conversation” is to Take Place
Belarusian budget for 2016 already includes 1.1 billion dollars of export duties on oil products (calculations have been made assuming that the price of oil will be 50 dollars per barrel). Although both sides still have to clarify that oil duties will be left to Belarusian budget.
Belarusian Ministry of Finance agreed on this step on the basis of the protocol with Russian Federation which states that Belarusian budget will be able to receive 1.5 billion dollars of oil duties consistently till 2025. The sum is guaranteed providing that the price of oil is 70 dollars per barrel. Taking into consideration that over the last 17 month the price of Brent crude oil fell by more than 60% (less than 50 dollars per barrel) another negotiation with Russia is not required: oil duties will go to Belarusian budget automatically.
These are the expectations of the Belarusian side, relying on agreements reached with the Russian Federation when signing the treaty establishing the Eurasian Union in May 2014. Whether Moscow has the same opinion or not is unknown: Russian officials have been making no comments on this theme lately. But the issue may be raised by the Russian side at desire, since from May 2014 the situation on the oil market changed fundamentally as well as, indeed, the economic environment in Russia itself.
Controversial issues, including the allocation of export oil duties in 2016, will rather be left to consideration of the presidents of Belarus and Russia. The first visit of A. Lukashenko to the Russian Federation after the presidential elections took place on December 16.
An Unusual Background for Bargaining
On November 13 at the first reading the Russian State Duma (second reading took place on December 2, the third – December 4) adopted a draft law on the federal budget for 2016. The budget is calculated assuming that the price of oil is 50 dollars per barrel. At the same time direct revenues from oil and gas industries comprise 44% of the budget receipts. Meanwhile, during discussion over the document the head of the Central Bank of the Russian Federation Elvira Nabiullina stated that a fall in oil prices will cause the contraction of the budget foreign currency revenues by 200 billion dollars a year.
Russian government has already decided to collect additional 300 billion roubles from oil and gas sectors in order to cover its budget deficit (during the first reading on November 13 the relevant bills – concerning the freezing of export duties on crude oil and an increase in mineral extraction tax for “Gazprom” – were passed by the Duma as well).
Experts on Russian oil industry note that 2016 is going to be the hardest time for extraction companies of Russia over the past few decades. After removal of sanctions the competition with Iran and Iraq will intensify. Being displaced from the USA market by local producers, Saudi Arabia will continue to compete actively with Russia for Asian and European markets. If the fiscal press on oil companies isn’t reduced, Russian oil industry will face a serious decline in production over the next 20 years. According to the negative scenario, which constitutes the basis of a draft of the new Russian Energy Strategy-2035, by the end of the period the extraction of oil in the country will be 310-320 million tons (while the Russian Ministry of Energy estimated that in 2015 this number will exceed 520 million tons).
In the meantime, the deficit planned by Russian government in 2016 is approximately 3% of the GDP. The former Russian Deputy Prime Minister Alfred Koch marks that it’s 17% higher than the planned revenues, which is quite comparable with the pre-default figures in 1997.
In Different Positions
Hence the official Minsk is going to face problems with gaining export duties on oil products into its budget and haggling over the terms of oil supply for the next 4 years as well, unless some serious concession is made on its behalf.
Belrynok.by wrote some time ago that the previous agreement on the terms of Russian oil supplies to Belarus expires in 2015 (in this document the parties stipulate the principles of price formation for strategic raw materials for Belarus, as well as some other conditions). Considering the fundamental changes of oil market that have occurred recently, the Belarusian side expects to make some significant changes to the document.
Namely the size of the premium to Russian oil companies is considered – they have offered to reduce it in accordance with the fall in oil prices. Moreover, Belarus intends to rank the qualitative characteristics of Russian oil in a more distinct way. But for now the Russian side doesn’t want to change the terms of oil supply to Belarus.
At the same time Belarusian oil refineries have decreased the processing of oil to a record minimum over the recent years. According to the latest data the volume of tolling oil is now 15% while the fixed quota established 50% of the oil imported from Russia. The remaining amount of oil is bought by Belarusian refineries though the proportion of 60 to 40 would be optimal for them from the financial point of view (i.e. 60% of oil is bought by Belarusian companies, 40% – by Russian firms). Note that in 2014 Russian companies processed 42% of the supplied oil on the territory of Belarus while the quota provided 50% of the oil imported from Russia; approximately the same volume was refined in 2013.
The decline in the amount of tolling oil sold to Belarus is also caused by the effect of a tax maneuver that Russian companies have been making from 2015. Under the new conditions exports of oil has become more profitable for Russian firms.
The Eurasian Puzzle
Another controversial issue is on the agenda: at the stage of creating a single EAEU (the Eurasian Economic Union) market for crude oil and oil products member states began to argue how the market would work.
Let us remind that the common market of crude oil and oil products in the EAEU is to start working in 2024; while the preparations of state programs of transition to the common market should be finished in 2017. The first document to determine principles of the united market formation is the concept of forming common markets of crude oil and oil products in the EAEU. The Eurasian Economic Commission has prepared the project of this concept and has recently sent it to the member states for approval. It turned out that they have got different visions of the common market. One of the disputable issues concerns the mechanism of price formation on the common market of oil and oil products in the EAEU.
According to the project, the pricing mechanisms “are formed on the base of existing pricing mechanisms in member states and stages of common market formation”. The Belarusian party disagreed and proposed its own formulation: the price of oil supplies among member states cannot “exceed the price of oil, calculated on the base of quotation by international pricing agencies, minus all costs, associated with the supply of oil outside the customs territory of the EAEU, and minus export duties”. The official Minsk is convinced that the pricing mechanism ought to accommodate the changes of qualitative characteristics of oil as well.
The Russian Ministry of Energy doesn’t support the proposal. The Deputy Head of the Ministry of Energy Kirill Molodtsov considers that this approach “lays a foundation for regulation of oil prices on the common market which contradicts the agreement of the EAEU (according to the agreement, market pricing of energy resources is one of the fundamental principles of mutually beneficial cooperation in the energy sphere)”.
Kazakhstan, in its turn, offered to form oil prices “on the basis of market mechanisms and fair competition”.
Moreover, the allies haven’t reached an agreement on the approach to the unification of standards for oil as well as the preservation of its quality. The concept stipulates that the players of the common market “will be unifying norms and standards for oil and oil products”. The Belarusian side insists on its own formulation. According to the Belarusian position common market players “must unify, control and preserve the quality of oil and improve the quality of oil products”.
As a matter of fact, Kazakhstan is solidary with Belarus over the inclusion of a norm of oil quality control into the concept. The Russian Federation stands against it. The Ministry of Energy believes it would be either impossible to preserve qualitative characteristics of oil due to objective reasons or just inefficient to do that.
Furthermore, the states of the EAEU have got different visions on the development of transport oil infrastructure. The Belarusian side considers it necessary to fix the following formulation in the concept: “Keeping in technically perfect order as well as development of transport oil infrastructure, intended for the functioning of common markets of oil and oil products in the Union”. Kazakhstan has supported it, unlike the Russian Federation. The Russian party notes that since “the development of transport oil infrastructure” already presupposes keeping it in technically perfect order there is no need to include it into the concept.
The controversial project of the concept of forming the common market of oil and oil products in the EAEU will be discussed at the board of the Eurasian Economic Commission in December 2015.
Belarusian currency revenue from the exports of oil products to Russia decreased over January–September 2015 by 61% comparing to the same period in 2014, to 316.4 million dollars. In physical terms it was a decline by 43% to 758.062 thousand tons as opposed to January–September 2014.