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 Oil price plunge cuts potential revenue in half

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Talks with Russia about oil terms have been postponed due to the so-called “tax maneuver” and the unknown future of the international oil market.

Belarus can be considered a net importer of crude oil. It buys around 22 million tons to keep its two oil refineries busy, whereas it extracts only 1.645 million tons of oil.

Nevertheless, the international oil price slump can hardly be a blessing for Belarus, especially if you take into account the direct losses from export and indirect losses from decreased currency profits on petroleum products export and from the shrinkage of the Russian market as a major importer of Belarusian products.

Pros and cons

The up side is that Belarus can cut energy costs due to the low price of oil. This is an obvious effect on the country’s economy.

During 11 months of 2014 Belarus bought 20.447 million tons of crude oil from Russia. The number is significantly larger than that of the same period in 2013 when only 19.165 million tons were imported. Moreover, Belarus paid $215.49 million less in 2014 in comparison with 2013. This is all the result of slumping oil prices:  from January to November 2013 crude oil cost $392 per ton, during the same period of time in 2014 the price was $356.9 per ton (These are last year’s numbers and they do not take into account the “tax maneuver” which came into force January 1, 2015).

At the same time, Belarus will suffer losses from the oil plunge as it is an exporter of its crude oil.

BelorusNeft plans to produce 1.645 million tons of oil in 2015 (the same amount was produced in 2014 and 2013).  In 2011 Russia agreed in the framework of the Common economic space (CES) to allow Belarus to export Belarusian crude oil (in 2010 Belarus was not allowed to do so. All of the crude oil it produced was processed in its own oil refineries).

Due to the plunge in oil prices the revenue from exporting crude oil decreased in 11 months of 2014 by $67 million in comparison with the same period of time in 2013.

In the 11 months of 2014 Belarus exported 1.482 million tons of oil for $1.066 billion, and it exported 1.48 million tons for $1.133 billion in the same period of time in 2014. In 2014 revenue fell due to the oil price slump: in the 11 months of 2014 the price dropped to $719.3 per ton in comparison with $765.6 per ton in November 2013.

It should be pointed out that in 2013 profits amounted to $1.241 billion in comparison with $1,288 billion in 2012. Total revenue in 2014 will be even lower and if the current oil market tendencies prevail next year’s number will decrease even more.

The Belarusian budget will also suffer. In 2013 $633.96 million from export duties (Belarus keeps export duties for exporting self-produced  oil but not for the petroleum products it exports), in 2014 this number will shrink and in 2015 it will decrease even more. This is not only because of to oil prices, but due to Russia’s “tax maneuver” which will result in lower export duties.

Belarus will not be the new United Arab Emirates

For several years Belarus argued with Russia over who gets to keep the export duties from petroleum products. In October 2013 Alexander Lukashenko claimed that he would have built the new United Arab Emirates if Belarus didn’t transfer export duties for petroleum products to Russia.

“We give Russia $4 billion from export duties on petroleum products, what would happen if the money remained in our budget? I would build the next United Arab Emirates,” said Alexander Lukashenko.

Unfortunately, there will be no new United Arab Emirates despite the fact that Belarus will keep export duties from petroleum products (in this way Russia is attempting to compensate the damage to Belarus from the “tax maneuver”).

It seems that due to the oil price slump the anticipated revenue will be slashed in half.

The Ministry of Finance forecasts an additional $1.89 billion in export duties this year in comparison with 2013 when Belarus gave Russia $3.32 billion in export duties from petroleum products. For 2014 the sum will be around $3 billion.

But even the estimated $1.89 billion might be off since this forecast was based on an international oil price of $83 per barrel (note: 1 ton of Russian oil is 7.3 barrels) and the price recently dropped to $50 per barrel. The following rule can be applied: the lower the oil prices on international markets, the lower the export duties. If prices plummet the volume of export duties will decrease and there will be less money coming into the Belarusian budget.

The Belarusian government will have to act quickly in such circumstances.

“Naturally such a situation calls for certain measures, this is why the government is working out the different scenarios that we could be faced with, we already have a “rough copy” of our action plan. Nobody knows what can happen in the near future with oil prices and what turns will take the economies of our neighboring countries (Russia, CIS countries) and of the European Union. Everything is not so simple there as well,” stated the Belarusian Prime Minister Andrei Kobyakov to journalists on January 18.

A continual fall in oil prices can lead to budget cuts. “This means that we have to keep a close eye on budget spending… Nevertheless, we will mostly likely have to give up what we can afford to give up or put off solving certain financial problems for another time ,”noted Anrei Kobyakov.

Talks have been postponed.

Because of the ambiguous situation on the international oil market, negotiations on oil duties in 2016 between Belarus and Russia have been postponed and will be continued in the beginning of 2015.

“Taking into consideration the ambiguity on the international market and the grim forecasts the talks will be held in the first half of 2015 instead of the beginning of the year,” stated Deputy Finance Minister Dmitry Kiyko.

Belarus’s stance on export duties remains the same: all of the export duties from petroleum products made out of imported Russian oil go into the Belarusian budget.

However, if oil prices remain lower than $70 per barrel, there will be no need for (and no point in) further negotiations.

According to the forecasts of the Ministry of Finance if the price doesn’t drop lower than $70 per barrel, the Belarusian budget can receive annual revenue of $1.5 billion from export duties. These were the terms agreed upon when signing the EAEC treaty in May 2014.

“The agreement that we reached with Russia regarding the $1.5 billion revenue for the Belarusian budget is a kind of safety net,” noted Dmitry Kiyko during an online conference January 15. “If prices remain relatively low, there will be no need for additional discussions considering the fate of the export duties. The revenue from them will go into the Belarusian budget in 2016 and 2017,” he added.

However, let’s not forget the fact that the mentioned agreement was reached when oil prices were twice as high – around $100 per barrel. Nonetheless, it’s unlikely that Russian will want to split the already meager revenue from export duties between the two countries. If prices continue to plummet below the $70 per barrel mark, Belarus will receive less than that which was promised in the bilateral agreement ($1.5 billion).

Moreover, as of January 1, 2015 prices for Russian oil will go up for Belarus while world oil prices plummet. This means a cut in export duties on crude oil and petroleum goods and at the same time a rise in oil prices for Belarus.

This has brought on the need in government support for the oil industry: lowering the excise tax on petroleum products and raising domestic prices on automobile fuel. Despite these measures, it is unlikely that Belarusian oil refineries will be able to progress and develop.

 

Original text from www.belmarket.by