The Russia-Belarus Oil Dispute and Western Oil Supplies

I hadn’t actually been paying much attention to the Russian:Belarus dispute over oil supplies. After the annual debacles that we are used to over natural gas supplies that flow from Russia to Western Europe through Ukraine, and which seem somewhat quiescent at the moment, I had failed to grasp how much Western supplies of oil from Russia flow through Belarus. But as is pointed out in Foreign Policy, the flow is significant, and this is a more far-reaching conflict than I grasped.

As a brief review:

In 2001, Belarus unilaterally canceled a contract that mandated the sharing of these revenues, leading to substantial losses for Russian pipeline monopoly Transneft and the Russian state budget. Now, Transneft is demanding that Belarus pay full import duties for the portion of Russian oil that it resells on the European market, a demand that could cost Belarus as much as $5 billion per year. The Belarusian government argues that the Russia-Belarus customs union obviates the need for Minsk to pay duty on imports from Russia. Although deliveries through the Druzhba pipeline have not, as of mid-January, been cut off, the prospect that Transneft (whose chairman is Russian Deputy Prime Minister Igor Sechin, a close confidant of Prime Minister Vladimir Putin) will turn off the taps to force compliance from Minsk is clearly one that has European leaders worried because the European Union imports about a third of its oil from Russia, mostly via Belarus. Already, the prospect of supply disruptions has driven U.S. crude oil prices to a 15-month high, presumably to Moscow's delight.

Well, as my post on Wednesday showed, I am not convinced that this conflict had a lot to do with the rise in oil prices (which actually dropped a little today, on their overall march upwards). But that does not lessen the longer-term impact of what is going on. It is, as it was with the Ukraine dispute, to with control, with Russia seeking to control fuel distribution in these countries, and through supply controls also influence the directions in which the country moves.

Russia is now warning that it will reduce oil flows to Belarus even further and wants the duty on the roughly 290,000 bd that is refined in Belarus and then exported to the West. At the moment the refineries in Belarus have a relatively short reserve (between a few days and a week, reportedly - depending on source) and the current contracts have expired.

Germany and Poland are believed to be hit hardest once Russia halts shipments through the Druzhba pipeline. Germany depends on Russian crude for about 15 percent of its total consumption, and Poland buys from Russia to meet 75 percent of its market demands.

Minsk has threatened to raise the transit fee for its European customers more than tenfold, from 3.9 dollars to 45 dollars per metric ton, should Moscow not agree to its conditions, RIA Novostinews agency quoted an unidentified expert close to the talks as saying.

At the moment the talks appear to be stalled. However they are not limited to the transit of oil. There is also a dispute over the transmission of electric power. Belarus acts as a transit country for power both to Kalingrad and to the countries of the Baltic. It has assumed somewhat greater urgency with the closure of the Ignalina nuclear power plant in Lithuania. The plant closed on December 31, and there are fears of greater dependence on Russia for future power. Russian complacency about the situation is not, I suspect, exactly helpful.

“It is inevitable that Russia is going to become a bigger supplier of energy to Europe and particularly to the Baltic countries. Ultimately there comes a point where you have to let the old days go,” Chris Weafer, chief strategist on Moscow’s Uralsib bank, told New Europe on 5 January, adding that the Baltics, which sorely need energy supplies, should adopt a pragmatic approach and rely on their eastern neighbor and forget the legacy of the Soviet Union. As long as Russia continues to try and build a modern and diversified economy with greater global integration, then it needs the goodwill of the West just as much as the West needs Russia’s energy.

Bids for construction of a new plant are due to be submitted by the end of this month, with the hope of getting the new plant on line by 2018. (Kalingrad is hoping to have its own reactor in about the same time frame).

In the interim the Baltic states are going to be dependent, not only on Russia for their electricity and oil, but also on satisfactory conditions to allow the transit of both through Belarus on their way.

Meanwhile, over in Ukraine, there is an election underway, with initial voting to take place on Sunday. It is perhaps for that reason that there have been no major gas disruptions so far this year. Anger with the current administration is giving a bit of a boost to a third candidate, so perhaps it is in Russia’s best interests to retain a low profile at this point. In fact Russia is claiming credit for keeping the UK supplied with gas as supplies from Norway dropped due to bad weather at some of the production sites. However Russia is also being nice to Turkey as insurance just in case it will still need to do some bypassing around Ukraine to supply Western Europe after the election is over.

Not that conditions in Ukraine itself have been unaffected. There are some 175 towns and villages that are reported to be still without power, due to the bad weather. This is a decided improvement from the 1,598 who lost power in the Dec 29th storm. At least they are more used to the cold.

Those in Florida who aren’t, and plugged in too many heaters, are also causing power outages down there.

Why do we seem to be hearing more of these disputes at this time? Is it because Russia (and everyone else) is so hard pressed financially, that the need to "get the last drop of blood out of the turnip"? And customers are so poor, that they really cannot afford to pay the higher prices?

I wonder too if volatile prices are playing a role. An agreement that looked reasonable at one price, may not look reasonable if prices go up or down by more than 50% in a year.

Why do some countries feel they have a right to get oil or gas for an absurdly large discount? Your analogy of blood out of a turnip is silly, do you think that during hard times that all prices should be arbitrarily reduced by the state. The normal prices for oil and gas per btu are already too low given the limited supply but some still feel they are "extortion". What happens when no amount of money is going to buy the amount they want or need? Perhaps the welfare bums Ukraine and Belorus should plan to the future instead of throwing tantrums.

Maybe I shouldn't have used the analogy blood out of a turnip. It seems like the problem can be on either side, or both.

Are the countries involved this time around at least fairly solvent? I know the Ukraine teeters on the edge of bankruptcy.

I think what we are seeing in former Soviet Union is a interesting twist on westexas exportland model. Had the SU not collapsed, the consumption in Belarus and Ukraine would have been counted as internal consumption within an oil exporting country.

I wonder if this may be the first of a succession of internal collapse scenarios in other exportland countries as the oil producing part of the country attempts to shed responsibility for the oil consuming part.

But is Russia attempting to shed B&U? No one seems to think so, so I'll not push this too far. Either way, armed conflict seems likely.

Interesting take on the situation. You might be right.

Even in the US, we have oil producing areas and coal and gas area.

Either way, armed conflict seems likely.

Could you explain why and what form this would take.

I'm fairly conservative in my views of what to expect in the way of human behavior. Mainly I expect behavior that is very like behavior that has occurred in the past. So ... Where there is a difference that cannot be eliminated by other means, it is resolved by violent conflict.

Why? ... Because that is what has happened in the past.
What form? ... Some composition or rearrangement of forms that have happened in the past.

My comment wasn't meant to be actionable intelligence.There are so many dots already connected in so many ways ...

Dear Heading Out. I opine that as the Export Land Model begins to take effect that situations such as these you have outlined will become more common and pressing. I really enjoy the analysis you and the the others provide. It gives me some view of the future that I might not otherwise have. Please continue the occasional geo-political posting.
Respectful regards
TG80 sends

I suspect that it will only be a few years before Belarus and Ukraine surrender all their political control to Moscow in return for cheap energy, but in the meantime their leaders can bolster their local support by blaming their problems on Russia.

I looked up Belarus energy supplies on Energy Export Data Bowser. Belarus is strictly an energy importer--seems to make its money as acting as a pass-through agent, and perhaps by converting natural gas to electricity.

When we look at Belarus energy consumption, it dropped off greatly at the time of the dissolution of the USSR. It has been rising in recent years, reflecting more and more natural gas consumption. If Belarus is performing a necessary service, they may be able to keep their share of the energy resources up, but I suppose there gets to be more and more conflict about how much of the available energy (as determined by prices and taxes) should end up with Belarus, how much with Russia, and how much with end users.

You want an easy way to track how likely conflict expansion is?

Track the term "energy security" in the news - it's rate of promulgation will correlate quite tightly with armed conflict.

This link will show the Google searches for "Energy Security"
The people seem quite relaxed at the moment.

This graphic seems to show a peak in searches in 2006, and gradually stepping down after that. Strange.

Throughput capacity at Primorsk has steadily increased, reaching around 1.5 million bbl/d during 2007 on average. With the usage of larger-sized Baltimax tankers, throughput from the port should continue to increase this year. Although the port’s actual export capacity is allegedly twice as large (around 3 million bbl/d), pipeline capacity to the port keeps exports constrained. The Baltic Pipeline System-II (BPS-II) expansion will add new export outlets to the region, and in May 2008 the Russian government decided that a new line will run to the port of Ust-Luga with a branch going to the Kirishi oil refinery, The first stage of the Baltic Pipeline System (BPS, designed to transport oil from both Russia's oil-producing regions and Kazakhstan, was commissioned in 2001. Transneft has estimated the cost of the second stage to Ust-Luga at around $3.3 billion.

Primorsk exports 2007: 1 484 000 bbl/d
Druzhba pipeline 2007: 1 269 000 bbl/d

As opposed to Ukraine, Belarus seams not to have a very strong negotiating position, due to the alternative tanker export route.

A note regarding natural gas supplies:

If we extrapolate the reported Russian natural gas production number through December (based on a recent Bloomberg article), Russian 2009 production was about 19,600 BCF, versus 23,100 BCF in 2007 (EIA). In 2007, consumption was 16,700 BCF, resulting in net exports of 6,400 BCF. I assume domestic consumption has dropped, but for purposes of illustration, if consumption has not dropped, their net exports would have gone from 6,400 BCF to 2,900 BCF in two years, a drop of 55%.

So, how much of the production decline was related to depletion, and how much was related to pipeline and demand issues?

The conventional wisdom is that most of the natural gas decline is related pipeline/demand issues, but what is odd is that Norway--and probably every other European producer--is producing at maximum capacity.

In regard to the reduced oil exports, I wonder how much of the reduction might be related to seasonal issues, i.e., higher domestic demand and cold weather related production problems.

Dig around enough and you will find plenty of evidence that points to active collusion between parties controlling oil flows through Eastern Europe.
It can be speculated that this is composed of two elements:
First, a straight forward technique to force up the price to the point where one partner can make the same margin, while having the customer pay for the transit charges.
Second, a feeling of common purpose with former allies and a pragmatic desire for them to have a supply ideally financed by the Western European customer.
If this seems far fetched it is worth remembering that the only thing holding Eastern Europe together are the modified KGB structures.
Disclaimer: The above is merely a foul brew of nonsensical allegations devoid of any basis in reality.
The author is a well known nut as can be seen by the lack of supporting references.


in the post-peak world, when you cannot meet demand it is vital to provide camouflage for your flagging production. Russia vs. Belarus & Ukraine squabbles provide excuses for failures to deliver and hide embarrassing geophysical realities.

In the coming decade, as oil demand rises and supplies peak, conflict over energy resources may become much more common-place. In an article written for the Future Agenda Project ( there are predictions made on the challenges facing the energy sector over the next decade and what possible paths may be taken by countries and supranational bodies around the globe.