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№ 10 (October 2012)

Russia’s Suppliers of Customer-Owned Oil Gaining Ground in Belarus

   Inspired by the chance to compensate for a two-year dry spell, Russian suppliers of customer-owned oil are loading Belarus refineries to the full.

By Andrei Asfura

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   Some of the resulting oil products are supplied to the local gas stations, but the chased-after “tops” are sent to Ukraine – the country is an attractive market for retail “subsidiaries” of Russian market players. Still, high oil prices could frustrate the tranquil plans of Russian operators.

The New Chance

   Signed last December, the agreement on the terms of oil deliveries to Belarus revitalized the subsidiaries of Russian oil companies. Having sacrificed the oil price premium, after a two-year break the suppliers were rewarded with cost-effective access to Belarusian refining. Without further ado, Russian companies were allowed to refine up to 50 percent of the crude on processing terms, to cater for their networks of gas stations, and to export the surplus.
The Russian government chose only five oil operators for the coveted oil supply quotas to the neighbor. The hand-picked list, according to the protocol on agreement of terms of Russian oil deliveries to Belarus for 2012–2015, includes Gazprom neft, LUKOIL, TNK-BP, Surgutneftegaz and Rosneft.

   In 2012, Russian oil companies scheduled to pipe to Belarus some 21.5 million tons of oil – 3.5 million tons up on 2011 levels. Each operator got the quota of nearly 4 million tons of oil – about 2 million tons of this volume can be processed on customer-owned basis. Well, the last of the list, Surgutneftegaz and Rosneft, will have to settle for the role of the sellers rather than suppliers of customer-owned oil – they have no subsidiaries in Belarus.

Loaded to the Brim

   The retailing subsidiaries of Russian oil companies rolled up the sleeves and started loading the Belarus refineries. For the first half-year each company maxed out their quotas, supplying Mozyr and Novopolotsk refineries with more than 1 million tons of customer-owned oil. For example, for the six months Gazpromneft Belnefteproduct more than quadrupled the processing volumes. Thus, in July this year the company supplied 197 000 tons of oil to Belarus refineries, dwindling to specks its January’s delivery of 45,500 tons.

   By contrast, LUKOIL spread its processing-terms crude supplies evenly by month. “We process the entire volume as we needed a lot of fuel to maintain our own network,” explains Aydar Abuzyarov, director general of LUKOIL-Belorussia.

   In general, Russian oil companies increased oil flows to Belarus by more than a third. Belstat, Belarus National Statistics Committee, says that in the first half-year the country received 10.9 million tons of Russian oil. About 30 percent of this volume was processed for Russian oil companies. Were Surgutneftegaz and Rosneft to acquire Belarus subsidiaries, the share of customer-owned oil could well have been close to the 50 percent. And this is precisely what the Belarusian government was counting on.

   Particularly, considering that processing of the customer-owned feedstock benefits both the Russian oil companies and the Belarus refineries. Cashing in on the processing, the refineries can hold back the hard cash so much needed for the modernization projects. Also, this setup ensures constant load for the Belarusian processing industry. According to statistics, Belarus gasoline production in the country jumped 33.9 percent (to 2.2 million tons) for half-year 2012 compared to first half of 2011, diesel fuel production – by 54.5 percent (to 6.8 million tons). It is easy to figure out just how the Belarus refineries depend on Russian suppliers of crude on processing terms.

Different Strokes for Different Folks

   Tastes of Russian oil companies do differ. The Slavneft heirs (Gazprom neft and TNK-BP) traditionally prefer to process their oil at the Mozyr refinery, which they co-own. Russian operators are guided by quite pragmatic considerations, too: Mozyr, unlike Novopolotsk refinery, produces RON-95 gasoline of Euro-5 standard. As a result, Gazprom neft in July delivered 154,600 tons of oil to Mozyr refinery and only 42,700 tons – to Naftan (Novopolotsk refinery). At the same time, LUKOIL’s approach to deliveries of customer-owned oil is not so selective; the company is trying to evenly distribute the crude to the refineries.
Belarusian fuel, both refinery- and customer-owned, successfully shipped to Ukraine and to EU countries. According to the Belstat, in the first half 2012 export of Belarusian oil products grew 40 percent compared to the same period last year. In January-June 2012 Belarus exported 9.8 million tons of oil products.

   Russian suppliers of customer-owned oil were fast to master the exports. To say, currently Gazpromneft Belnefteproduct sells only 14 percent of oil products in the domestic market, exporting 86 percent of the stock abroad. There several reasons that push the companies towards export: low domestic consumption, the need to maintain the customer base in other countries, more profitable conditions for oil products export. According to unofficial data, exporting oil products received from the customer-owned oil  not long ago could earn the companies up to $60-70 per ton of supplied crude.

   Almost a third (30 percent) of light oil products Belarusian subsidiary of Gazprom neft supplies to Ukraine. “Currently, everyone is interested in Ukrainian market. Why, Ukraine is ‘loaded’ not only from Belarus but from Russia, Lithuania and Romania. But the best logistics are with Belarus shipments,” says Anatoly Bratash, Director General of Gazpromneft Belnefteproduct. The company delivers Belarusian fuel to the end-user: by 2020, Gazprom neft plans to build in Ukraine a network of 300 gas stations.

zHome, Sweet Home

   The subsidiary of Russia’s largest private oil company provides much more modest data. According to LUKOIL, LUKOIL-Belorussia supplies to Ukraine only about 10,000 tons of light oil products per month. LUKOIL-Ukraina, which owns a network of some 280 gas stations in 24 regions of Ukraine, is first to get the Belarusian fuel.

   Still, according to the company, the vast majority (75-80 percent) of light oil products produced from customer-owned oil goes to the Belarusian gas stations. “Starting last spring, the domestic market is more profitable than sales on foreign markets. But it is impossible to sell everything on the domestic market, there is no much demand,” emphasizes the general director. Current profitability of the domestic supplies is 2.5-3 percent.

   However, say the market experts, the Belarusian subsidiary is being modest about its export potential. According to our sources, every month LUKOIL supplies 28,000-30,000 tons of Belarusian oil products to the domestic market, exporting the rest (including to Ukraine).

   The British-Russian TNK-BP is probably most keen on supplying Belarusian oil products to Ukraine. Having closed Lisichanka refinery in Ukraine, the company is making tremendous efforts to save the retail network, to which it earlier invested, to put it mildly, considerable investment resources. As a result, Ukrainian cars run largely on pour Belarusian fuel. In April, the company even talked about the option to use the quota of the other operators – Surgutneftegaz and Rosneft. But so far that was just talk.

   Ukraine gets up to 60 percent of all light oil products produced by Belarus-based companies, estimates Anatoly Bratash. “Sure, there are force-majeure situations when the price cannot be agreed. Then the light oil products go to the Baltic,” he says.

Dark “Rivers”, Wide “Banks”

   According to rumors, the subsidiaries of Russian producers have previously had difficulties with fuel transfer to Ukraine. This was to be expected – the leading Belarusian oil exporter, Belarusian Oil Company, feels far better when the competitors ship oil products to the Baltic ports, laying no claim to the juicy Ukrainian market. However, Russian suppliers of customer-owned oil had a strong trump up the sleeve – the intergovernmental agreement that gave the oil companies a free hand in the supply of Belarusian oil products. Therefore fuel from customer-owned crude “leaked” to the Ukrainian gas stations anyway.
Meanwhile the West gets the heavy cut. Thus, a subsidiary of Gazprom neft loads fuel oil in the port of Klaipeda. The company ships Belarusian oil products to the Netherlands, Moldova and Cyprus, too.

   To the extent practicable, LUKOIL-Belorussia sells heavy oil products to Belarusian companies, shipping the remaining volume to its sister company – trader LITASCO.

   To fully meet the domestic demand, closer to 2015 Gazpromneft-Belnefteproduct and LUKOIL-Belorussia will increase oil products shipments to the domestic market. Both players are going to expand their retail networks in Belarus to 100 gas stations. LUKOIL’s retailer (now the company owns 81 gas stations in Belarus) plans to implement this project within three to five years, while the subsidiary of Gazprom neft (so far the company has only 40 gas stations) – by 2020. In 2012–2013 alone, subsidiaries of Russian oil companies can acquire dozens of new facilities.

   The desire to develop a retail network in Belarus is easy to explain: the companies want to reinforce the position on the Belarusian market, which in the near future will be their target area. Starting 2015 Russia plans to level out the export duties on oil and oil products. After this, Belarus-based oil companies will gain more by filling cars of Belarusians rather than Ukrainians or Dutch drivers.
“Catch-22”, Local Version

   Optimism Russian oil companies in Belarus may be thwarted by growing global oil prices. If the price of a barrel on the world market rises to, say, $130, the Belarus-based subsidiaries of Russian oil producers could dive into the red. In this case, fuel supplies to the domestic market, where the rates are strictly regulated by the state, would be unprofitable. At present, Belarus enjoys some of the lowest in the world fuel price tags: a liter of RON-92 gasoline costs $0.79, RON-95 – $0.85, Normal-80 – $0.75, diesel fuel – $0.87.

   As companies have to meet their commitments on supplying to their own fuel networks, pricing burden will fall on their shoulders. A spike in world prices for natural gas could render export of petroleum products useless as it will not cover the unexpected cost. The rather that export taxes grow in addition: starting from September 1 they had 17% increase.

   This creates the Catch-22 setup: while for the oil producers the growing barrel means big profits, for their subsidiaries in Belarus this is fraught with troubles. For them, the optimal global price of oil is $80-90 per barrel. At least, in this scenario the oil companies would remain completely confident on the Belarusian terrain.

   Also, rising world prices of oil could frustrate the profitability of processing terms for the operators (for Russian oil companies the processing costs up to $45 per ton with VAT). “At the moment, conditions for processing provide means for profitability. Perhaps on the background of rising oil prices it slips to the minus, but in the long run the reports are calculated for a period rather than for a specific month. That is, there are months with negative profitability,” admits Aydar Abuzyarov.

   Still, now the Russian suppliers of customer-owned oil feel quite comfortable in Belarus. While the customer-supplied crude is splashing in storage of Belarus refineries, subsidiaries of Russian oil companies install new gas stations and increase the salaries. In the Belarusian-Russian oil relations there is now a period of content – albeit impermanent but still welcome.

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