Energy War Between Russia and Belarus

Energy Supply Disruption Puts Focus on Russia

I hate sounding like a broken record… For the past four winters, I think I’ve written at least one story about an energy dispute between Russia and the rest of Europe. Supplies of crude oil and natural gas have been disrupted often between these two regions, and as we head into the new year we’re hearing of yet another row.

This time, the energy quarrel is between Russia and Belarus.

The Guardian reports, “Russia halted deliveries to refineries in Belarus on New Year’s Eve and fresh negotiations this weekend between the two sides failed to result in an agreement on prices for 2010.”

The two countries were supposed to reach an agreement by the end of 2009, which didn’t happen. Belarus said Moscow was pressuring too hard over a preferential tariff, which is applied to Russian crude oil passing through Belarus.

The BBC says, “Russia says it is prepared to sell [crude] oil to Belarus duty-free for domestic consumption but wants to charge the tariff for oil that Belarus exports.”

Sounds reasonable, but what might not be reasonable was the immediate supply cut that ensued on New Year’s Eve after no decision had been reached between Russia and Belarus. Supplies only resumed on Sunday.

Belarus Fights Back

It’s a good thing that Belarus had a week’s energy supply in its inventories, because Germany gets between 10% and 15% of its crude oil needs from Belarus, and Poland relies on the country for 75% of its crude oil consumption.

Belarus has threatened to increase its transit fees in retaliation for Russia shutting down its energy supply.

A full 400,000 barrels of crude oil a day is shipped through the Druzhba pipeline to European countries, making it one of the world’s biggest. This move (if it comes to pass) might help mitigate some of the costs of a preferential tariff.

The Guardian reports, “Experts estimate that the tax would cost Belarus $5bn (£3bn) this year, 10% of its gross domestic product.”

Not surprisingly, Belarus has tipped its hand a little. The country has threatened to cut off electricity supplies to the Russian enclave of Kaliningrad.

This is a tricky situation, as Kaliningrad is the only Russian port on the Baltic that is ice-free all year… Meaning winters make Kaliningrad’s port very important for both economic and military reasons.

Kaliningrad was also seriously considered – until January 2009 – as a site for a missile installation, as the U.S. was in talks with neighboring Poland for the development of a missile shield.

So energy becomes a bargaining chip, particularly as harsh winter weather makes its way into the region.

On Monday at 6:30 p.m. in Kaliningrad, it felt like 11 degrees Fahrenheit. In Minsk, Belarus, it felt like minus 5.

More Energy Pipelines In Russia’s Future

Russia has been moving forward with two pipeline plans to get around these disputes with Eastern European (and former Soviet bloc) countries. They are the Nord Stream pipeline and the South Stream pipeline, and they would totally eliminate the need for natural gas to pass through sticky countries like Belarus and Ukraine.

As an aside, Russia and Ukraine did sign a new energy contract for transporting crude oil and natural gas to European Union countries. Moscow increased its tariff to Ukraine by 30%, which could mean a good deal of money as 80% of the EU’s imports from Russia pass through Ukraine.

Had the two not reached a deal, countries like the Czech Republic, Slovakia and Hungary would have been left out in the cold. (25 degrees, 18 degrees and 10 degrees, to be specific.)

The Nord Stream will transfer up to 55 billion cubic meters of natural gas a year. The project is a joint venture between Russia’s Gazprom, Germany’s BASF (along with Wintershall Holding) and E.ON (with Ruhrgas), and Gasunie of the Netherlands.

No surprise that Gazprom holds a 51% stake in the project company Nord Stream AG. The pipeline will pass under the Baltic Sea directly to Germany with potential spurs to Finland, Estonia and Sweden (via the Baltic Gas Interconnector pipeline).

The South Stream project will eventually ship 63 billion cubic meters of natural gas a year and is a 50/50 joint venture between Gazprom and Italy’s Eni SpA (E:NYSE).

This route travels under the Black Sea, bypassing Ukraine and bringing natural gas to central Europe via a route through Bulgaria, Serbia, Hungary, Slovenia and ending in Austria. A spur off this main route will travel south through Greece and across the Ionian Sea to Italy.

The Competing Nabucco Natural Gas Pipeline

These two pipelines will also compete with a non-Russian natural gas pipeline – Nabucco.

I told you again about this natural gas pipeline in the Dec. 29 edition of Taipan Insider. This project will bring 31 billion cubic meters of Caspian natural gas a year (from places like Azerbaijan and Turkmenistan, for example) to Europe via Turkey, Romania, Bulgaria, Hungary and ending up in Austria.

The main stakeholders in the Nabucco natural gas pipeline are a mixture state-owned and private energy companies:

BOTAS AS (state-owned, Turkey)
BEH EAD (state-owned, Bulgaria)
MOL Plc (private and publicly traded, MOL:Budapest)
OMV Gas & Power GmbH (private and publicly traded, OMV:Vienna)
RWE AG (private and publicly traded, RWE:XETRA)
TRANSGAZ S.A. (state-owned, Romania)

These three pipeline projects could bring a total of 149 billion cubic meters of natural gas to Europe a year.

That’s in addition to the 162.4 billion cubic meters Gazprom shipped to Europe in 2008. (Remember that Gazprom has a monopoly on all the natural gas exports in Russia.) Once the Nord and South Stream pipeline projects come online, Gazprom could be responsible for 289.4 billion cubic meters of natural gas exports to Europe a year.

Europe imports about 240 billion cubic meters a year already, meaning it relies on Gazprom for 68% of Europe’s imports.

What do all these facts and figures mean?

That Europe will continue to be reliant on Russia and Gazprom for the majority of its natural gas imports, even with the Nabucco pipeline bringing 31 billion cubic meters of natural gas.

We already have Eni SpA, the company partnering with Gazprom on the South Stream project, in our Taipan Insider portfolio.

We first put it on our watch list back on Nov. 18, 2008, at $45.46 a share. As of yesterday, Eni was trading at $52.17, a gain of 14.76% so far. We’re definitely holding onto this company, as Eni is also a major partner in many Caspian Sea projects.

That means that Eni will benefit from both the South Stream project and the Nabucco project (indirectly, anyway).

This is a long, long-term opportunity as both of these projects are moving slowly but steadily ahead.

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