The Energy Dynamic on the Borders of the EU Belarusian Russian Relations

Ministry for Foreign Affairs of Finland

11th October 2006

Aleksanteri Institute Eurasia Energy Group

www.helsinki.fi/aleksanteri/energy/

General Overview

Belarus is a challenge for EU as well as for Russia This challenge is comprised of symbiotic political,

economic, and military aspects; We should avoid simplistic dichotomies:

democratic/dictatorship; market/planned economy; EU /

Union State; We want to find new European approaches to the Belarus

issue; Now it is time for creating conditions for forthcoming

changes in Belarus; and The European Union should be in a position to be an

active player when changes in Belarus occurs.

The Pathology of Lukashenka regime

Lukashenka is popular because of his model of transition;

Lukashenka is neither a communist, nor a puppet of

Moscow;

Lukashenka utilises the Soviet legacy and incorporates

nationalist rhetoric;

Lukashenka’s transition model has many economic deficits

but it has provided the solution to many social problems; and

The Union State is to a large extent cheap talk of integration

rather than a real political process.

An Exit Strategy for Lukashenka?

Lukashenka has avoided exit strategies before by

extending his presidential term

Previously identified exit strategies for Lukashenka:

1. President of the Union State under the Yeltsin

administration (failed)

2. President of the Union State under the Putin administration

(increasingly unlikely)

3. President of the Union State after Putin in 2008 (highly

unlikely)

Is time running out for Lukashenka?

Deadlines for Lukashenka:

1. Completion of the NEGP in 2010; and

2. When his presidential term ends in 2012.

By 2010, the EU should be in the position to

diplomatically assist in creating the conditions conducive

to an exit strategy for Lukashenka.

The Energy Aspect: Roots of the Gas War

Personalities: Yeltsin, Putin and Lukashenka;

Politics: Sovereignty & Unity;

Economics: Diversified Ownership of Soviet Industrial

Core;

Finance: Weak Institutions, Barter Transactions, & Debt

Service; and

CIS Member State Relations & Changing International

Conditions.

The Energy Aspect: Overall Relations

Energy Dependence (84% imports 98% NG - 75% Oil RF) Continuing Indebtedness to Gazprom (158m 01.2006 to

64.1mUSD as of 07.2006); Interruptions in Gazprom service (40% reduction in 2000); Lack of Asset Swap Agreement (BelTransGaz); Stable Alternative Transit Country (Northern Lights &

Yamal Europe Gas, & Northern Druzhba Oil Pipeline); No documented siphoning or theft (Gazprom 720m USD

Loss in Ukraine 1999); and Low Domestic Level Gas Price (46.68USDmcm 2004) for

Belarusian Consumers (10m).

The Energy Aspect: BelTransGaz

Cheap Gas & Asset Swap (April 2002); Swap of BelTransGaz giving Gazprom 50% Ownership

(BelTopGaz’s 6000 km of Domestic Pipeline Network &

Northern Lights Gas Pipeline); Russian Domestic Rates for Belarusian Consumers to

2007; Agreement coincided with Union State Negotiations

(Terms favourable to Russia & Putin); Lukashenka reacts (BelTransGaz is not privatised); Gazprom retaliates; does not fulfil contract

10.2bcm/18.5bcm; and Crisis averted; BelTransGaz swap to go ahead; gas

prices raised to 40USD/mcm in 2002.

The Energy Aspect: Outcomes

Signalling game tied to Union Treaty between the Kremlin & Minsk;

BelTransGaz asset swap cancelled / To be privatised; price tag now at

5bUSD (Lukashenka 29.09.06);

No Union State while Putin is President of RF (Lukashenka 29.09.06);

Prospect of increased gas prices for Belarusian domestic consumers

(47USDtcm 2004 to 200USDtcm in 2007); and

Situation threatens optimal transit of gas to Europe through the Yamal

Europe & Northern Lights Pipelines.

Russia via

Ukraine

(Soyuz)

Russia via

Belarus

(Yamal

Europe)

Algeria Norway

Extraction 14.3 14.3 16.1 44.6

Transport 75.4 61.4 28.5 30.4

Transit

fees

10.0 5.7 3.9

Total 99.6 81.4 48.0 75.0

Cost of gas supply to EU 15 (USD per tcm) in 2004

Source: Ferdinand, Tochitskaya & Giucci (2004): ”Belarus as a Transit Country”. IPM Research Center, p. 3.

Transit fees, the competitive advantage of Belarus

Transit fees for Russian natural gas exports have been

one fifth to one third lower via Belarus than through

Ukraine

Transit fees:

Northern Lights 0.75$/1000m³/100km

Yamal Europe 0.46$/1000m³/100km

Lukashenka has threatened to raise transit fees for NG, if

Gazprom raises the Belarus’ domestic gas prices

Diversification of the Russian NG export routes

Ukraine’s share of transit of the Russian natural gas

exports to area outside the former Soviet Union (to

Europe).

Before 1999 approximately 93-95%

73% in 2005 (Yamal Europe & Bluestream (To Turkey))

66% after 2010 (NEGP)

Natural gas export routes/pipelines via Belarus have

played an important role in Russia’s/Gazprom’s attempts

to reduce the transit monopoly of Ukraine & diversify

export routes.

Yamal Europe (Yamal I) gas pipeline

Construction started 1994; Inaugurated in September 1999; The route runs from Western Siberia through Belarus and

Poland to Germany; 575 km in Belarus territory; Construction estimated to be completed at the end of the

2006; Pipeline owned by Gazprom, but serviced by BelTransGaz; Land on which the pipeline is built belongs to Belarusian

state; Land is leased to Gazprom on long term contract; and More compression stations are needed to enable the

pipeline to operate at full capacity

From Yamal Europe to NEGP

Yamal Europe increased Gazprom gas exports through

Belarus from 7% to 15%; Yamal Europe increased the role of Belarus as a transit

country, but didn’t end disputes with all CIS transit states; Interruptions in deliveries to Europe through Yamal Europe

pipeline in early 2004 and other frictions between Belarus and

Poland gave Gazprom the incentive to began planning for a

new alternative gas pipeline that would by-pass transit

countries (NEGP); Earlier there existed plans to build the Yamal II pipeline that

would have doubled Gazprom’s NG export capacity via

Belarus; but That project has so far been put on hold by the priority given

to the NEGP.

Gazprom NG export pipelines through Belarus

Pipeline Capacity

Billion m³

% of the Gazprom’s

total export

capacity (239 bn.

m³)

Northern Lights

(Soviet era pipeline)

Owned & operated by

BelTransGaz in Belarus

25 10.5%

Yamal Europe I

(Since 1999)

Owned by Gazprom &

serviced by

BelTransGaz in Belarus

28 11.7%

Northern Lights &

Yamal Europe I

53 22.2%

Figures from: Heinrich

(2006): ”Gazprom – A

Reliable Partner for

Europe’s Energy Supply?”,

Russian Analytical Digest,

1/2006, p. 4.

The role of the NEGP for Belarus gas transit

With the NEGP operational after 2010 Belarusian routes share

of Gazprom’s total export capacity drops from: 22.2% (in 2005)

19.8% (after 2010)

The NEGP’s capacity (28 billion m³) is the same as the Yamal

Europe pipeline Option to build another pipeline which would double the NEGP NG

transport capacity exists

Both NEGP and Yamal-Europe transport natural gas to

Germany (Western Europe) In case of soured relations between RF and Belarus the NEGP

could completely substitute the Yamal-Europe In such a scenario the remaining Belarus export pipeline (Northern

Lights) would account for only 10.5% of the Gazprom’s total exports

Oil export pipelines

Belarus has also been a major transit country for Russian

oil exports;

The Northern Druzhba oil export pipeline goes through

Belarus to Poland and Germany, with a branch line to

Ventspils oil export terminal in Latvia;

In 2003 approximately 50% of Russian oil exports to

Europe were transported via Belarus; and

Due to a leak in the line, Northern Druzhba is at this time

under repairs & out of commission for the foreseeable

future.

EU’s Security of Energy Supplies

One of the main principles of EU energy policy alongside

markets and competition, and sustainability Springs up from the EU’s relative and worsening energy

poverty and amplified throughout 2006 after the often

misrepresented Russian-Ukrainian ‘gas war’ Key issues:

New energy crisis management rules and storage

systems Solidarity in energy crises Energy savings and efficiency Concerns of the existing energy mix Diversification of supplies only a recent but a major

concern, and can in practice pursued only partially

Belarus in EU’s Security of Supplies Puzzle (I)

New energy crisis management rules and storage systems: mostly

an internal EU measure not overcoming dependency on external

supplies and transit countries; Belarus not needed

Solidarity in energy crises: mostly an internal EU measure not

overcoming dependency on external supplies and transit countries;

at best, some assurances from Belarus for not illegally siphoning

gas intended for EU market from its transit pipelines in any possible

Russia—Belarus ‘gas war’ a la the Russia-Ukraine case in 2005—6

Energy savings and efficiency: mostly an internal EU measure in the

absence of its effective export to the ‘east’; reduced Belarus

consumption through extensive EU technical aid and info campaigns

would relieve some Russian resources for export to the EU area

Belarus in EU’s Security of Supplies Puzzle (II)

Concerns of the existing energy mix: Gas likely to remain

key part of EU consumption due to the expensively built

infrastructure, long-term supply agreements and

sustainability principle; Belarus pipelines one part of the

strongly interdependent Russia—EU gas grid

Diversification of supplies: Ventspils scenario possible

with the NEGP by 2010 and other new pipelines; Belarus

can potentially play a role as a transit state for

diversifying EU supplies outside Russia, although no

such projects are currently planned

Conclusion

In the short to mid-term, Belarus likely to remain one part in the

EU security of supplies puzzle

Non-cooperative Belarus can damage energy security of

individual EU countries disproportionately in the short-term

Cooperative Belarus can best be ensured by not repeating the

same mistakes made in the early 1990s with Russia;

This means a Europe of principles and values must be

complemented by a ‘wider Europe’ of geography, pipelines, joint

interests, movement of people, information gateway.

Belarus should be provided the prospect of a step-by-step

integration with thus understood ‘wider Europe’