The Oil Drum

It hardly seems any time at all since we heard that Belarus and Russia had signed an agreement that had set the price per thousand cu meters at $100, Gazprom was going to use part of the money, over time, to purchase a 50% share in the Belarus pipeline company, and another crisis had been averted.

Except that the story dealt only with natural gas, and there is a second fuel, oil, that also makes its way from Russia, through Belarus, to places like Germany and Poland. It carries about 20% of the total supply. (The photo on Robert Amsterdam’s site shows you how large the diameter of the Druzhpa pipe is, large enough, he notes, to carry 1.2 mbd of oil to Germany and Poland. It is thus one of the highest capacity pipelines in the world . And on Monday Russia turned that tap off. For much the same reasons as, last year, they closed the tap on the natural gas pipeline feeding through Ukraine. Large volumes of the fuel headed west were being siphoned off. It is not, in fact, the Russian government that is directly involved in this dispute, at least superficially and at this point, but rather the Russian oil pipeline company Transneft. Their story is that, as with Ukraine, Belarus did not want to pay the new duty on the oil, that Russia was now demanding .

Last month, Russia imposed an export duty of $180 per ton of oil sold to Belarus, a severe blow to the country's reprocessing industry and government revenue. Belarus responded by imposing an import duty of $45 per ton of Russian oil that crossed its territory.

UPDATE: When I said that most countries had reserves that would get them through the crisis I forgot to look at Belarus, and they apparently only have a week's worth. And the second point is that without customers for their oil, Russia might have to cut back production by up to 1 mbd, since it will run out of places to store the oil, and has only a very limited means of alternate shipping (which includes a lot of railcars.)

UPDATE 2 It now appears that Russia refused to meet with the Belarus delegation today.

However, a quick resolution to the dispute seemed distant after the Russian government refused to meet a Belarussian delegation that arrived in Moscow on Tuesday.

Andrei Kabyakov, the Belarussian deputy prime minister, flew there for talks with his Russian counterpart but failed to start negotiations.

"The Russian side told us... they are not yet ready for talks," Vladimir Naidunov, Belarus's first deputy economy minister, told reporters in Moscow.

The same source also mentions that President Putin has warned Russian oil companies to consider cutting production.

The weather is still pleasantly warm, and winter seems, as yet, to be just an unpleasant thought that can be put off until, at least, Thanksgiving. But unfortunately for those who have to look towards energy supplies for the winter, particularly in Europe, it may already be coming too quickly. To simply describe what is likely going to turn into yet another mess this winter, let me try a quick summary of what seems to be in the offing.

Gazprom you may recall has been buying into, or acquiring more control of, pipelines that carry their gas from Russia to the West. In the process, last year, it had a bit of a row with Ukraine, over the price that should be paid for the gas Ukraine was using. By offsetting the cheaper price that was to be paid for gas from Turkmenistan, the deal that was cut gave Ukraine the promise of gas at a price that would allow it to continue to function. Well, unfortunately for that agreement, Gazprom has just agreed to pay more for Turkmen gas. At a price of $100 per thousand cubic meters this is already $5 above the price that Ukraine was going to pay for a blend that also contained $230 Gazprom gas.

It was a relatively minor note in the news that Gazprom has taken a majority holding in the gas pipelines that form the North European Gas Pipeline. At this rate they are going they will be scratching their heads, this time next year, to try and find anyone left that they can take over. But the gilt is off that gingerbread. As was noted in the Guardian the time when Europe foresaw `the great prospect of the 21st Century" being the energy partnership between them and Russia, has started to reveal "the dark side of the force." We are at the point that

In a direct reference to the Russian president, Mr Barroso (head of the European Commission) last week complained that the Kremlin was increasingly resorting to a very blunt, but potent weapon in its dealings with Europe - "the use of energy resources as an instrument of political coercion". . . . . In short, to mix the energy metaphor, Gazprom appears to have Europe over a barrel.

However, given that companies have to be assured of their investments before they commit to large energy construction, it is worth noting that the pipelines and infrastructure are going to cost around $11 billion. Since it will take four years to get the pipes in, is it fair to ask those who demand windfall profits taxes from the energy companies, what they would consider a fair return on that investment?

Sheesh! There I was, just quietly slipped out of town for a quiet week at one or two of those conferences and westexas slips this little spark-emitting fizzy sounding thing into the comments. The FT story requires subscription, but the Mosnews seems to have most of it. The basic story itself is a dash of water in the face...all of it suggests that we are definitely entering one of those "interesting times", if we weren't in it already. (much more under the fold).

You may have noted a couple of posts recently concerning the relationships between Gazprom and its customers.  More particularly the pressure being put on places such as Armenia, Belarus and now the UK to allow Gazprom to take over the distribution companies for the natural gas.  Well, just in case the message wasn't getting through, there now comes a new threat. The West has been benefiting too long from Russian largesse, in terms of oil availability.

Russia plans to cut oil supplies to Europe, diverting shipments from "overfed" European markets to Asia, Semyon Vainshtok, president of pipeline monopoly Transneft, said in an interview published Monday.

"We have overfed Europe with oil. Every economics textbook says that surplus supply lowers prices," Vainshtok said in an interview published in Nezavisimaya Gazeta. "But we can't reduce supply -- all our exports are oriented toward Europe."

That will change with the construction of the Eastern Siberia-Pacific Ocean pipeline, which will feed energy-hungry Asian markets with up to 1.6 million barrels of oil per day, Vainshtok said.

"As soon as we turn to China, South Korea, Australia, Japan, it will immediately take away a portion of oil from our European colleagues," Vainshtok said.