By Nathaniel Espino and Katarzyna Klimasinska / January 9, 2007

Jan. 8 (Bloomberg) — Russian oil flows to Europe were cut off by a disagreement with Belarus, the third time in as many years that energy supplies have been disrupted because of a dispute between Moscow and nations that ship its crude and gas.

The cutoff comes after Belarus introduced a transit tax in retaliation for higher charges imposed by Moscow for crude supplied to the former Soviet state. Last year a disagreement between OAO Gazprom and Ukraine lowered deliveries to Europe from the Russian natural-gas producer.

“We have contacted Russian and Belarusian authorities and demanded a clear explanation of the causes of this disruption,” Ferran Tarradellas Espuny, a spokesman for the European Commission, said at a regular press briefing today. “There is no immediate risk for the supply of oil in the European Union.”

The Polish segment of the Druzhba pipeline carries about 50 million tons of oil a year, including 96 percent of Poland’s oil. About 27 million tons goes to German refiners such as PCK Raffinerie GmbH and Total Raffinerie Mitteldeutschland GmbH. Germany imports about 100 million tons of crude a year.

Belneftekhim, a Belarussian oil pipeline operator, made the decision to reduce supplies, Interfax reported from Minsk, citing an unnamed spokesman for the company. OAO Transneft, Russia’s oil pipeline operator, couldn’t be reached for comment. Today is a public holiday in Russia.

`Illegal’ Taxes

Belarus has imposed “illegal” taxes on Russian oil exports in a move that “smells of a trade war,” Russia’s Deputy Economy Minister Andrei Sharonov told Echo Moskvy radio. Talks with Belarus on renewing oil shipments will begin only after the taxes are abolished, he said.

German Economy Minister Michael Glos, current chairman of the European Union Energy Ministers’ Council, said he views the shutdown with “concern.”

“I expect efforts to be made to restore delivery through the pipeline at full volume as soon as possible,” Glos said in a faxed statement. The situation in Germany is “not dramatic” and refiners have enough crude “to ensure deliveries even during stoppages of a longer nature,” he said.

Crude Reserves

Poland has reserves to cover 80 days’ demand and will bring in crude by sea, Polish Deputy Economy Minister Piotr Naimski said in a phone interview from Warsaw.

The disruption “shows that oil supplies from this direction are untrustworthy,” he said.

Mol Rt., Hungary’s biggest refiner, said oil supplies from Russia dropped and may be halted by the end of the day, forcing it to tap reserves and find alternate supplies.

“In case the crude shipments do not restart from Belarus, the Ukraine transit reserves are expected to dry up by this late afternoon and the shipments to Hungary will accordingly stop by late evening today,” Mol said in an e-mailed statement.

Germany and Russia are building a gas pipeline underneath the Baltic Sea to circumvent transit countries such as Belarus, Ukraine and Poland, a move denounced by Polish government officials. Poland wants the EU to form a joint energy policy towards Russia.

The oil delivery stoppage today shows that Germany and Russia are taking the right steps in laying a subsea pipeline which will be “unaffected by other national interests,” said Kurt Beck, leader of the Social Democratic Party, part of the German government coalition.

Energy Dependence

Poland is working to reduce energy dependence on Russia, which also supplies almost two-thirds of its gas. Belarus, while traditionally a close ally of Russia, is protesting Russian plans to raise gas prices to market levels and has imposed a duty on oil transit that Russia says violates trade agreements.

Russia and Belarus waited until Dec. 31 to sign an agreement on gas transit fees for 2007, raising concern in Poland that supplies would be interrupted as they were by the Ukraine dispute in 2006 and by a row between Russia and Belarus in 2004.

Oil shipments to Poland’s two biggest refineries, PKN Orlen SA and Grupa Lotos SA, were completely cut off. Orlen’s main refinery in Plock, central Poland, continues to operate at full capacity and its Polish refineries can be fully supplied by sea, Poland’s biggest refiner said in an e-mailed statement.

`Quick Resolution’

“I think that similarly to the gas disruption at the beginning of last year, a quick resolution will be achieved, so I don’t expect any impact on Orlen,” said Gergely Varkonyi, an analyst with Deutsche Bank in Budapest.

Buyer countries have sufficient reserves and solving the dispute is in the interest of both Belarus and Russia, Varkonyi said.

Lotos’s reserves will enable the company to refine crude at full capacity for two weeks.

Orlen shares fell 0.9 percent to 47.55 zloty, and Lotos shares rose 1.1 percent at 45.51 zloty in Warsaw. The benchmark WIG20 index declined 0.1 percent.

The Czech Republic experienced a “short disruption” that was covered by reserves from Slovakia, and deliveries to the country “are in no danger,” Industry Ministry spokesman Tomas Bartovsky said by phone.

Slovakia’s Economy Ministry said supplies haven’t been interrupted. Slovnaft AS, the Slovak refinery controlled by Hungarian oil company Mol, said it plans to release a statement later today.

Poland will “certainly” intensify its efforts to find other supplies of oil following the cutoff, Naimski said. The state-owned natural-gas monopoly said last month it would build a terminal to import liquefied natural gas, supplying more than half the country’s needs.

To contact the reporters on this story: Nathaniel Espino in Warsaw

Azerbaijan has ceased importing gas from Russia as of January 1. Despite the anticipated shortage of gas in the country — compounded by an unanticipated production delay at the international Shah Deniz gas project — Azerbaijan has refused to pay $235 per 1,000 cubic meters of Gazprom-delivered gas in 2007. President Ilham Aliyev turned down such “commercial blackmail,” telling the Russian media, “I cannot allow that to happen. Azerbaijan is no longer the kind of state that can be forced into anything” (Ekho Moskvy, December 23).

Gazprom’s final proposal to Azerbaijan in late December increased the volume offer from 1.5 billion cubic meters of gas to 2.5 billion cubic meters for 2007, though still far below last year’s 4.5 billion cubic meters. And it raised the asking price to $235 per 1,000 cubic meters for 2007, compared with the $110 price charged to Azerbaijan, Armenia, and Georgia in 2006. Moscow left the price unchanged for Armenia in 2007 in return for property takeovers in that country; but it more than doubled the price to Azerbaijan and also to Georgia, which ruled out property transfers to Russia.

President Aliyev, Industry and Energy Minister Natig Aliyev, and State Oil Company president Rovnag Abdullayev all declared publicly in the closing days of the year that Azerbaijan would not accept arbitrary overpricing or a politically motivated price. Indeed, geopolitics largely motivates Moscow’s decisions to raise the price and slash the volume of gas deliveries to Azerbaijan. The goal is to prevent the latter from helping Georgia to resist Moscow’s twin threats of supply cuts and extortionate pricing.

Azerbaijan currently extracts some 5 billion cubic meters of gas annually and the international oil-producing consortium extracts some 2 billion cubic meters of associated gas. The country’s annual requirement is 10 to 11 billion cubic meters. Azerbaijan will use some internally produced gas, as well as fuel oil, instead of Russian-delivered gas, to generate electricity. Almost all of Azerbaijan’s electricity-generating capacities operate on gas, but a large part can also operate on the more expensive fuel oil.

To obtain that fuel oil, Azerbaijan must redirect some volume of crude oil from export to refining in the country. It will definitely not redirect any volume from the Baku-Tbilisi-Ceyhan pipeline, but rather from the line that runs to Russia’s Novorossiysk Black Sea port. That pipeline handled some 4 to 4.5 million tons of oil from Azerbaijan per year in 2005 and 2006, some of it from the international consortium and some from Azerbaijan’s state company. The international consortium’s share in using that pipeline has grown in late 2006 due to technical problems on the BP-operated Baku-Supsa (Georgia) pipeline — a situation that seems to persist. Azerbaijan can shift some of that volume into the pipeline to Ceyhan and another portion for in-country refining, producing fuel oil to generate electricity.

Technical problems are also causing a further delay of the start of commercial production at the BP-operated Shah Deniz giant gas field, the source of the Baku-Tbilisi-Erzurum (Turkey) pipeline. Planned for mid-2006 and postponed into December, that production start has again been postponed for “some weeks” due to a leak at the first well, deep under water. Three other wells are due on stream shortly. The delay has complicated the gas supply situation for 2007 in Azerbaijan and especially in Georgia. The first gas deliveries from Shah Deniz had been scheduled to reach Georgia in September 2006, then rescheduled for December 20. The postponement has been a factor in forcing Georgia at the end of December to sign a contract with Gazprom, buying gas at the extortionate price of $235 per 1,000 cubic meters, as a stop-gap solution to survive the winter.

Both Azerbaijan and Georgia have considered the possibility of emergency imports of Iranian gas in small volume to tide them over the winter. In Azerbaijan’s case, Iran was willing at the end of December to supply 1.8 billion cubic meters of gas in 2007, but the talks on the price were inconclusive. In January-February 2006, Azerbaijan transited small but critical volumes of Iranian gas to Georgia through the Astara-Gazi Mahomed-Gazakh pipeline during the Russian energy blockade of Georgia. Recalling that situation recently, U.S. Deputy Assistant Secretary of State Matt Bryza declared in Tbilisi that no one can “tell Georgia to refuse buying Iranian gas and freeze in winter.”

The winter of 2006-2007 is almost certainly the final opportunity for Russia to exert leverage on Azerbaijan and Georgia through manipulation of energy supplies. Clearly, this form of leverage has lost its effectiveness thanks to the direct availability of Caspian supplies to Azerbaijan and Georgia. By next winter, both countries should have become completely immune to Moscow’s use of the energy trade as a pressure tool.

(ANS, APA, Turan, Interfax, December 23-30, January 3; see EDM, December 8)

On December 27, 2006, Moldova’s First Deputy Prime Minister Zenaida Grecianii signed an agreement on gas deliveries for 2007 with Gazprom president Alexei Miller. On December 30, chief executives of Gazprom and MoldovaGaz — which is majority-owned by Gazprom — signed a five-year agreement on guidelines for gas deliveries in 2007-2011. The negotiations had been quiet as well as secretive, and the political fallout nil. Gazprom is touting both agreements, especially the latter, as a “model” applicable to other ex-Soviet countries.

Under the agreement for 2007, Gazprom is raising the price just slightly to $170 per 1,000 cubic meters, up from $160 that Moldova paid during the second half of 2006. The contracted volume apparently remains constant at 2.5 billion cubic meters for the year to right-bank Moldova and 1.1 billion to Transnistria. The transit tariff for Russian gas exports farther afield via Moldova remains unchanged at $2.50 per 1,000 cubic meters per 100 kilometers of pipelines on Moldovan territory. Moldova has transited 20 to 22 billion cubic meters of Russian gas to Balkan countries per year in the last few years. The pipeline’s capacity is 25 billion cubic meters annually — a transit potential of strategic scope.

The five-year agreement with Gazprom stipulates a gradual scale and timetable for bringing the price of gas supplied to Moldova up to a purported “European average price” minus transportation costs. Under this agreement, Gazprom will charge Moldova 75% of that price in 2008, 80 to 85% in 2009, 90% in 2010, and 100% of the “European average price” in 2011.

Reciprocating these presumed favors, Moldova hands over its internal gas distribution networks to Gazprom. Those networks were built in large part during the post-Soviet years from state, district, and municipal budgets and some private business funds. The government’s legal right to hand those networks over to a foreign party may be open to legal challenges. As a precautionary measure, the de facto handover to Gazprom may formally be carried out via MoldovaGaz.

Meanwhile, MoldovaGaz retains its existing ownership structure: Gazprom with 63.4% and the Moldovan government with 36%. Chisinau insists that the handover of the distribution networks should not change those proportions.

According to Gazprom spokesman Sergei Kuprianov, the agreements just signed with Moldova constitute a model for the type of relations Gazprom aims to build with other CIS member countries as well. The model’s essence involves taking over those countries’ assets in return for Gazprom’s consent to a phased increase in the price of gas during a three- to five-year transitional period, at the end of which the price of Russian-delivered gas would equal the “European average” minus transport costs. Moldova is the first CIS country to accept such “European price-formation principles” to Gazprom’s satisfaction (Interfax, Itar-Tass, December 27, 30; Moldovapres, December 4).

The unstated though obvious catch in this “model” is that Russia substantially determines European prices through its monopolistic practices along the entire supply chain, from upstream to end-users — a trend that profoundly marked energy politics in 2006 and seems set to continue this year. Moreover, countries on which this model is being experimented are asked to hand over their assets permanently and irreversibly, in return for only temporary relief on the pace of price increases, which can then continue extorting assets in an open-ended process.

Moldova, a member of the World Trade Organization, consented at the year’s end to Russia’s accession to the WTO, on the condition that value-added taxes on Russian gas deliveries to Moldova be levied in the country of destination, in accordance with WTO rules. Those taxes were being collected in Russia until now. Following year-long negotiations on this issue, Moldova signed the documents on Russia’s accession to the WTO on December 27, along with the signing of the gas supply agreement for 2007. However, at the last moment, Russia postponed the expected signing of the documents on country-of-destination VAT collection.

Moldova had paid $80 per 1,000 cubic meters of Russian gas until January 1, 2006 — the highest price paid by any CIS member country during 1996-2005. In January 2006, Russia imposed a total cut-off in gas supplies to Moldova for 17 days — the longest such interruption suffered by any customer of Gazprom since 1992. Russia then raised the price to $110 for the first half of 2006 and $160 for the second half of the year, thereby doubling the price to Moldova within a 12-month period. Thus, the increase by “only” $10 per 1000 cubic meters for 2007 is no favor, but rather a consequence of the recent, steep price hikes on a buyer who is being pushed beyond the edge of solvency.

Russia supplies 100% of the gas consumed in Moldova. Alternative supplies from Romania are possible, but never materialized. Moldova imported 2.5 billion cubic meters of Russian gas annually in 2005 and some 2.3 billion cubic meters in 2006. The interruption of supplies in January 2006 and the mild weather toward the year’s end explain the decrease below the contracted level in 2006.

For its part, Transnistria consumed approximately 1.1 billion cubic meters of Russian gas annually in the last few years. Officially recognized debts to Gazprom passed the $1 billion mark in 2004. According to Supreme Soviet chairman Yevgeny Shevchuk, Transnistria’s arrears to Gazprom reached $1.2 billion as of mid-2006 (Itar-Tass, December 29, 2006). Thus far, Gazprom or the Russian government never seriously attempted to collect those debts.

Transnistria’s de facto authorities held a 13% stake in MoldovaGaz until withdrawing from the company in 2005. The following year, Moldova exercised its legal right to hand over that stake to Gazprom, thus raising the latter’s stake in MoldovaGaz to the present level of 63.4%. However, the gas distribution systems in Transnistria remain under those authorities’ physical control. For its part, Chisinau has paid its gas bill to Russia on schedule, in full and in cash for almost a decade. This record, however, is not preventing the monopoly supplier from dictating price hikes to grab the country’s remaining, meager national assets.

Vladimir Socor

The late statements on Romania’s energy security, doubled by last week’s events caused an effervescent debate. Both NATO and the European Union are worried about Russia’s intended expansion in the natural gas provisioning.

The only solution seems to be a common European policy in alternative gas resources, in order to avoid the dependence on Russia.

In the energy area, Romania lived a series of events during the past few days: the Petrom privatization became subject for the Supreme Defense Council, Economy Minister accused political pressure, several managers were suspended and NATO officials declared they are just as preoccupied as Romanians in the energy issues.

Even more, a confidential NATO report warned on Russia’s intention to build a natural gas cartel, along with Asian and Algerian producers, while Gazprom and Lukoil signed a collaboration agreement with Algerian Sonatrach.

Aleksandr Riazanov, vice president of the Russian natural gas giant Gazprom was fired because of his independence and reticence in fulfilling orders. Riazanov was replaced with Valeri Golubev, former KGB officer and a close acquaintance of president Putin.

The new vice president will handle issues in the Community of Independent States (CSI) area, the organization representing all former USSR states, except for the three Baltic states.

Golubev, a career man in Sankt-Petersburg, just like president Putin, was named in the position without any further comments or explanations.

Gazprom intends to force higher prices for the natural gas delivered to Russian neighboring countries, and for this reason is accused of serving as a weapon against the former Soviet states.

Minister of the Economy Codrut Seres and presidential counselor Theodor Stolojan met a delegation from Russian natural gas giant Gazprom, headed by company vice-president Alexander Medvedev. Romania imports six billion cubic meters of natural gas from Russia, accounting for a third of internal consumption.

A serious bidder for Romgaz

‘We are interested in Romgaz and eager to join the race respecting the rules established by the Government. If bidding is organized we will take part in it. We are anxious for the terms of the privatization race to be published’, Medvedev said. With 6.2 billion cubic meters, Romgaz accounts for half of the Romanian natural gas production. The Ministry of Economy will sell a 51 percent stake, in a fashion established by the strategic consultants. The Ministry holds 85 percent of Romgaz while the remaining 15 percent have become part of the portfolio of the Proprietatea Fund. Hungarian Group MOL, Gaz de France, Lukoil, Ruhrgas and Wintershall have also shown interest in the Romgaz privatization. Prime Minister Calin Popescu Tariceanu specified at the beginning of the year that the way Romgaz is sold should make it possible for Romania to benefit from the advantage of its own important natural gas deposits. Another project Gazprom might implement in Romania is the construction of a natural gas-fueled thermoelectric power plant, which would produce both electric and thermo energy. 

Gazprom interested in Nabucco project

Gazprom plans to be a part of the Nabucco project – the transit of natural gas from the Caspian Sea region to Western Europe – as the investment requires important natural gas and a solid distribution market, Medvedev announced. “It is obvious that a project of this scale cannot be conducted without Gazprom,” the company official believes. Romania is directly affected by the Nabucco project which will result in connecting the Romanian natural gas transport system with those in Hungary and Bulgaria as well as greater Europe. The companies of Botas (Turkey), OMV (Austria), MOL (Hungary), Bulgargaz (Bulgaria) and Transgaz (Romania) are taking part in the project. The Nabucco pipe should be operational in 2011 and have a capacity of 4.5 to 13 billion cubic meters per year.

New storage facility for natural gas

Representatives of Gazprom and Conef signed a 25-year contract on Friday, under which the Russian company is to provide a quantity of 50 billion cubic meters of natural gas. Gazprom also signed a contract with Romgaz for the opening of a mixed company that would build a natural gas storage facility in Roman-Margineni, in Neamt County. Minister Seres believes the partnership with Gazprom is necessary as internal production is slightly decreasing and Russia could provide the two billion cubic meters of natural gas necessary for the Roman-Margineni reserves. The required investment for the construction of the storage facility has been estimated between 120 and 258 million euros by the Ministry of Economy and Commerce. The Roman-Margineni facility could store an active volume between 600 million and one billion cubic meters as well as an inactive stock between 500 million and one billion cubic meters.

The creation of this storage facility can fully cover the natural gas demand in the northeastern area of Romania and would insure a capacity reserve for supplementary deliveries to third parties at the same time, shows a release of the Ministry of Economy.

For the creation of the facility, Romgaz and Gazexport, a division of Gazprom, will close a memorandum, and the contract of incorporation will be signed only after experts from both parties agree on the optimal operating strategy.

The timing of the agreement signature is itself significant. The signing had been scheduled for October, 2005, yet the alternative was preferred, of having the agreement signed prior to the legislative elections in Germany (September 18). Analysts immediately saw in this fact a deliberate support granted by President Putin to Chancellor Schroeder, whose party is outperformed by the Opposition in opinion polls (41-43 vs. 31-32 per cent). The Social democrats are counting on a rise in polls, which would allow for establishment of a “large coalition” to undertake the governance of Germany after the elections (both Christian-Democrats and Social Democrats). This would in turn ensure continuity in Germany’s policy on Russia. In the joint Schroeder-Putin press conference after signing the agreement, the former used the following words to define the Russian-German relationship: “Few peoples on this Earth have such a clear mission, the mission incumbent on our peoples to help settle global conflicts on our planet through peaceful means. This applies to Europe, but not only to Europe…We can thank our strategic partnership…” German media were not late in warning on the threat of Germany’s (and Western Europe’s) dependence on Russian gas, as well as on the geopolitical implications of this phenomenon in the future. Definitely, with the planned Baltic gas pipe we have a case in which geo-economic requirements are overwhelmed by the geopolitical ones, whether real or only perceived as real because of a burdened track record of the Russian-German relationship and its impact on the Eastern European sphere.