Mozyr Refinery Highly Profitable

UNCLAS MINSK 001391

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG ECON ETRD BO
SUBJECT: Mozyr Refinery Highly Profitable

Refs: (A) Minsk 614, (B) Minsk 1365


1. (SBU) Summary: Belarus has two oil refineries, in Mozyr and
Novopolotsk. The GOB owns the Novopolotsk refinery and 43% of the
Mozyr refinery, but is trying to take ownership of another 12% from
an employee association. The Mozyr Oil Refinery (MOR) can refine
10 million tons of oil per year. As it approaches the end of 15
years of modernization, MOR expects to be able to refine 16 million
tons shortly. MOR imports almost all its crude from Russia at
reduced Russian domestic prices, and sells it westward at world
prices. This earns MOR and the GOB hundreds of millions of dollars
each year, and likely contributes millions more to Lukashenko's off-
budget accounts. MOR's director admitted it would be technically
possible, but economically unlikely, to import Caspian crude
through Odessa-Brody. End summary.


2. (U) On November 3, Ambassador toured the Mozyr Oil Refinery
(MOR),located in southeastern Belarus (ref B),and spoke with
General Director Anatoly Kupryianau. Kupryianau explained the
basics of the refinery, ongoing modernization, and import and
export patterns. The Mozyr Oil Refinery is one of two Belarusian
refineries; the other is located in Novopolotsk. [Comment: Naftan,
the Novopolotsk refinery, is 99.8% owned by the GOB, and in 2004
refined 8.8 million tons of oil.]


Production
--------------


3. (U) The refinery began multi-stage reconstruction in 1994, and
has invested USD 400 million in modernization in the past ten
years. In 2004 the plant finished the fourth stage of
reconstruction, which included installation of a catalytic cracking
unit, a sulfur production unit, and a sour water stripper. As a
result MOR is capable of refining up to 9.6 million tons of
petroleum products annually. When the reconstruction ends,
scheduled for 2009, MOR plans to be able to refine 16 million tons
annually. For 2004 the refinery's output was divided as follows:

Diesel Fuel 31.3%
Fuel Oil 29.2
Gasoline 22.7
Other 5.4
Vacuum Gas Oil 4.3
Heating Oil 3.9
Oil Bitumen 3.2


4. (U) Because of its latest upgrades, the refinery boasts that the
quality of its products is increasing. As of 2004, all of the
diesel they produce meets Euro 4 standards. After installation of
the catalytic cracking unit in 2004, MOR's output of high-octane
gasoline (RON 92 and 95) increased to 75% of all gasoline produced.
The refinery expects to finish its fifth stage of reconstruction,
installation of an alkylation complex and a benzene recovery unit,
in June 2006. Kupryianau explained this means MOR's gasoline will
meet European Union standards. In third quarter 2006 MOR expects
to be able to add ecological agents to its gasoline, allowing them
to sell to the U.S. market.


A Very Profitable Business
--------------


5. (U) In 2004 the Mozyr refinery processed 9.618 million tons of
feedstock. Of that amount, the refinery itself owned 3.662 million
tons (38%). The other 5.956 million tons (62%) was owned half by
Slavneft and half by Lukoil. Kupryianau said that even though the
majority of MOR's activity was refining Russian-owned crude, this
service only contributed six percent to its total profits. The
vast majority of profit, 94% in 2004, came from selling the refined
product MOR itself owned. MOR purchases this oil at Russian
domestic prices and sells it westward at world prices. While MOR
buys crude in Russia, it does not have any sales agents abroad and
so sells its refined product at the Belarusian border (see para 9).


6. (U) In 2004 the refinery earned BYR 286 billion [USD 133
million] in net profit, twice what it earned in 2003. Kupryianau
explained that profits have risen sharply in recent months, as
world oil prices have been high. Press reports confirm this will
be a very successful year for Belarus' refineries; in the first
half of 2005 MOR earned BYR 252.4 billion [USD 117.4 million] in
profit, three times what it did in the same period in 2004. This
business is very profitable for the GOB, which collects nearly 43%
of the profit, based on its ownership of the plant (see below). In
addition, the GOB collects 24% of gross profit in taxes (USD 42
million in 2004). Additionally, MOR paid BYR 1.98 in dividends in
the first half of 2005, netting the GOB another USD 400,000.
During the same period the refinery brought USD 662 million in hard
currency to Belarus.


7. (SBU) [Comment: The above profit numbers are all based on
officially released information, which seems to understate MOR's
profit. Back-of-the-envelope calculations show the refinery likely
makes much greater profits. From January through July MOR refined
5.8 million tons of crude. They paid an average of USD 190 per ton
to Russia for the oil, and sold each ton for an average price of
USD 325.7, for a gross profit of USD 787 million. Belarus'
National Academy of Sciences told Econoff that figures on per ton
refining costs are classified. Regardless, it seems probable the
refinery earned more than the official data shows, lending credence
to rumors that Lukashenko makes money from oil refining for his off-
budget funds. End comment.]


Sources and Transport/Odessa-Brody
--------------


8. (U) Belarus has limited reserves of oil, mostly found in the
Gomel region near Rechitsa. The GOB annually extracts roughly 1.8
million tons of oil, all of it processed by the Mozyr refinery.
MOR also receives oil from Russia through the Druzhba pipeline, and
by rail from Russia. In the first ten months of the year MOR
imported 275,383 tons of oil from Russia by rail.


9. (U) Kupryianau explained that by agreement with the Council of
Ministers, MOR must sell 30% of its output domestically. MOR
exports the rest of its product, mostly through the Druzhba
pipeline. This pipeline splits at the refinery, with one branch
going west to Poland and Germany and one south to Ukraine and
Hungary. By cost, 15.5% of MOR's exports go to CIS countries and
84.5% to "far foreign countries." MOR exports 40% of its diesel
fuel to the Baltic States by rail, and ships smaller amounts to
Poland and Ukraine. Kupryianau stated Ukraine is a very strong
potential market for MOR, as Kiev is closer to the refinery than is
Minsk and Ukraine has no refineries that can compete with MOR.
Kupryianau hopes to begin selling gasoline to Russia. He argued
that lack of modernization of Russia's refineries, and the sharp
increase in cars, make Russia a very lucrative market.


10. (U) In response to Ambassador's question, Kupryianau opined
that it would be technically possible for MOR to import Caspian
crude through the Odessa-Brody-Druzhba pipeline. However, he
thought the economic factors, especially the higher price of
Caspian crude, would make this unlikely.


GOB Exerts Control over the Refinery
--------------


11. (U) The Mozyr Oil Refinery was founded in 1975. In 1994 it was
registered as a joint stock company. Current owners are: the
Belarusian Ministry of Economy, 42.757%; Russia's Slavneft (itself
owned by Gazprom),42.581%; refinery employee corporation Mozyr
Refinery Plus (MNPZ),12.252%; and individual shareholders, 2.41%.
MOR is controlled by a board of twelve members, five from the GOB,
five from Slavneft, and two from MNPZ.


12. (SBU) Shortly after Ambassador's trip to Mozyr, independent
economic press in Belarus reported on a conflict between the GOB
and MNPZ. MNPZ consists of 2,235 current refinery employees and
700 retirees, and was created in 1995. [Note: MOR has 3,781
employees, so a majority belong to MNPZ.] In January the GOB,
claiming MNPZ owed USD 4.7 million in unpaid Soviet-era debt, used
the Golden Share mechanism (septel) to take over temporary
management of MNPZ, even though this violated the Golden Share law.
[Note: MNPZ has never been state owned, and therefore the Golden
Share should not have been used against it.] The GOB is trying to
gain ownership of 98% of MNPZ in exchange for dropping the debt
claim. In response, MNPZ has offered to sell four percent of their
company, which they claim would raise USD 5 million, to pay the
debt. If the GOB does gain a majority stake in MNPZ, which seems
likely, it would control a majority of the refinery.


13. (SBU) In the meantime, the GOB, through the control it gained
from the Golden Share, is forcing MNPZ's board members to vote with
the GOB's board members. In the latest example, on October 28
MOR's board voted to invest USD 112.6 million to construct a
facility that would produce 120,000 tons of paraxylene annually.
Slavneft voted against, as paraxylene production would reduce the
output of high-demand light petroleum products. The GOB supported,
and forced MNPZ to do so also. MNPZ issued a statement saying it
opposed this plan, but had been ordered to vote for it by Gomel
Oblast authorities.


Comment
--------------


14. (SBU) Oil refining is one of the bright spots of the Belarusian
economy. Timely investment in its two refineries and the great
good luck of being able to buy Russian crude at vastly discounted
prices have combined to earn the GOB hundreds of millions of
dollars annually. This has put Belarus in the unlikely position of
being an oil importing state that benefits from high oil prices.
Independent economists, the IMF and the World Bank all credit high
oil prices with much of Belarus' current economic growth. One
credible economist estimated 94% of Belarus' GDP growth is due to
high oil prices, either directly through profits on refining and
transporting, or indirectly based on increased Russian demand for
Belarusian products from Russia's own oil profits. This estimate
is likely high, but illustrates the value oil has for the
Belarusian economy.


KROL