Gas Negotiations Drag On, and On

UNCLAS SECTION 01 OF 02 MINSK 000629 SIPDIS SIPDIS E.O. 12958: N/A TAGS: EPET ECON PREL ENRG ETRD USTR BO SUBJECT: Gas Negotiations Drag On, and On Ref: Minsk 479 ¶1. Summary: Gas price negotiations have continued behind closed doors between the GOB and Gazprom, with no deal apparently reached at the most recent session on June 1. Russian media, quoting Gazprom officials, claim that Gazprom sent the GOB a contract listing USD 200 as the price for 2007, an increase of over 400%. Belarus has suggested a price of USD 51.80, and continues to resist privatizing its Beltransgaz pipeline network. The GOB has suggested it could sell a 50% stake in Beltransgaz, but only in exchange for Gazprom assets that produce 10 to 12 billion cubic meters of gas a year. Complicating things, in May the GOB started to reclassify Beltransgaz as a state-owned company (which it is de facto),which would prohibit any sale of shares. Meanwhile, the GOB is trying to convert a greater share of its economy to using local fuels, especially firewood. President Lukashenko has evaded Russian demands for controlling rights to Beltransgaz in the past, but given the unprecedented level of pressure from Russia, it remains to be seen whether Lukashenko will be successful this year. End summary. Gazprom Suggests Quadrupling the Price -------------- ¶2. Gazprom and GOB officials have met several times to negotiate gas prices for 2007, most recently on June 1 in Moscow. Neither side has said much publicly about the progress of those negotiations. However, on June 9 Russian newspaper Kommersant reported that Gazprom deputy chairman Alexander Ryazanov told the paper that Gazprom recently sent the GOB a gas contract for 2007 that listed a price of USD 200 per 1,000 cubic meters (tcm). Belarus currently pays USD 46.68/tcm. Ryazanov reportedly added that once the contract has been sent, the price can only be changed by someone "higher than the corporate level." Kommersant also reported, while not naming the source, that the June 1 talks, "were unproductive and added no small amount of new annoyances with Minsk for Moscow." A source reportedly close to Gazprom's board told the paper that Belarus had been offered stabilization credits to offset the price increase, and a source in Russia's Finance Ministry said the GOR is working to solve the issue of payments to the Russian budget for petroleum products imported and re-exported by Belarus. [Note: Belarus has been levying export duties on this Russian petroleum, but not sharing any proceeds with Moscow.] 
 Flies in the Negotiating Ointment -------------- ¶3. Belarusian independent press tried to confirm this Kommersant article, but Gazprom would neither confirm nor deny that such a contract had been sent. Representatives of Belarus' Ministry of Energy and Beltransgaz both denied they had received such a contract or that Gazprom had suggested a gas price of USD 200/tcm. The Ministry of Energy reiterated that Belarus was ready to pay USD 51.80/tcm in 2007. Several GOB officials, including Lukashenko, have announced they are ready to pay any price for gas, as long as Russian domestic consumers pay the same. The GOB insists Belarus deserves such preferential treatment as it is Russia's Union State partner. ¶4. On May 12, the GOB confirmed to the press it had started the process of transforming Beltransgaz from a joint-stock company (which means interested parties can theoretically buy shares, although this is limited in practice) to a republican unitary company (100% state-owned). One independent analyst told Econoff this is a strong sign the GOB is not ready to sell Beltransgaz. The same analyst also claimed that the GOB stopped work on the last compressor stations for Gazprom's Yamal-Europa pipeline. Post cannot confirm if this is true. A Beltransgaz spokesman announced June 9 that no date has been set for the next round of negotiations. Despite such problems, on June 13 Gazprom deputy CEO Alexander Medvedev told the press he did not foresee any need for Gazprom to cut gas supplies to Belarus, as it did with Ukraine. Pipelines for Russian Assets? -------------- ¶5. While Gazprom's main demand seems to remain privatization of a controlling stake in Belarus' state-owned Beltransgaz gas pipeline network, the GOB has been offering everything but giving over ownership. In early May GOB officials mentioned they might consider selling a minority share of Beltransgaz in exchange for Russian oil and gas production assets. On May 17, Belarusian Deputy Prime Minister (and main energy negotiator) Vladimir Semashko told the press the GOB would agree to a sale of 50% of Beltransgaz in exchange for ownership of Gazprom assets that produce 10 to 12 billion cubic meters of gas annually. On June 9, Lukashenko told the press he would not sell Beltransgaz unless MINSK 00000629 002 OF 002 Belarus received assets to develop hydrocarbon deposits in Russia (he did not specify oil or gas). ¶6. The GOB also continues to suggest various joint projects with Gazprom, presumably to sweeten any gas deal. On May 15, Belarus' Council of Ministers announced that Beltransgaz hoped to build an underground gas storage facility near Mozyr, as a joint project with Gazprom. The GOB suggested using a salt mine to hold up to one billion cubic meters of gas. At the same time the GOB also announced it had reserved land for a second Yamal-Europa pipeline, if Gazprom was interested. Belarus Preparing for the Worst -------------- ¶7. Meanwhile, the GOB is working to increase use of domestic fuels. Lukashenko announced that local fuels should provide 25% of Belarus' energy needs by 2010, up from 11% now. Belarus has small reserves of oil, as well as sizeable amounts of peat and wood. At an energy conference in mid-May, the GOB announced its intention to increase the use of wood for heat and energy from 800,000 cubic meters in 2005 to three million tons by 2010. To this end the GOB is starting to build a number of small wood-fired electrical generating stations across the country. However, the Head of the Belarusian State Timber, Woodworking, Pulp and Paper Industries Concern, Vladimir Shulga, told the conference that wood is not an economic fuel as long as gas remains under USD 75/tcm. Comment -------------- ¶8. Many observers in Belarus have commented that gas price negotiations are going nowhere, largely because Lukashenko refuses to compromise. In past years he has been able to get away with such intransigence, as Russia seemingly did not want to cut-off its semi-loyal (or at least anti-western) ally. Lukashenko's argument that Belarus deserves better treatment and cheaper gas because it is Russia's Union State partner rings hollow, especially since Lukashenko has been actively blocking development of the Union State for several years. For the first time, this year Russia has started pressing Minsk hard on energy well before the current contract expires. Whether the Russians are serious about this current effort or whether Lukashenko can once again escape with a last minute deal favorable to Belarus remains to be seen. KROL