Gas Negotiations Drag On, and On

UNCLAS SECTION 01 OF 02 MINSK 000629

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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

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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