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January 4, 2007
Belarus To Russia: Game On

After Belarus caved on New Year's Eve to Russian demands for a rate hike on gas supplies as well as a piece of Belarus' action on pipeline service to the West, the dispute looked over. Belarus, however, just declared a new round in the battle:

Belarus has imposed big taxes on Russian oil pumped through its pipelines to customers in Europe.

The move comes three days after Belarus reluctantly agreed to demands by the Russian state energy giant, Gazprom, to a doubling of gas prices.

Belarus says it will charge Russia $45 (£23) per tonne of oil.

Analysts said the move was unlikely to affect world oil prices but could cause short-term disruption to refiners in countries like Germany.

Every day Russia transports around a fifth of its oil exports - or one million barrels - through Belarus, mainly to refiners in Poland and Germany.

This will prove interesting. The Belarus tax could make the gas so expensive that Russia's customers might find it more appealing to look elsewhere for supplies. Of course, considering the efforts of Vladimir Putin to consolidate energy companies into his control, it's not a bad idea anyway -- but Belarus's tax may force their hand.

Putin probably didn't foresee this as a potential outcome. He needs the flow of hard currency from the West to continue, and his little power play with Alexander Lukashenko may have jeopardized that. It looks like Belarus may have the last word on the price war after all.

UPDATE: One effect that the Belarussian move has is to make Norway a more economically viable alternative to Russian imports:

It is estimated that one-fourth of the world's oil and natural gas reserves lie hidden away in the Arctic. Some of them lie beneath the ocean floor, in the Barents Sea. At the end of this year, the Norwegian energy concern Statoil wants to begin extracting natural gas in the area.

Getting the resource from the ice desert to central Europe by pipeline would be too expensive. Pipelines more than 3,000 kilometers (1,864 miles) long aren't worth the cost, and the Barents Sea is simply too far away. That's why Europe's first major facility for the liquification of natural gas is now being built on the island off the port of Hammerfest. Once the natural gas has been liquified, it can be shipped all over the world by sea.

The production of so-called "liquified natural gas" (LNG) -- a clear, colorless, non-toxic liquid -- is becoming increasingly important in the energy business. LNG already accounts for a quarter of the global natural gas trade. Qatar, the country in the Persian Gulf that has the world's third-largest reserves, is investing massively in liquification technology, and Algeria, Indonesia and Malaysia are fast following suit. The entire market is expected to grow by about 8 percent a year until 2025 -- much faster growth than is expected from the pipeline business.

Until recently, Western European countries like Germany paid little attention to the trend. But ever since the Russian-Ukrainian dispute over natural gas prices in early 2006 and the more recent rift between Russian gas monopoly Gazprom and Belarus, concern has been growing in Berlin that Germany's dependence on Siberian natural gas reserves has become too great. Now LNG shipments could become one of the most important alternative sources of natural gas.

It may have more than strictly economic attractions, especially if Norway can break Gazprom's grip on the European market. It could interrupt the guaranteed currency pipeline that Putin needs for his consolidation of power in Russia.

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Posted by Ed Morrissey at January 4, 2007 4:51 AM

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