Tuesday, May 22, 2007

Russia Diversifies its Distribution Network: Beltransgaz

Over the past few days Russia in the face of its energy monopoly Gazprom has taken significant steps into mitigating its Belorussian partner as a threat to energy supply delivery into Europe. As Kommersant reports:

Gazprom has at last signed the contract for acquiring 50 percent of Beltransgaz shares. Thus, the monoploy gained access over the main pipelines thru which one fourth of Russia's natural gas is exported. The contract is the fruit of 13-year-long complicated negotiations. Gazprom decided to maximally hedge itself, stipulating that disputed be solved in a foreign arbitration court. Due to this condition, signing the contract nearly fell thru on Friday. Yet, experts believe that Belarus authorities still have the levers of pressure on the Russian monopoly.

The deal is worth $2.5 billion and the stock ownership will be transferred to Gazprom over a period of four years in four equal installments, further prolonging the sale process. Despite the contract being agreed upon after this New Year's standoff between the two sides over gas prices the details were only finalized now. The stake in Beltransgaz was the long sought prize by Russia, which felt it deserved for the long years of almost unconditional support for the Belorussian leader, largely unwanted in the West and claimed to be leading the last totalitarian regime in Europe by the US.

The tensity of the deal reached is highlighted by the fact that the resolution of legal disputes in the future was the leading stumbling block of the negotiation process. Despite many analysts claiming that Belarus has the ability to use methods that Russia is now using against Western oil companies and take away the asset in case of conflicts with Russia, the signing of the deal today, when relations between the two countries are rather cool, proves a very important point. Despite the pipelines going through Belarus being strategically important to Europe, President Lukashenko is not wanted in Europe, and has no other options that to make deals with the Kremlin and criticize the Russian government in public to maintain a level of credibility in the nation.

In a second move, this time to diversify its energy supply routes, the Russian government has ordered its energy ministry and state-owned Transneft to construct the second branch of the Baltic Pipeline System that is set to bypass Belarus in the transfer of energy supplies to Europe. The project value set to be at $2.5 billion will ensure the transfer of anywhere from 50 to 75 million metric tons of oil annually, with construction taking 18 months. Despite Russia's claims that the old Druzhba pipeline will be used to pump oil into Europe, analysts cited by Kommersant said that keeping intact two identical pipelines is economically unsound, and most likely oil supply transfer through Lithuania and Belarus via the Druzhba pipeline will be shut down in the years to come.

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