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Russia Oil and Gas Competitive Intelligence Report 2010 charge Lithuania US$320/mcm over 2010. An average realised gas price paid by Gazprom's non-FSS European customers in H110 was just below US$300mcm, with most FSS states paying significantly less. Gazprom argues that owing to the small absolute volumes consumed by the Baltic states, it needs a price premium to make supplying the region worthwhile. Gazprom has managed to keep a presence in all the Baltic markets following the break-up of the Soviet Union and owns about a third of the national gas companies of Estonia (37%), Latvia (34%) and Lithuania (34%). The more Russia-friendly Latvia appears to be content with the status quo for the time being. Its two neighbours, however, have become decisively uncomfortable in Gazprom's grip. The Nord Stream subsea pipeline from Russia to Germany, bypassing the Baltics, has only raised Vilnius and Tallinn's energy security fears. As an alternative to Gazprom's supplies Lithuania is pushing the Amber pipeline project. In its revised form the 5bcm pipeline will link the country with Poland's planned LNG terminal. The Świnoujście terminal is due onstream in around 2015. For the foreseeable future, however, Lithuania's dependence on Russian gas looks solid. The same applies to even greater extent to Estonia. Until the two countries develop tangible supply alternatives, brinksmanship with Gazprom could lead to some long cold Baltic nights. Azerbaijan In March 2009 Gazprom and Azerbaijan's state-owned Socar signed an MoU for the delivery of a minimum of 500Mcm of Azeri gas to Russia a year starting in January 2010. A final binding agreement followed in October 2009. Socar's CEO Rovnag Abdullayev said following the deal that Azerbaijan would export 1bcm of gas to Russia from January 2010. The exported gas will be sourced from the first phase of Azerbaijan's Shah Deniz field. At a later stage, Russia may also import gas from Shah Deniz's second phase. Gas from this project has also been earmarked for the EU-backed Nabucco pipeline project, which is intended to supply Europe bypassing Russia. In January 2010 Gazprom announced plans to double gas imports from Azerbaijan to 2bcm from 2011. Gazprom added earlier in the month that it would be willing to buy 'all gas exported by Azerbaijan'. The Middle East There has been much talk of extending Russia’s Blue Stream pipeline to Turkey further south into the Middle East. In February 2006, Turkish energy ministry officials claimed that talks were under way between Gazprom and Turkish state-run gas distributor Botaş about extending the pipeline through Turkey to Syria, Lebanon, Israel and Cyprus in a project known as Blue Stream II. Speaking during an official visit to Turkey in June 2010 however, Prime Minister Putin said Israel is now likely to be excluded from the Blue Stream II project. Putin said that gas discoveries in recent years in Israel have reduced the country's future gas import projections, making an extension of the pipeline to Israel unnecessary. Putin stressed that the decision was not connected to an attack by the Israeli navy on a © Business Monitor International Ltd Page 17
Russia Oil and Gas Competitive Intelligence Report 2010 Oil Transit convoy heading towards Gaza, which drew international criticism. The attack does appear to have had an impact on Turkey's view of the project, however, with the country's Aksam newspaper citing unnamed energy ministry sources as saying that Turkey's international agreements with Israel, including Blue Stream II, would now be reviewed. The Baltic Region Russian Prime Minister Vladimir Putin signed an order on December 1 2008 for the construction of a second trunk line of the Baltic Pipeline System (BPS). The new line will boost Russia's oil export capacity from the Baltic Sea and will provide an alternative export route to the Druzhba North pipeline that runs from Russia through Belarus and Poland into Germany. Transneft proposed building the new BPS trunkline (BPS-2) in January 2007, and the government approved the project in May 2007. The existing BPS transports oil from European Russia to Primorsk on the Gulf of Finland. Construction was completed in 2001 and current capacity is 1.5mn b/d. BPS-2 will extend 1,300km from the Bryansk region to the port of Ust-Luga, near Primorsk, with a branch going to the Kirishi refinery. Oil should start flowing in Q312 at an initial rate of 600,000b/d, with capacity to be raised subsequently to 1mn b/d. The estimated cost is RUB120-130bn (US$4.3-4.7bn). Construction appears to have been delayed indefinitely from the June 2009 start-up date. Belarus Historically Russian companies were exempt from Russian export duties on oil exports to Belarus. This encouraged the companies to operate with so-called 'give-and-take' contracts, under which they would export duty-free crude oil to Belarus, where they would process it for a fee at the country's refineries before re-exporting it to Europe. In April 2007, however, as part of a general process of phasing out energy subsidies to former satellite states, Russia imposed a limited export duty on crude oil exports to Belarus and insisted that Belarus increase excise tax on oil products. This led to Russian companies ceasing the 'give-and-take' contracts and companies that had participated, such as Lukoil, began selling oil directly to the owner of the country's two refineries, Belneftekhim. Russia briefly stopped supplying Belarusian refineries in January 2010 after the existing supply deal expired without the two sides agreeing on a new framework. Under the expired agreement, Belarus had benefited from preferential oil trading terms with its eastern neighbour, with its refineries paying only around 36% of the standard Russian crude export tariff and then making a healthy profit exporting their refined products to European customers at market prices. During earlier negotiations over the new oil deal, Russia had said that it would provide tax-free oil to Belarus for domestic consumption, but that the country should pay export duties for oil exported to Europe. Belarus argued that this would go against an agreement on a customs union that the two countries signed late in 2009 and responded by demanding higher transit fees for oil crossing its territory. This divergence © Business Monitor International Ltd Page 18
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