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Oil line to Europe is cut off

A spat between Russia and Belarus over taxes leads to the shutdown. Talks are to begin today.

January 09, 2007|David Holley | Times Staff Writer

MOSCOW — A dispute between longtime allies Russia and Belarus over oil taxes escalated Monday, leading to a cutoff in the flow of crude oil through a pipeline serving European customers.

Officials in Minsk, the Belarusian capital, issued conflicting statements as to whether Belarus had intentionally cut off the flow of oil through the Druzhba (Friendship) pipeline, which crosses Belarus to link Russia and the European Union. Later in the day, Russia said it had stopped supplying oil to the pipeline, blaming Belarus for the move.

"I would like to stress that Belarus was the first to suspend the transit of Russian oil intended for third countries via its territory," Andrei Sharonov, Russia's deputy trade and economic development minister, said in an interview with Vesti-24 television. "Russia moved to suspend supplies to Belarus in response."

The incident reignited a debate about the reliability of Russia as an energy supplier. The European Union relies on Russia for about 40% of its natural gas imports and about 30% of its oil imports. Russia is the world's largest exporter of natural gas and the second-largest oil exporter, after Saudi Arabia.

News of Monday's pipeline shutdown initially drove oil futures higher in New York and London as traders worried about energy shortages. But the rally couldn't be sustained on the New York Mercantile Exchange because warm weather in the U.S. has put a damper on demand for petroleum products, and crude for February delivery closed Monday at $56.09 a barrel, off 22 cents. In London, the European benchmark Brent crude fell 4 cents to $55.60 a barrel.

"We have much more of a cushion in crude and gasoline supplies than we had last year after the hurricanes in the Gulf [of Mexico]. That cushion is offering a little bit of a buffer to these stories," said Phil Flynn, vice president and senior market analyst for Alaron Trading Corp. in Chicago.

The oil dispute was triggered by Russia's new customs duty of $180 per metric ton on oil exports to Belarus. The tax took effect Jan. 1. Belarus retaliated by imposing a charge of $45 per ton for oil shipped through the pipeline to the European Union, which Minsk initially called a customs duty but now describes as a transit fee.

The oil dispute erupted immediately after Moscow and Minsk worked out a last-minute New Year's Eve deal ending an argument over natural gas prices. Belarus yielded to a Russian demand to pay in the new year slightly more than double the 2006 price. Belarusian officials had expressed unhappiness with that deal, which averted the threat of a midwinter disruption of gas supplies to European customers.

Despite the significant price hike, Belarus still receives Russian natural gas for less than half the amount charged to other European Union customers.

The natural gas standoff in late December resembled a pricing dispute a year earlier between Russia and Ukraine. In that case, failure to reach a contract by Jan. 1, 2006, led to a brief disruption of gas supplies to European Union countries

Officials in European capitals expressed concern Monday about the oil cutoff but said there was no immediate risk to sufficient energy supplies in the European Union. The pipeline delivers 20% of Germany's yearly oil supply, but Berlin was not panicked: The winter has been mild, and officials said the country had 130 days' worth of reserves.

"I view the closure of the important Druzhba pipeline with concern," German Economics Minister Michael Glos said. "I expect the deliveries through the pipeline to resume completely as soon as possible."

Crude oil shipped through the pipeline is refined into products such as gasoline and heating fuel. The current Russia-Belarus spat over oil has resulted in European politicians calling for less reliance on Russian oil and gas.

Guido Westerwelle, chairman of Germany's Free Democrats, said Monday that the new dispute demonstrated a need for his nation "to get more independent from foreign energy supplies."

"It would be much more sensible if we would have a mix of energy resources," Westerwelle said. "This is not only an ecological or economic question. It is also an issue of foreign relations, which would make us more independent and less subject to blackmail."

Belarus and Russia accuse each other of violating bilateral economic agreements on duty-free trade by instituting the new charges on oil. Semyon Vainshtok, head of the state-owned Russian oil pipeline monopoly Transneft, accused Belarus of siphoning off oil illegally.

Belarusian President Alexander G. Lukashenko has been widely criticized in the West as "Europe's last dictator," and he has been heavily dependent on economic and political support from Moscow.

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