Yamal-Europe-2: How big is the shortfall for Belarus?

Yamal-Europe-2: How big is the shortfall for Belarus?

Russian President Vladimir Putin instructed on April 3 state-run gas giant OAO Gazprom to return to work on a plan to build a second line for the Yamal-Europe gas pipeline project as he met with OAO Gazprom CEO Alexey Miller. It is planned that the second section of the Yamal-Europe gas pipeline will boost Gazprom’s export supplies and “improve security of energy deliveries to Poland, Slovakia and Hungary,” which will all be interested in the implementation of the project.

Furthermore, Miller said that a second pipeline would cut operation costs to deliver gas to Europe, as it is planned that the second line would begin in Belarus, where Gazprom already owns pipeline infrastructure following the acquisition of the Beltransgaz gas transport system. Put simply, Yamal-Europe-2 is designed to make natural gas supplies to Europe faster, simpler and cheaper. The new line will have a capacity of 15 billion cubic meters of natural gas per year, “based on market analysis;” and is due in 2018-2019.

Two days later, on April 5, Alexey Miller and Miroslaw Dobrut, Director General of EuRoPol GAZ, inked a Memorandum of Understanding, which envisions the implementation of the Yamal-Europe-2 project with a feasibility study for the project expected to be available within six months.

The map of Russia’s gas transport system in Eastern Europe. Yamal-Europe-2 is represented by a dotted line

Some analysts remain openly skeptical about the project, citing its economic inefficiency for Russia and wrong time and place. Stuart Elliott, analyst at Platts, called the new pipeline project illogical and surprising on a number of levels. First, the idea seems to contradict Gazprom’s own recent strategic decisions, namely, to shift its focus to the East. Second, European demand for gas has dwindled since the 2008 global financial crisis, and European consumers have voiced their intention to diversify gas imports and reduce their dependence on the Russian trader. Finally, heavy injections in the construction of a new pipe will bring about hikes in Gazprom’s expenditures, given its already vast pipeline investments in the South Stream and Nord Stream projects.

Other experts believe that the main reason behind the plans to revive the gas pipeline project is Gazprom’s intention to shed its dependence on the Ukrainian gas transport system and is primarily an instrument of political pressure. (There is some economic logic, though—Yamal-Europe-2 will be approximately 500 kilometers shorter than the gas route via Ukraine).

However, using a narrower context, we should ask whether Belarus could benefit from a new Yamal-Europe-2 pipe, given plans to engage Belarus in the delivery of additional gas volumes. If not, will the new pipeline project strip Belarus of any benefits?

Unfortunately, the latter is more likely; however, this is not associated with the construction of the pipeline itself, but the transit losses of Belarus after it sold Beltransgaz. Payments of transit fees are governed by a separate agreement between the Government of the Russian Federation and the Government of the Republic of Belarus, and the transit duty applied to Russian gas supplies is unambiguously construed as “payment for OAO Beltransgaz services to transit natural gas via the territory of Belarus.” In other words, Gazprom is paying its own subsidiary for gas transit, whereas the state budget of Belarus gets nothing.

But how big is this shortfall?

The Belarusian section of the existing Yamal-Europe pipeline is 575 kilometers long. The transit rate applied to the Beltransgaz pipeline is USD2 per 1,000 cubic meters transported over 100 kilometers and is subject to adjustments depending on the inflation rate (i.e. it will be growing). It can easily be calculated that the transport of 1,000 cubic meters of natural gas by the 575-kilometer Belarusian section costs USD11.5, so if Yamal-Europe-2 indeed increases gas deliveries to Europe by 15 billion cubic meters annually, the Belarusian state budget will be short of USD172.5 million worth of transit duties every year.

Anyway, there are some benefits in store for Belarus.

In 2012, Yamal-Europe pumped 44.3 billion cubic meters of natural gas, and a 30% increase in the pipeline capacity will likely call for a modernization of the gas transport system. Further, the Belarusian gas transport system does not have a connection to the Polish border, meaning that the pipe will have to be extended. This implies major investments in the Belarusian economy, additional tax payments and new jobs.