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Wikileaks shows value of oil refining for Belarusian economy

Below is the full version of the document provided to the online Naviny.by newspaper by representative of the WikiLeaks media organization Israel Shamir.

11/16/2005 14:20 UNCLAS MINSK 001391 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EPET, ENRG, ECON, ETRD, BO SUBJECT: Mozyr Refinery Highly Profitable Refs: (A) Minsk 614, (B) Minsk 1365

1. (SBU) Summary: Belarus has two oil refineries, in Mozyr and Novopolotsk. The GOB owns the Novopolotsk refinery and 43% of the Mozyr refinery, but is trying to take ownership of another 12% from an employee association. The Mozyr Oil Refinery (MOR) can refine 10 million tons of oil per year. As it approaches the end of 15 years of modernization, MOR expects to be able to refine 16 million tons shortly. MOR imports almost all its crude from Russia at reduced Russian domestic prices, and sells it westward at world prices. This earns MOR and the GOB hundreds of millions of dollars each year, and likely contributes millions more to Lukashenko's off-budget accounts. MOR's director admitted it would be technically possible, but economically unlikely, to import Caspian crude through Odessa-Brody. End summary.

2. (U) On November 3, Ambassador toured the Mozyr Oil Refinery (MOR), located in southeastern Belarus (ref B), and spoke with General Director Anatoly Kupryianau. Kupryianau explained the basics of the refinery, ongoing modernization, and import and export patterns. The Mozyr Oil Refinery is one of two Belarusian refineries; the other is located in Novopolotsk. [Comment: Naftan, the Novopolotsk refinery, is 99.8% owned by the GOB, and in 2004 refined 8.8 million tons of oil.]

Production

3. (U) The refinery began multi-stage reconstruction in 1994, and has invested USD 400 million in modernization in the past ten years. In 2004 the plant finished the fourth stage of reconstruction, which included installation of a catalytic cracking unit, a sulfur production unit, and a sour water stripper. As a result MOR is capable of refining up to 9.6 million tons of petroleum products annually. When the reconstruction ends, scheduled for 2009, MOR plans to be able to refine 16 million tons annually. For 2004 the refinery's output was divided as follows: Diesel Fuel 31.3% Fuel Oil 29.2 Gasoline 22.7 Other 5.4 Vacuum Gas Oil 4.3 Heating Oil 3.9 Oil Bitumen 3.2

4. (U) Because of its latest upgrades, the refinery boasts that the quality of its products is increasing. As of 2004, all of the diesel they produce meets Euro 4 standards. After installation of the catalytic cracking unit in 2004, MOR's output of high-octane gasoline (RON 92 and 95) increased to 75% of all gasoline produced. The refinery expects to finish its fifth stage of reconstruction, installation of an alkylation complex and a benzene recovery unit, in June 2006. Kupryianau explained this means MOR's gasoline will meet European Union standards. In third quarter 2006 MOR expects to be able to add ecological agents to its gasoline, allowing them to sell to the U.S. market.

A Very Profitable Business

5. (U) In 2004 the Mozyr refinery processed 9.618 million tons of feedstock. Of that amount, the refinery itself owned 3.662 million tons (38%). The other 5.956 million tons (62%) was owned half by Slavneft and half by Lukoil. Kupryianau said that even though the majority of MOR's activity was refining Russian-owned crude, this service only contributed six percent to its total profits. The vast majority of profit, 94% in 2004, came from selling the refined product MOR itself owned. MOR purchases this oil at Russian domestic prices and sells it westward at world prices. While MOR buys crude in Russia, it does not have any sales agents abroad and so sells its refined product at the Belarusian border (see para 9).

6. (U) In 2004 the refinery earned BYR 286 billion [USD 133 million] in net profit, twice what it earned in 2003. Kupryianau explained that profits have risen sharply in recent months, as world oil prices have been high. Press reports confirm this will be a very successful year for Belarus' refineries; in the first half of 2005 MOR earned BYR 252.4 billion [USD 117.4 million] in profit, three times what it did in the same period in 2004. This business is very profitable for the GOB, which collects nearly 43% of the profit, based on its ownership of the plant (see below). In addition, the GOB collects 24% of gross profit in taxes (USD 42 million in 2004). Additionally, MOR paid BYR 1.98 in dividends in the first half of 2005, netting the GOB another USD 400,000. During the same period the refinery brought USD 662 million in hard currency to Belarus.

7. (SBU) [Comment: The above profit numbers are all based on officially released information, which seems to understate MOR's profit. Back-of-the-envelope calculations show the refinery likely makes much greater profits. From January through July MOR refined 5.8 million tons of crude. They paid an average of USD 190 per ton to Russia for the oil, and sold each ton for an average price of USD 325.7, for a gross profit of USD 787 million. Belarus' National Academy of Sciences told Econoff that figures on per ton refining costs are classified. Regardless, it seems probable the refinery earned more than the official data shows, lending credence to rumors that Lukashenko makes money from oil refining for his off- budget funds. End comment.]

Sources and Transport/Odessa-Brody

8. (U) Belarus has limited reserves of oil, mostly found in the Gomel region near Rechitsa. The GOB annually extracts roughly 1.8 million tons of oil, all of it processed by the Mozyr refinery. MOR also receives oil from Russia through the Druzhba pipeline, and by rail from Russia. In the first ten months of the year MOR imported 275,383 tons of oil from Russia by rail.

9. (U) Kupryianau explained that by agreement with the Council of Ministers, MOR must sell 30% of its output domestically. MOR exports the rest of its product, mostly through the Druzhba pipeline. This pipeline splits at the refinery, with one branch going west to Poland and Germany and one south to Ukraine and Hungary. By cost, 15.5% of MOR's exports go to CIS countries and 84.5% to "far foreign countries." MOR exports 40% of its diesel fuel to the Baltic States by rail, and ships smaller amounts to Poland and Ukraine. Kupryianau stated Ukraine is a very strong potential market for MOR, as Kiev is closer to the refinery than is Minsk and Ukraine has no refineries that can compete with MOR. Kupryianau hopes to begin selling gasoline to Russia. He argued that lack of modernization of Russia's refineries, and the sharp increase in cars, make Russia a very lucrative market.

10. (U) In response to Ambassador's question, Kupryianau opined that it would be technically possible for MOR to import Caspian crude through the Odessa-Brody-Druzhba pipeline. However, he thought the economic factors, especially the higher price of Caspian crude, would make this unlikely.

GOB Exerts Control over the Refinery

11. (U) The Mozyr Oil Refinery was founded in 1975. In 1994 it was registered as a joint stock company. Current owners are: the Belarusian Ministry of Economy, 42.757%; Russia's Slavneft (itself owned by Gazprom), 42.581%; refinery employee corporation Mozyr Refinery Plus (MNPZ), 12.252%; and individual shareholders, 2.41%. MOR is controlled by a board of twelve members, five from the GOB, five from Slavneft, and two from MNPZ.

12. (SBU) Shortly after Ambassador's trip to Mozyr, independent economic press in Belarus reported on a conflict between the GOB and MNPZ. MNPZ consists of 2,235 current refinery employees and 700 retirees, and was created in 1995. [Note: MOR has 3,781 employees, so a majority belong to MNPZ.] In January the GOB, claiming MNPZ owed USD 4.7 million in unpaid Soviet-era debt, used the Golden Share mechanism (septel) to take over temporary management of MNPZ, even though this violated the Golden Share law. [Note: MNPZ has never been state owned, and therefore the Golden Share should not have been used against it.] The GOB is trying to gain ownership of 98% of MNPZ in exchange for dropping the debt claim. In response, MNPZ has offered to sell four percent of their company, which they claim would raise USD 5 million, to pay the debt. If the GOB does gain a majority stake in MNPZ, which seems likely, it would control a majority of the refinery.

13. (SBU) In the meantime, the GOB, through the control it gained from the Golden Share, is forcing MNPZ's board members to vote with the GOB's board members. In the latest example, on October 28 MOR's board voted to invest USD 112.6 million to construct a facility that would produce 120,000 tons of paraxylene annually. Slavneft voted against, as paraxylene production would reduce the output of high-demand light petroleum products. The GOB supported, and forced MNPZ to do so also. MNPZ issued a statement saying it opposed this plan, but had been ordered to vote for it by Gomel Oblast authorities.

Comment

14. (SBU) Oil refining is one of the bright spots of the Belarusian economy. Timely investment in its two refineries and the great good luck of being able to buy Russian crude at vastly discounted prices have combined to earn the GOB hundreds of millions of dollars annually. This has put Belarus in the unlikely position of being an oil importing state that benefits from high oil prices. Independent economists, the IMF and the World Bank all credit high oil prices with much of Belarus' current economic growth. One credible economist estimated 94% of Belarus' GDP growth is due to high oil prices, either directly through profits on refining and transporting, or indirectly based on increased Russian demand for Belarusian products from Russia's own oil profits. This estimate is likely high, but illustrates the value oil has for the Belarusian economy.

KROL