US embassy cable - 05MINSK1391

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