Riga, Latvia (Platts)--14Nov2012/731 am EST/1231 GMT

Officials in the Baltic countries of Latvia and Lithuania believe the economic recovery in the region could stall if Belarus realizes a plan to shift transit of goods -- specifically oil products -- from the landlocked nation away from the ports of the Baltic states and towards Russian ports.

The plan, hatched by Belarus President Alexander Lukashenko, could cut oil product shipments at the Lithuanian port of Klaipeda by as much as 200,000 mt/month, and by a significant amount at the Latvian port of Ventspils, through which some 12 million mt/year of cargo transits.

Business at both ports is already declining, as Russian oil companies use newly built pipelines, such as the Baltic Pipeline System, to bypass transit countries and instead ship crude and oil products to Russian ports.

Shipments of petroleum products from Belarus helped keep both Baltic nation oil ports alive, after Russia shut down crude oil pipelines to Latvia in 2002, and to Lithuania in 2006.

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Andris Maldups, head of the transport policy department at Latvia's Ministry of Transport, said this week that the loss of Belarus' transit business could cost the country Lats 640 million ($1.16 billion), or around 5% of GDP.

The major cargoes are oil products and potash fertilizer from Belarus, and coal from Russia.

"This announcement came as a surprise, because we have very good relations at the moment with Belarus," Maldups told Platts in an interview.

"Only three weeks ago we had the meeting of the Latvian-Belarusian Intergovernmental Commission where both sides agreed to expand cooperation in transit," he said.

Ilze Nagla, spokeswoman for Ventspils Nafta, refused to disclose how much of the company's roughly 12 million mt/year of oil product transshipment is sourced from Belarus.

But it is believed that the majority of production from the Belarus Novopolotsk refinery transits Ventspils via the existing 5 million mt/year capacity Polotsk-Ventspils oil products pipeline, with additional volumes of oil product arriving via rail from both Belarus and Russia.

President Lukashenko's announcement may have stemmed either from a desire to boost relations with Russia, or to punish EU countries for leveling sanctions against Belarus earlier this year, Maldups said.

BELARUS-RUSSIA RELATIONS

Minsk is keen to improve relations with Russia, which recently threatened to reduce the volume of crude delivered to Belarus refineries in a dispute over customs paid on oil products made from Russian crude but exported West by Belarus.

Because the two countries have a customs union, Belarus buys the crude from Russia duty-free, but is supposed to pay Russia additional funds when it exports the refined product.

However, Russia this year accused Minsk of avoiding some of these payments by using schemes such as labeling oil product as solvent. It threatened to reduce crude supplies in retaliation.

Lukashenko's latest comments could be an olive branch to help put the dispute behind them, Maldups said.

Pavel Lyogky, chief spokesman for the Belarus leader, said the president made the comments Friday during a meeting in Minsk with Alexander Drozdenko, governor of the Russian Leningrad province, where the country's Baltic Sea ports are located.

"We took a principled decision to re-orientate large volumes of cargo... from the ports of the Baltic states to [Russian] ports," Lukashenko was quoted as telling Drozdenko by Belpan, a Belarus news agency.

"We need to very seriously attempt that theme... We need to discuss it with the railway companies of Belarus and Russia and quickly realize agreements."

The Belarus president's comments seemed to be confirmed by Marina Kostyuchenko, press secretary at Belneftekhim, the state-owned oil company, who said her company was currently investigating the economic viability of alternative transshipment options.

"There is a customs union with Russia and we are in discussions with various authorities there, and in the Leningrad province on transport logistics," she told Platts this week.

"If it turns out cheaper to transport oil products through Russian ports than through Latvia, we will take that option."

LITHUANIAN SPAT

Maldups said even though the distance from Belarus to the Russian part of the Baltic Sea was greater than the route via Latvia and Lithuania, the cost was "probably" not significantly higher.

He said the Latvian government would adopt a "wait and see" approach, since Belarus had made similar threats to shift cargo transshipments in the past but failed to follow through in practice.

However, he said it was also possible that Lukashenko's comments stemmed from Minsk's current dispute with the Lithuanian oil transport company, Klaipedos Nafta.

Officials from Belarus in September confirmed they were considering shifting transit of oil products away from Klaipeda to competing ports, after state-controlled Klaipedos Nafta announced in August it would ditch its contract with Belarusian oil trader Transkhema and sign a new contract with Lukoil-owned trader Litasco.

Tomas Kersis, commercial director at LitRail, told Platts in an interview in October that, as a result of this commercial dispute, volumes of oil products transported via rail to Klaipeda totaled just 23,000 mt in the first 15 days of October, well down on previous levels.

Diplomatic relations between Minsk and Vilnius have been tested recently.

Officials from the two countries have clashed this year over Lithuanian concerns about the safety of Belarus' nuclear project, and water levels in key rivers.

--Ben Seeder, newsdesk@platts.com
--Edited by Alisdair Bowles, alisdair_bowles@platts.com

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