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2.3 Urals premium price to Brent mean Russian companies lose money
The Urals premium to Brent touched $2.71/bbl at the start of July, but, in our current reality of transverse meanings, even higher oil prices seem to have negative consequences for oil companies. Due to the specifics of taxation, currency regulation and other issues, the positive Urals-Brent spread is negative for vertically integrated Russian oils. Tatneft is the only exception. We believe that Gazprom Neft would suffer most.
Limited Urals supply drives premium. The Urals premium to Brent since May has largely been driven by declining Russian crude supplies due to OPEC+ restrictions (8.5mmbl/d quota effective for May-July), with, which Russia is in compliance (see Morning Comment – 2 July). The logistics of European refineries, which actively use Urals, also matters here. While Urals trades at a premium, for better quality oils (e.g. ESPO, Novy Port), the premium to Brent did not tangibly change. We believe the premium valuation of Urals will remain for a while, affecting Russian oils’ financials.
Budget positive. The Russian budget benefits from the higher Urals quotes (Russian Oil and Gas – Weekly Oil Flow, of 29 June) as the revenue-based taxes are Urals-linked. A $1/bbl premium to Brent provides $1.7bn of additional taxes paid by the Russian oil companies, we calculate.
Russian oils lose. It might seem counterintuitive, but Russian oil majors are indeed in a detrimental position, losing money due to the Urals premium. The domestic upstream segment benefits for obvious reasons, but downstream must pay a higher crude price, while domestically, oil products remain stable and export pricing is mostly driven by cracks to Brent (Figures 2-5). However, the ruble is sensitive to Urals, which leads to higher transport and other costs (if denominated in dollars) and an increase in the damper tax. As a result, on average, Russian oils, being integrated, lose some $0.52/bbl of EBITDA due to the present Urals/Brent premium (compared with parity).
11 RUSSIA Country Report August 2020 www.intellinews.com
