Page 9 - FSUOGM Week 17

FSUOGM COMMENTARY FSUOGM
went negative, marking its lowest level since December 1998. Reports emerged that Urals had also slumped into the negative last week. However, VTB Bank and other brokerages concluded that these reports were erroneous. Industry sources also told NewsBase that this was indeed false.
Urals trading has nevertheless been erratic in recent weeks, however. Typically the grade trades at a discount to Brent. Ahead of the new OPEC+ deal on production cuts, this discount to Brent widened to more than $10 per barrel, industry sources told NewsBase, up from a typi- cal $1.5-3.0 in recent years.
This record discount was the result of Saudi Arabia cutting its prices and flooding the market with its rival Arab Light blend in Europe, where Urals is primarily sold. Weak demand in Europe and higher prices in Asia even led to some Urals shipments being rerouted to China.
Since the OPEC+ deal was reached, though, the discount has fallen to just $2 per barrel, sources say, and rarely exceeds $5 per barrel. However, prices remain highly volatile.
Urals was selling for $16.39 per barrel in North-Western Europe on April 24, Argus reports, up 4.3%. It even represented a premium to Brent of $0.20, according to the market data provider. Confirming this, Reuters reported on
April 27 that two Urals cargoes had been sold by Surgutneftegaz for delivery from Baltic ports to Glencore at a $0.50 premium to Brent.
Urals selling at a premium to Brent is not unprecedented, but such trading is usually short-lived.
Impact on producers
Even at Urals’ current low price, Russian produc- ers are able to cover their costs quite comfortably. Moscow-based ACRA Ratings estimates the upstream costs of Russia’s five biggest produc- ers at just $4.7 per barrel of oil equivalent (boe), down from $5.6 last year primarily thanks to the ruble’s depreciation. This does not factor in taxes, transportation and other costs, although the agency estimates that producers can continue generating positive cash flow even with Urals at
$10 per barrel.
Like their international peers, though, Rus-
sian producers will have to make cuts to capital spending. State firms such as Rosneft and Gaz- prom Neft will face pressure from the govern- ment to do so to protect dividends – a valuable source of budget revenues. However, these pro- ducers could successfully argue that continued investment is needed to expand maintain and expand production when markets recover, at the short-term cost to the state. ™
PIPELINES & TRANSPORT
Gazprom pipelayer in English Channel
EUROPE
The Akademik Cherskiy appears to have traversed the globe
to complete the Nord Stream 2 pipeline.
THE Gazprom-owned Akademik Cherskiy pipelaying vessel, which Russia has said will be able to finish the sanctioned Nord Stream 2 gas pipeline to Germany, is now in the English Channel, shipping data shows.
The ship left the Russian Far East in mid-Feb- ruary and has since travelled via Southeast Asia and around the Cape of Good Hope, before mov- ing northward up Africa’s west coast and around Europe. During this journey it has changed its stated destination multiple times.
Data provided by vesselfinder and marine- traffic shows that the ship was passing the Chan- nel Islands on April 26.
The Nord Stream 2 was originally due to have been completed before the end of 2019, enabling Russia’s Gazprom to pump an extra 55bn cubic metres per year of gas under the Baltic Sea to northern Germany. However, construction fell behind schedule because of Denmark’s delay in issuing the necessary permits for the section of the pipeline running through its waters.
The US then slapped sanctions on the pro- ject in December, forcing Swiss contractor Allseas to halt pipelaying activities. Only 6% of Nord Stream’s offshore portion remains to be finished.
Before Washington targeted the pipeline, Russian Energy Minister Alexander Novak
suggested the Akademik Cherskiy could be used to finish its construction if international contractors were unable to do so. However, nei- ther Gazprom nor the Russian government has confirmed that this will be case.
Interestingly, the Akademik Cherskiy’s current destination is now Nakhodka, the same port in the Russian Far East that it left in mid-February.
Nord Stream 2 will enable Gazprom to tran- sit less gas via Ukraine and potentially increase overall shipments to Europe, consolidating its position as the continent’s main supplier. Rus- sian President Vladimir Putin suggested in December that the pipeline would be ready to operate in either late 2020 or early 2021. Pipe- lines of this size would normally take around nine to 12 months to reach full capacity.
The European gas market is currently reel- ing from the effect of coronavirus (COVID-19) lockdowns, and this has had a major impact on Gazprom’s sales. Gazprom cut its gas produc- tion by 10% year on year in the first quarter to 123.7 bcm, data published by the Russian energy ministry’s CDU-TEK unit indicates. The com- pany has stopped reporting its monthly exports, although Interfax estimates that its sales to non- CIS countries fell to 13.0-13.5 bcm in March, down from 16.1 bcm a year earlier.™
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