Page 5 - Euroil Week 13 2020

EurOil COMMENTARY EurOil
At current prices, the return from investing in the oil industry is far less attractive than it was at $60 per barrel. Wood Mackenzie estimates that around 85% of oil and gas projects will gener- ate less than a 15% internal rate of return (IRR). Meanwhile, 75% of projects will not even cover the cost of capital, assumed at 10%.
European majors have got more involved with clean technologies in recent years, plough- ing a combined $10bn into solar, wind and other renewable energy sources. This investment is a mere fraction of what they have spent on oil and gas, however, accounting for only 5% of their total capital expenditure.
At $60 per barrel oil, Wood Mackenzie calcu- latesthatrenewablessuchaswindandsolaronly provide an average IRR of 5-10%, which is less than the double-digit returns of some oil and gas projects, despite the much lower technical and commercial risk of renewables. But following the sharp decline in oil prices the tables have turned and renewables are a more attractive bet.
“Once the dust settles and market forces establish the price of oil, the sector will be better placed to make long-term strategic decisions, including potential diversification into renewa- bles,” Wood Mackenzie predicts. “The fact is that the energy transition is here to stay. If anything,
pressures to commit to net zero carbon will intensify.”
The problem is that oil and gas firms will be contending with weakened balance sheets, making it harder for them to finance merger and acquisition (M&A) moves into renewables.
“As of now, only companies with strong financials will be able to look at the ‘big picture’ and move to capture opportunities in the fast- er-growing zero-carbon energy,” Wood Mac- kenzie says. “The five European majors have committed to spend just over $5bn per year between them on zero carbon technologies in the near term. This represents around 9% of their planned [pre-crisis] upstream development budgetoutto2022.”
While spending cuts may cause the emissions reduction drive to lose momentum in the nearer term, pressure on oil companies from investors, regulators and consumers to keep their green commitments will only grow.
“Diversification into clean energies could ensure the long-term survival of oil and gas com- panies that embrace change,” Wood Mackenzie says. “Meaningful carbon mitigation strategies could help win back increasingly disenfran- chised investors and help retain and recruit much needed new talent.”™
PIPELINES & TRANSPORT
Russia may start importing fuel amid slump in European prices
RUSSIA
European prices are at a significant discount to Russian ones.
LOCKDOWN measures have caused gasoline prices in Europe to slump significantly below those in Russia, encouraging the latter to start importing supplies from the continent, Kom- mersant reported on March 31.
Gasoline in Russia costs at least RUB6,000- 8,000 ($76.90-$102.50) per tonne more than in Europe, the newspaper said. AI-92 and AI-95 gasoline on the St Petersburg International Mer- cantile Exchange (SPIMEX) cost RUB41,500 and RUB43,000 per tonne on March 30, down 3% and 4% respectively, according to Reuters. But taking into account taxes and the current ruble rate, imported gasoline in European Russia cost only RUB37,000 per tonne.
European gasoline prices have fallen 59% since the end of February, Moscow-based VTB Capital estimates, in line with a 55% decline in oil prices and weak demand as a result of lockdowns. Meanwhile Russian wholesale prices have dropped by only 27%, resulting in a premium.
Kommersant said the disparity was partly caused by a damper mechanism in Russian oil
taxation, which compensates producers for sell- ing fuel domestically when oil prices are high. When prices are low, as they are now, produc- ers must pay extra tax on sales, propping up domestic fuel prices and making imports more attractive.
“The dramatic drop in crude prices has turned the damper mechanism from a subsidy to oil companies into a payment to the govern- ment,” VTB said in a research note on March 31.
Current European gasoline prices imply a $217 per tonne damper payment, according to the bank, and the mechanism is based on a fixed ruble-denominated threshold that was also raised by RUB5,000 per tonne in 2020.
“This means that the damper payments do not depend on actual domestic wholesale prices,” VTB said, preventing oil companies from reduc- ing domestic wholesale prices any further.
Gazprom Neft is likely to suffer the most under these conditions, as it is most exposed to the domestic market, the bank said, whereas Sur- gutneftegaz is likely to suffer the least.™
Week 13 02•April•2020 w w w . N E W S B A S E . c o m P5