Page 4 - FSUOGM Week 45

FSUOGM COMMENTARY FSUOGM

Russian producers face

difficulties ahead

Russian producers are contending with output restrictions as well as

difficulties replenishing reserves in current market conditions

RUSSIA RUSSIAN producers will shortly report their no reason for Russia to change course now, but
financial numbers for the third quarter, with said it was possible that the producers’ group
WHAT: their results likely to trend with those of their might maintain or even deepen cuts at the start
Russia's oil majors are international counterparts. of 2021. Top executives at Russian producers
set to report Q3 numbers The world’s largest oil companies by and large held talks with Russian Energy Minister Alexan-
that trend with those reported improved earnings in Q3 compared der Novak on November 2 to discuss a potential
of many leading oil with Q2, aided by a recovery in fuel demand and change in policy.
companies. the absence of large impairment charges. But
unsurprisingly, their numbers were still much Replenishing supply
WHY: weaker than a year earlier, owing to coronavirus' Like their international peers, Russian produc-
Russian producers have (COVID-19) impact. ers have been forced to cut spending on explo-
had to cut production Russian oil firms have generally fared better ration, and this will have serious consequences
and exploration spending, than many, thanks to their low costs. Devalua- for the sector in the longer term. Russia’s Natural
creating serious tion of the ruble, which has shed around 20% of Resources Ministry estimates that companies
consequences for long- its worth against the US dollar since the start of will slash their appraisal and exploration spend-
term supply. the year, has served as a double-edged sword for ing by 20% this year to RUB250bn ($3.2bn) in
producers. On the one hand, it has inflated their response to low prices and OPEC+ production
WHAT NEXT: foreign currency-denominated debts, while on quotas.
OPEC+ could opt the other, they have earned more rubles from This reduction in drilling means that Russia
to extend cuts, and exports, while most costs remain the same. will extract more oil than it adds to its reserves
another threat to The impact of the 2014 ruble crash was largely this year, marking the first such shortfall in two
Russian oil comes from negative, as Russian producers were heavily decades. The ministry forecasts that producers
decarbonisation efforts. indebted to foreign banks. But since then they will only report 400mn tonnes (2.9bn barrels) of
have worked to reduce their international debt new oil and condensate reserves this year, versus
and overall leverage, amid sanctions and broader 585mn tonnes in 2019.
tensions with the West. As such, the weakening In October, Energy Minister Alexander
of the ruble this year is mostly a positive. Novak predicted a 10% fall in national liquids
During the previous market downturn, output to 510mn tonnes (10.3mn barrels per
though, Russian oil output continued growing day) this year, primarily because of the OPEC+
to record levels until it was eventually capped cuts.
under the first OPEC+ deal. This time around, Making matters worse, producers will find
Russia has committed to much greater cuts in it difficult to commercialise many of the new
production. discoveries at current low prices. Many of recent
Pressure is mounting on the OPEC+ coa- finds have been discovered in unconventional or
lition to consider dropping its plan to ramp up deep layers at developed fields, or in the Arctic
production next year, as oil demand has been and other remote regions. Only 11 discoveries
stung by fresh COVID-19 restrictions. Russian of conventional oil in developed areas were made
President Vladimir Putin said in October he saw in the first half of this year, amounting to a mere

P4 www. NEWSBASE .com Week 45 11•November•2020