Page 5 - FSUOGM Week 45

FSUOGM COMMENTARY FSUOGM

Russian President
Vladimir Putin and
Saudi Crown Prince
Mohammed bin
Salman. OPEC+ are
discussing a potential
change in policy.

30mn tonnes (220mn barrels). years, but that gives them enough time to pro-
This trend will continue, as more and more vide shareholders with generous reverse mort-
fields in Russia’s well-developed basins reach gage take-outs,” VTBC said.
exhaustion, forcing producers to turn to increas- However, Russian companies will still likely
ingly challenging projects in remote areas to endure “an unpleasant struggle for the low-cost
keep output stable. This in turn will drive up producer market share,” according to VTBC.
costs, and in current market conditions, some Some like BP have forecast that oil demand
of the more ambitious ventures will simply be may never again reach pre-pandemic levels,
unfeasible. while others like the International Energy
One answer is for the government to provide Agency (IEA) are more bullish, predicting
more support for the industry. But it is going growth until at least 2030. In any case, the pan-
in the opposite direction. Russian lawmakers demic and decarbonisation efforts will result in
have passed a new tax bill that strips producers Russian oil production achieving lower numbers
of many of the tax concessions they previously than earlier projected.
enjoyed at challenging projects. Hardest hit have As long as OPEC+ restrictions are in place,
been Lukoil and Tatneft, although they are nego- Russian upstream activity will be muted. Even
tiating to get some of the support back. before the COVID-19 crisis, the government
Despite the bearish market outlook, the gov- forecast that national oil production would
ernment is unlikely to reverse course on these remain either flat or decline in the coming years.
changes, as it needs extra receipts to fund its The country’s new energy strategy, approved in
massive social obligations in order to maintain April but drawn up last year, sees average liquids
approval ratings and avoid popular discontent. output of 11.15-11.25mn bpd between 2020 and
However, the impact of reforms may have been 2024, versus 11.25mn bpd in 2019. It is then pre-
overstated, VTB Capital (VTBC) argued in a dicted to drop to 9.84-11.05mn bpd between
research note on November 3, forecasting a 2025 and 2035.
resulting loss of only $1.7bn in 2021 EBITDA Prospects for Russian gas are much stronger,
among Russia’s leading oil firms. for multiple reasons. Under the current strat-
egy, supply is expected to rise from 790bn cubic
Decarbonisation challenge metres last year to 985-820 bcm annually by
Another threat to Russian oil comes from an 2024 and 860-1,000 bcm by 2035. This growth
increased global push to decarbonise. Govern- will be driven by new Arctic LNG supply coming
ments across the world have put in place tougher on stream, mainly at Novatek projects.
targets to reduce their emissions, weighing down Unlike oil, gas production is under no restric-
on long-term prospects for oil demand. Interna- tions, and even condensate, often produced as
tional majors have responded by investing in a by-product at gas fields, is exempted from
alternative energies including renewables, and OPEC+ quotas. Gas output is also unaffected by
even announcing targets for scaling back oil recent tax reforms.
production. There is also a much stronger case for gas in
Even so, VTBC notes that Russian producers the energy transition, as it can reduce emissions
have something of a “vaccine” to global decar- by replacing dirtier fuels such as coal and oil in
bonisation. “Russian oils are not under such power generation and heating. The IEA sees con-
financial and public pressure around greenhouse sumption potentially surging by 15% by 2030
gas [GHG] emissions,” the bank explained. and 30% by 2040, reaching 5.22 trillion cubic
Russian firms have the advantage of being metres. Demand for gas was also more resilient
more GHG emission-efficient than many of than for coal and oil during coronavirus-related
their peers. Furthermore, they do not have to lockdowns, although Gazprom bore the brunt of
buy emissions permits and “spend billions in reduced consumption in Europe this year. Gas
self-distracting capex.” prices have also seen a more stable, albeit later,
“This might mean a sorrowful end in 30-50 recovery compared with oil prices. ™

Week 45 11•November•2020 www. NEWSBASE .com P5