Page 13 - NorthAmOil Week 01 2021

NorthAmOil COMMENTARY NorthAmOil

The number of wells sunk in UK waters more off relatively unscathed, others such as Lukoil,
than halved this year, with exploration drilling Gazprom Neft and Tatneft are reconsidering
seeing the biggest decline. The lull in activity investment plans in light of the changes.
will weigh down on production numbers in the Despite the hardships of 2020, though, Rus-
years ahead. sia’s oil majors have proved more resilient to
The UK government provided support to the the downturn than many of their international
industry in the form of its job furlough scheme peers. The country’s producers have mostly kept
this year but has not offered any tax relief. It has their dividend policy unchanged and some have
also delayed publishing its “transformational” continued buyback programmes, reflecting
sector deal, promised by the UK Conservative confidence in their financial standing.
Party in its 2019 election manifesto, which aims There are concerns in Moscow that Rus-
to support the industry through the energy sia might struggle to reclaim its market share
transition. once OPEC+ cuts are ended. As such, the gov-
Norway, in contrast, provided the industry ernment is looking to provide support for the
with some NOK100bn ($10.6bn) in tax relief in drilling of some 3,000 wells that will remain
June, in a bid to help companies stay afloat and unfinished until the output restrictions are
continue investing. The country’s willingness to lifted. Russia is drawing from the practices of US
provide so much support is hardly surprising, shale companies, which sometimes drill but do
given the major role that oil and gas plays in the not complete wells when oil prices are low, and
Norwegian economy. The incentives package then finish them when prices are higher.
led to a flurry of new investment announce- Azerbaijan and Kazakhstan are more depend-
ments. Many of these projects had been shelved ent on oil and gas for their economic output and
at the onset of the crisis. state finances than Russia. From an operational
Exploration in Norway has also fared better point of view, OPEC+ cuts have forced Azerbai-
than in the UK, in large part thanks to the coun- jan to reduce supply from its flagship Azeri-Chi-
try’s supportive fiscal regime. Norway allows rag-Gunashli (ACG) oil project in the Caspian
companies to deduct almost 80% of their explo- Sea, in additional to smaller fields. Kazakhstan
ration costs from taxable income. has imposed reductions at a number of large
At the same time, Norway also imposed its and medium-sized oilfields, including the giant
own cuts to production this year, in a show of Kashagan and Tengiz sites operated by interna-
solidarity with OPEC+. tional consortia.

FSU: Tighter margins Latin America: Complicating the situation
As members of the OPEC+ alliance, Russia, The year began with OPEC losing ground in
Kazakhstan and Azerbaijan committed to dras- Latin America. On January 1, 2020, Ecuador
tic cuts to their oil production this year. formally exited the group, leaving Venezuela –
Russia alone took over 2mn barrels per day of increasingly moribund, as a result of US sanc-
oil supply offline beginning in May. It restored tions – as the only remaining member in the
500,000 bpd in August and expects to bring a region.
further 125,000 bpd back on stream this month. This departure had little practical effect,
Further increases will be negotiated with its partly because Ecuador had been one of the
OPEC+ partners on a monthly basis. smallest oil producers in the organisation and
Producers have implemented these cuts partly because the subsequent crude price
by closing down older, less profitable wells at crash made a mockery of that country’s hope of
mature fields in Western Siberia and the Vol- boosting output and exports in order to increase
ga-Urals region. They have also delayed growth earnings. Nevertheless, OPEC and its pricing The risk is that
at greenfield projects in the Arctic and Eastern and production policies certainly did affect the
Siberia. The risk is that some mature projects region, as they cut into the revenues of hydro- some mature
may never return to operation, undermining carbon-dependent states such as Mexico. projects may
long-term prospects for Russian oil supply. In turn, Mexico showed itself reluctant to
Russian oil producers boast some of the low- come to the organisation’s aid after the OPEC+ never return
est production costs in the world. But the out- deal lapsed at the end of March. More specif-
put cuts, combined with weak oil prices, have ically, it declined to accept the group’s recom- to operation,
squeezed their margins considerably. mendations on output cuts, saying it could not
During the 2014 oil price crash, the ruble’s afford to rein in production. (This move led US undermining
resulting collapse wreaked havoc on Russia’s President Donald Trump to offer to make up long-term
finances at large. But it also helped prop up Rus- part of the difference.)
sian oil firms’ earnings by inflating the value Meanwhile, the COVID-19 pandemic dis- prospects for
of their exports. This time around, they have rupted Latin America’s oil and gas industry,
enjoyed no such relief, as Russia’s government even as infection rates soared in the region. It led Russian oil
made delinking the currency from the oil price major producers such as Brazil and Argentina to
one of its key tenets of economic stability in the make temporary reductions in oil and gas yields, supply.
aftermath of the 2014-2015 economic crisis. and these cuts, in turn, helped to derail Argen-
Russian oil producers have also had to con- tina’s plans for becoming a net exporter of LNG.
tend with an overhaul in oil taxation, aimed It also served to complicate negotiations
at extracting more budget revenue from the on initiatives such as the planned takeover of
industry. While state oil giant Rosneft has come Curaçao’s Isla refinery by Geneva-based Klesch

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