Page 4 - FSUOGM Week 27

FSUOGM COMMENTARY FSUOGM

Russian oil firms paradoxically hurt

by Urals’ premium over Brent

Russia’s tax system means a rise in prices is not necessarily a good thing for oil firms

RUSSIA RUSSIA’S flagship Urals oil grade surged in value
last week, reaching a record premium of $2.71
per barrel over North Sea Brent. But rather than
benefitting the country’s vertically integrated oil
companies, Urals’ strength will in fact hurt them,
VTB Capital (VTBC) argues.
Urals typically trades at a discount to Brent,
but it has overtaken the global benchmark as a
result of Russia cutting back supplies owing to
OPEC+ restrictions, causing prices to spike.
Russia has pledged to keep its oil output (exclud-
ing condensate) at under 8.5mn barrels per day
(bpd) between May and July. Evidence suggests
that Russian producers are largely complying
with this quota.
Russia will ease its cap on output after this
month, but restrictions will remain until April
2022. According to VTBC, Urals’ premium total output is lower, at only 73%. Assuming
is here to stay for a while. The Russian budget that the Brent to Urals spread remains at $2 per
will benefit from higher Urals prices, as reve- barrel, VTBC forecasts that its EBITDA might
nue-based taxes are Urals-linked, the bank said fall by 8.8%. Rosneft and Lukoil will also suf-
in a research note on July 6. But this is bad news fer, with earnings dropping by 6.2% and 5.7%
for producers. respectively.
VTBC estimates that with Urals selling at a $1 At the other end, Tatneft will enjoy a 1.1%
per barrel premium to Brent, Russian oil compa- gain in EBITDA, as it sells most of its oil rather
nies pay an extra $1.7bn in tax. than refining it, and produces only Urals grade.
“It might seem counter-intuitive, but Russian As a whole, Russia’s upstream sector will
oil majors are indeed in a detrimental position, generate an extra $936mn of EBITDA this year
losing money due to the Urals premium,” VTBC if Urals maintains a $2-per-barrel premium
wrote. “The domestic upstream segment benefits to Brent, but this will be more than offset by a
for obvious reasons, but downstream must pay a $2.74bn downstream loss.
higher crude price, while domestically, oil prod- “This [will] happen due to the narrowed oil
ucts remain stable and export pricing is mostly products cracks, as the prices for products are
driven by cracks to Brent.” predominately Brent-based, while for crude to
The ruble is sensitive to Urals’ price, result- be refined, Russian refiners have to pay the pre-
ing in higher transport and other costs if they mium Urals price,” VTBC wrote. In addition, the
are denominated in US dollars. The higher the economics of the domestic downstream are to
price of Urals, the greater the damper effect – a be affected by the increased payments under the
tax mechanism introduced by Russia in 2018 damper, which might reach $6.7bn in 2020.
to prevent sharp prices in domestic fuel prices. In contrast, the damper meant that oil com-
Under this mechanism, oil refiners pay extra into panies received $4.1bn in tax relief last year.
the budget when regulated domestic prices for VTBC also noted that “higher Urals is sup-
petroleum products become higher than export portive for the ruble exchange rate versus the
netbacks. dollar, which means Russian oils have a lim-
VTBC estimates than Russian oil firms lose ited ability to save on costs in such a macro
$0.52 per barrel of core earnings (EBITDA) at environment.”
Urals’ current premium to Brent. The bank estimates that the industry as a
Hardest hit by the premium will be Gaz- whole will see a 5.4% drop in EBITDA in 2020,
prom Neft, because it refines more of its own or $1.6bn, if Urals retains its current premium
oil than its rivals and the share of Urals in its until year-end. ™

P4 www. NEWSBASE .com Week 27 08•July•2020