Page 66 - BNE_magazine_05_2020

66 Opinion
bne May 2020
“Russia’s geological conditions are inherently worse than Saudi Arabia’s, but even measures that could have helped in the current standoff were not taken in advance. For example, Russia has very limited capacity for storing oil and petrochemicals, which means it is unable to fully balance current demand against production. It needs to offload virtually all the oil it produces,” says Salikhov. “After the
oil crisis of 2014–2015, the Energy Ministry discussed the creation of strategic oil reserves and the construction of storage capacity, but no action was taken.”
However, if the goal was to destroy the US shale industry,
or at least significantly reduce US production, that much
has probably been achieved. The US will reduce output by 500,000 bpd this year and 700,000 bpd next year, according to the latest IEA estimates, and the first big US shale producers are already going bust and the number of operational rigs is falling fast.
If the calculation was Russia’s economy would take a hit after oil prices fell, but it would not be as bad as the hit everyone else would take, then that calculation has also gone badly wrong. Initially well respected economists like Bank of Finland Institute for Economies in Transition (BOFIT) and the Institute of International Finance (IIF) were predicting the Russian economy would only contract by about 1% in 2020 due to
the falling oil prices, but as the coronavirus pandemic has gathered steam the predicted contraction has increased to somewhere between 5% and 8%. In the 2008-09 crisis the economy contracted by 7.5%.
Russian oil industry under pressure
Even if the intended victims were US shale oil producers, amongst the collateral damage is Russia’s own oil industry. The plunge in crude prices puts significant pressure on Russian oil producers, says Sberbank CIB. The problem is the decision to collapse oil prices at the start of March has destabilised the entire market, indeed, coming on top of the pandemic, the entire global economy has been destabilised, and Russia has lost what little control it had of the situation.
“The collapse in WTI May futures has led to significantly increased volatility in other global benchmarks. Brent front- month futures dropped to $16/bbl, Brent spot prices to $14/ bbl and ESPO spot prices to $11/bbl, according to Bloomberg data in the days after WTI fell to -$37 on April 20. The Urals price has fallen below $9/bbl, according to Reuters Refinitiy,” Andrey Gromadin and Anna Kotelnikova, analysts from Sberbank CIB, wrote in a note.
The combination of the supply-side shock thanks to the Saudi dumping of crude in Europe plus the demand side shock of a
pan-Continental lockdown is unprecedented and has crushed the market, which was already suffering from a glut of oil.
“Given that the market remains very oversupplied and that the OPEC+ deal will only take effect in May, Sberbank had assumed that April would be the most challenging month for Russian oil companies. However, the situation only continues to deteriorate, and at a rapid pace. Operating costs in the crude upstream are mainly in rubles, and the ruble has remained fairly resilient versus the dollar, which has resulted in upstream crude cash costs of $8-10/bbl, according to the bank’s estimates,” say Gromadin and Kotelnikova.
The average realised price in the industry will be substantially higher than the Urals price, as Urals exports account for less than 30% of total Russian output, says Sberbank, while the remainder is oil products (linked to Brent) and mainly lighter benchmarks.
“So, in normalised tax terms (i.e. without the lag in export duties) companies' margins should still be positive. However, April is particularly challenging due to the lag in the export duty, which is now around $7/bbl (based on a $50/bbl oil price) but should drop below $1/bbl in May,” the Sberbank analysts add.
Individual companies will be harder hit. The drop in ESPO spot prices has eroded most of Rosneft's tax-free margin
for crude oil supplied via eastern routes (previously $3.3bn annually). While Sberbank had highlighted this risk earlier,
“Even if the intended victims were US shale oil producers, amongst the collateral damage is Russia’s own oil industry”
the magnitude of the contraction is much more severe than the bank had anticipated. Indeed, the whole crisis has rapidly escalated faster than anyone was expecting.
“All in all, while the plunge in oil prices is quite painful for Russian oil companies, it is even more so for most other producers globally. The entire sector has entered into survival mode,” say Gromadin and Kotelnikova. “We believe that the crude production cuts are likely to accelerate in a major way across the globe and in OPEC+ countries in particular. The magnitude of the cuts could be far greater than what countries have agreed to.”
www.bne.eu