Russian producers ready to survive flood of Saudi crude
A flood of discounted Saudi crude is heading for Europe, but Russia might just have the only producers in the world equipped to compete with it.
With some of the world’s lowest production costs, a flexible tax system and a free-floating ruble, Russian companies can keep pumping, even in an extremely bearish price scenario, analysts said.
“Russian companies can ensure sustainable production until oil hits $15 to $20 per barrel,” Karen Kostanian, an oil and gas analyst at Bank of America.
Saudi Arabia has escalated a battle for industry dominance after the collapse of the OPEC+ alliance last week. The kingdom has slashed prices and announced a massive production increase. Russia’s
Energy Minister Alexander Novak said his country’s industry will remain competitive “at any forecast price level.”
A well-developed field infrastructure, as well as efficient railway and pipelines enables Russian oil majors to operate at low costs. Last year, state-run Rosneft PJSC, Gazprom Neft PJSC and the top private producer Lukoil PJSC spent less than $4 to extract a barrel of oil, according to Bloomberg calculations based on the companies’ financial reports. Add to this around $5 to ship the barrel and $6-8 per barrel of capital spending, and you still get a barrel of oil for under $20.
Low costs and other factors, such as favorable currency exchange rates, can help Russian companies through a short-lived price war, but they would start to feel some strain in a long battle.
The oil and gas industry is the single largest source of revenue for the Russian budget, generating around 40 percent of the total inflows and feeding Vladimir Putin’s multi-billion social-spending programs. The state budget envisions that all the costs over the next several years will be covered at oil slightly above $40.
As a result, “oil falling below $45-50 almost inevitably leads to conversations about a higher tax load on crude producers,” said Dmitry Marinchenko, senior director at Fitch Ratings. (The Houston Chronicle’s parent, Hearst Corp., owns Fitch.)
Back in 2016, when the government needed extra funds amid a bear market, it tweaked the oil-extraction tax formula to raise revenues, Evgenia Dyshlyuk, oil and gas analyst at Gazprombank PJSC, said. “If the state budget sees potential for a deficit, there is a risk of a similar move now,” she said.
The windfall-tax risks may emerge only if the bear market lasts for three to five years, Andrey Polischuk, Moscow-based analyst for Raiffeisenbank, argued. Price shocks lasting for several months will likely have no impact on the tax burden for producers, he said.
The industry’s resilience to pricing pressure won’t come without costs. With oil at $15-$20 a barrel, producers will need to cut their investment programs, undermining future output potential, and modify dividend policies, Kostanian said.
For now, the nation’s producers are staying positive. “It’s not the first time that crude falls,” Lukoil President Vagit Alekperov, who in the span of his 52-year oil career saw price levels of some $2 to $146, told investors this week. “We are used to operating in a volatile environment.”