Russian Oil and Gas Industry: News #2

Global Market Scan: Nord Stream 2 — to complete or not to complete?

In December 2019, the United States introduced sanctions against companies involved in the construction of the Russian gas pipeline projects Nord Stream 2 and Turk Stream. As a result, Swiss company Allseas, that has been installing the underwater pipeline for Nord Stream 2 in Danish territorial waters, paused its work. This resulted in a significant delay in the project’s completion, even though at the time of the announcement, approximately 93 per cent of Nord Stream 2 had been finished, according to Russian newspaper “Vedomosti”.

The Nord Stream 2 gas pipeline was developed by Russian company Gazprom to deliver natural gas to Germany through the Baltic sea bypassing transit pipelines that go through Ukraine, Belarus, Poland and other East European and Baltic states. With a length of 1,224 kilometers, the Nord Stream 2 pipeline is sized to deliver up to 55 billion cubic meters of natural gas per year from Russia to Europe.

The project is a joint venture between Gazprom, Austrian OMV, French Engie, British-Dutch Shell and the German firms Wintershall and Uniper. Originally, commissioning of the project was planned at the end of 2019. After the U.S. sanctions, Gazprom indicated that the project will be completed solely by Russian engineering and construction companies. According to Russian officials, shipments through Nord Stream 2 could come as early as of the end of this year.

Despite the substantial investments by Gazprom and its partners (Gazprom invested about $5 billion USD), the project is facing serious economic challenges. Even though European gas demand is expected to grow in the long-term, the projected increase from 2020 to 2030 is not high and reaches only 9.6 per cent for the 10 years.

At the same time, a significant increase in the global supply of LNG puts pressure on the price of the commodity in Europe and, also, on the price of Russian pipeline gas. The Natural Gas Programme of the Oxford Institute for Energy Studies recently published a report that estimates: “European gas demand will not recover to its 2010 level until about 2025… The natural gas demand in the 35 countries of the European region falls from 594 billion cubic meters in 2010 to 564 billion cubic meters in 2020 and then rises to 618 billion cubic meters in 2030”.

Currently, total capacity of LNG terminals in Europe (including Turkey) exceeds 160 million tonnes. In addition, Germany, Croatia, Estonia and Cyprus are planning to build new terminals with a total capacity of about 30 million tonnes.

Due to the newly developed LNG infrastructure and growing supply, European customers purchased around 110 billion cubic meters of LNG in 2019, as estimated by the EIA (US Energy Information Administration). This was approximately double the volume of LNG purchased by Europe in the previous year.

At the beginning of 2020, the amount of LNG supplied to the region equaled the volume of gas transported through pipelines. The success of LNG is resulting from the fact that it is cheaper than pipeline gas if transportation exceeds four thousand kilometers.

The ongoing economic slowdown in Asia and the commissioning of new LNG projects around the world resulted in a major decrease of global LNG and pipeline gas prices. The average price of Russian pipeline gas sold in Europe in 2018 was around $246 USD per thousand cubic meters. In Q3 2019, the price dropped dramatically (by about 31 per cent) to approximately $170 USD per thousand cubic meters.

In addition to lower prices, the structure of gas payments has changed as well. Historically, pipeline gas has been sold based on tariffs defined in long-term contracts, with contracts often designed around a “take-or-pay” approach (which guarantees a seller a minimum payment). Following the recent market developments, Gazprom started to sell more gas on the spot market (approximately 16.5 per cent as of January 2020). The change in the sales approach from the contract base to spot prices increases the overall risk to suppliers and raises the cost of capital for their new projects.

The major exporters of LNG in the world include Australia, Qatar and the United States, with the U.S. quickly ramping up LNG production despite the supply glut resulting from the economic slowdown in Asia. Intentions to build large LNG-related infrastructure projects have been manifested by many energy companies, such as Shell and Total, as well as some large utilities. However, according to McKinsey consultants, only 10 per cent of these projects are likely to be implemented, as potential global supply seems to exceed demand.

Slow long-term growth in European gas demand, fast development of new LNG infrastructure, as well as the pressure on gas prices that is likely to increase even further due to the global economic growth slowdown, undermine the importance of the immediate completion of Nord Stream 2.

In addition, a recently signed five-year contract for pipeline gas transportation between Russia and Ukraine (planned transportation: 65 billion cubic meters in 2020 and 40 billion cubic meters annually for the next four years) significantly lowers risks related to Russian gas supply to Europe in the long-term and highlights a need for alternative pipeline gas delivery projects.

Nation can pump until oil hits $15-$20 per barrel: BofA
Companies may face higher taxes if the oil freefall lasts

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 from Bank of America Corp. to Raiffeisenbank say.

“Russian companies can ensure sustainable production until oil hits $15 to $20 per barrel,” Karen Kostanian, BofA’s Moscow-based oil and gas analyst, said.

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.”

It is the well-developed field infrastructure, as well as efficient railway and pipelines that 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.

The country’s fiscal system offers more protection. Last year, government levies formed the bulk of the remaining expenses for the Russian producers: the companies paid $34-$42 per barrel to the state in extraction tax and export duty, Bloomberg calculations show. However, Russia has a flexible fiscal system, which means as oil prices fall, taxes drop with them, said Dmitry Marinchenko, senior director at Fitch Ratings.

“Under the current tax regime, it is the Russian state that shoulders most of the risks associated with low oil prices,” Marinchenko said. With crude at $50 Russian producers pay more than 40% of their revenues in taxes, his calculations show. If the price falls to $25 the share of taxes declines to just around 20%, and in the $15-$20 scenario, the fiscal burden nearly disappears, Marinchenko said.

Finally, Russian producers, which earn part of their revenues in U.S. dollars and spend almost exclusively in rubles, are shielded by a flexible exchange rate. The ruble’s weakening to the dollar helped support the companies’ capital expenditures during the market’s previous plunge. As the ruble depreciated to 67.03 per $1 in 2016 from 31.85 in 2013, Russia’s top producer Rosneft grew its capex in rubles about 66%, investing in future production while its global competitors had to cut spending.
Familiar Threat

These factors 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% 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,” Fitch’s Marinchenko said.

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.”

Norway is what Saudi Shitstainia could have been (and should have been) if that benighted nation had not been ruled by degenerates and medieval religious fanatics. Fuck them, and enjoy their impending collapse

A few weeks ago Rosneft announced this huuuge investment program into arctic oil fields (Yamal, Krasnojarsk) with the building of new towns, airports, harbors and so on. 240 Bill. $ will be spend. After axing the agreement with OPEC Russia is now free to pump this new oil into the market.

U.S. Looks To Snag Market Share From Russia In Its Own Backyard

kvs wrote:

owais.usmani wrote:https://oilprice.com/Energy/Crude-Oil/US-Looks-To-Snag-Market-Share-From-Russia-In-Its-Own-Backyard.html

U.S. Looks To Snag Market Share From Russia In Its Own Backyard

Hilarious.   The US imports 8 million barrels per day of oil.