Russian Oil and Gas Industry: News #2

Why Is Russian Crude So Expensive?

One of the main reasons why the coronavirus-induced price slump feels so odd is that it is accompanied by a prolonged price war that has simultaneously dropped crude differentials, in many instances to levels unseen in the past 8-10 years. The price war was started by Saudi Arabia’s national oil company Saudi Aramco mid-March when it cut its April prices by $6-7 per barrel month-on-month, in a move that was at the time perceived as Riyadh’s claim to safeguard or even increase its market share come what may, a strategy that was continued with May-loading cargoes. Yet despite fears that Russia’s main export grade Urals will inevitably fall victim to such an aggressive Saudi marketing strategy, Urals’ allure has caught market watchers somewhat offguard.

There is no sole reason why Urals has not declined further and followed the pricing curve of Arab Medium or Arab Light. As a matter of fact, if one is to look at the dynamics of Urals pricing chronologically, the underlying reason why Urals differentials should not plummet has changed over time. This being said, outright Urals prices have bounced back from their lowest in the last 20 years – Urals Baltics went as low as $11.59 per barrel on April 21 (see Graph 1) whilst on that same day Urals Med declined to $12.09 per barrel. From here both the Baltic and Mediterranean outright prices rose to their current level of $16-17 per barrel, to actual premia against Dated Brent and even Azeri Light.

But let’s take a dive first into the pallid statistics of crude oil differentials. Data indicate (see Graph 2) that right after the Russia-Saudi Arabia axis broke down and the crude market went into an uncontrolled freefall, Urals differentials reacted in a way that was to be predicted by market analysts. Urals had no other option but to react on Saudi Aramco dropping April OSPs – if Urals Rotterdam averaged a $-1.8 per barrel and Urals Med averaged a $-1.2 per barrel discount in January-February 2020, the second half of March turned out to be a spectacular tailspin. By April 01, both the Mediterranean and Baltic Urals stood at a $-5.4 per barrel discount, yet instead of dropping even lower, Urals started to get off the ground.

First, amidst Chinese crude demand coming back to life, Urals was supported by the remarkably beneficial economics of China exports. In the first days of April the ICE Brent – Dubai swap differential was at a whopping $6.20 per barrel discount which made long-haul voyages to Asia Pacific remarkably attractive for Chinese buyers. The end result of robust Chinese buying demand: a total of 19.7 MMbbls of Urals has set sail for China in April 2020, an absolute all-time high, beating the previous maximum by a whopping 7 million barrels. The total tally includes an unprecedented four VLCCs, all of which are en route to Shandong (of which three are going to Qingdao).

Mid-April Brent-Dubai differentials moved back into premium, only to decline in multi-dollar discounts during the last days of April – expect further Chinese buying runs of Urals as it happens. Evidently, Urals is by no means the only residue-heavy grade coveted by Chinese refiners, the US-produced Mars has become a hit of recent Chinese purchases. However, there seems to be an organic barrier to further US purchases as most American output is very light, in fact too light for Chinese refiners. Potentially, Chinese demand might also be satiated by Arab Medium or Arab Heavy cargoes from Saudi Arabia, yet according to market reports there is only scant spare additional capacity for these grades, with Riyadh actively promoting Arab Light and Arab Extra Light instead.

Thus, Russian exporters could more or less avoid European demand declining, only to return to it once the window of opportunity shut down. Fuel oil cracks have been very supportive towards Urals acquisitions in Europe, penalizing other Mediterranean and Baltic crudes with a higher gasoline and kerosene yield, yet that is only half of Urals’ recent differential anomaly. The other reason, one might argue a much more substantial one, is Russian producers cutting back exports in accordance with the OPEC+ agreements. Comparing April and May exports from Russia’s main European ports provides a telling case in point – based on the preliminary May schedule month-on-month loadings in Primorsk have dropped by 42% and in Ust-Luga by 32%, whilst Novorossiysk will witness a hefty 60% drop.

Whilst coronavirus continues to paralyze Russia’s economy (President Putin has extended the lockdown until May 11, for the third time already, and most probably will be forced to do so at least once again as new cases still do not plateau), Russian exporters have been having a hard time placing their crude barrels – domestic demand has shrunk, storage is becoming ever-rarer so the only elegant way out is to bring forward field maintenance and cut exports. The only conduit not to see a massive May throughput cut will be ESPO – in fact, May loadings from Kozmino are headed for an all-time high of 0.765mbpd. The decision to keep ESPO supplies to Asia has obviously left an imprint on the Russian grade’s pricing, from a $2 per barrel premium to Dubai it went to $-4.70 per barrel in mid-April, only to reach its current level of a $-2.75/-3 per barrel discount to Dubai, i.e. the differential rebound was palpably smaller than in the case of Urals.

Germany nixes Nord Stream 2 exemption from EU gas rules

The Federal Network Agency (BNetzA) of Germany has sent a document to Nord Stream 2, the project company constructing a controversial pipeline from Russia to Germany, noting that it plans to reject its application for exemption from the EU gas directive, as the gas pipeline does not comply with the provisions of German law on the energy sector, which would free it from regulation, since its construction has not yet been completed.

BNetzA indicated that they would not issue a derogation from the rules of the Gas Directive because in their view the criteria of “completed” had not been fulfilled by May 23, 2019, when the amended Gas Directive entered into force.

Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, told New Europe on May 7 such decision would be a setback for Nord Stream 2 but it should not be seen as entirely unexpected although from a legal/regulatory point of view there is a scope for the German regulator both to grant and refuse a derogation.

She said it cannot be ruled out that while denying the derogation, BNetzA may stipulate a specific regulatory framework for Nord Stream 2 in its final decision, which could be more lenient that then the one established by the directive, taking into account the fact the investment was made earlier.

According to Yafimava, alternatively, in a separate procedure, BNetzA could request Nord Stream 2 to undergo certain changes in its operatorship/ownership and subsequently certify it as compliant with the directive. “A very important question is whether Nord Stream 2 would be allowed to operate while its certification is ongoing – there are many precedents for doing so in the EU – but ultimately it would be the BNetzA’s decision,” the Oxford expert said, arguing that should BNeztA decide that certification must be completed before operation can start, this could delay flows via Nord Stream 2. “Realistically, construction of NS2 could be finished in late 2020 or early 2021, hence there is sufficient time for BNetzA to issue certification by the time the pipeline is built and ready to operate,” Yafimava said.

Nord Stream 2 EU representative Sebastian Sass told New Europe on May 6 the pipeline company is aware of the information shared by the German authority with the participants in the procedure. “We do not agree with this conclusion. We will wait for the formal decision of the authority and of course evaluate it and further actions to preserve our rights,” he said.

Asked if Nord Stream 2 plans to appeal the German regulator’s decision, Sass said they will evaluate the formal decision once Nord Stream 2 has received it. “Based on that we will decide on further actions. At this point I can confirm that we do not agree with this conclusion,” he said.

Regarding whether this decision would delay the start of Nord Stream 2, Sass said the construction permits are based on a different set of legal rules than the decision on Nord Stream 2’s application for a derogation. “Therefore, the upcoming decision on a derogation has no impact on the finalisation of construction works,” he said.

Meanwhile, pipe-laying vessel Akademik Cherskiy owned by Russian gas monopoly Gazprom has reportedly left the Kaliningrad area and is heading towards the port of Mukran, which is one of Nord Stream-2 key logistics supply hubs and where the NS2 pipes might be stored on one of the German islands in the Baltics. “It looks likely that it will be Akademik Cherskiy, which will be finishing construction of the remaining section,” Yafimana said. “This suggests that further works on refitting the ship might take place there rather than in Kaliningrad,” she added.

The start of pipe-laying depends on several factors, including the time required to make any necessary technical adjustments to the ship, she said, adding that its speed of pipelaying is understood to be lower than that of Allseas.

Sass reminded that a total of 2,300 kilometres out of approximately 2,460 kilometres, or 94% of the Nord Stream 2 pipeline had been laid by December 20, 2019, when Nord Stream 2 contractor Allseas was forced to suspend the pipelay due to the threat of sanctions by the US that the European Commission has described as a breach of international law. “We are actively looking for solutions and will inform about it in due time. All other works like the completion of landfalls and offshore works for stabilising the pipeline continue as planned,” he said.

Former German Chancellor Gerhard Schroder, who is the President of the Board of Directors of Nord Stream 2, in a recent interview slammed sanctions against Russia.

However, Yafimava reminded that there are no sanctions against Nord Stream 2 yet. There is only a threat of sanctions being applied, emanating from the US National Defense Authorization Act adopted in December 2019. “It is this threat that has caused the All Seas ship to suspend pipelaying activities, right after the NDAA was adopted. “There is a very low likelihood scenario under which US President Donald J. Trump may decide not to impose sanctions thus clearing out the way for the All Seas ship to come back and finish the job thus speeding up finalisation of construction,” Yafimava said, adding, “There is another scenario under which further legislation could be adopted by the US threatening more sanctions, but ultimately it is highly unlikely to have a serious impact on finalisation of construction, and the Russian ship should be able to finish the job sooner or later.”

Viktor wrote:Reason is given for the constant change in directions of Academician Chersky  

Martsinkevich explained how Russia outwitted everyone with the ship for the completion of the Nord Stream-2

assigning new route points each time, the vessel did not fall under any sanctions, because no one had accurate information where the final point of his route was.

kvs wrote:
Reason is given for the constant change in directions of Academician Chersky  

Martsinkevich explained how Russia outwitted everyone with the ship for the completion of the Nord Stream-2

assigning new route points each time, the vessel did not fall under any sanctions, because no one had accurate information where the final point of his route was.

JohninMK wrote:The US knew Russia had to use this ship. Given that once it left Vladivostok, passed Singapore and we started commenting on it as it went down the east coast of Africa it was blindingly obvious to anyone just where she was headed. That she had a RuN escort the whole way as far as we can tell was probably a bigger factor in her safe journey.

Boris Martsinkevich might be an 'energy expert' but he should have checked on this thread before he spouted rubbish like that.

Also, whilst on the subject, she only spent a couple of days in Kaliningrad before moving on. This seems too short a break for a crew that had just spent 84 days at sea. Laying pipes 24 hours a day means that she would have had the multi shift crew that would have been needed for the trip.  I am excluding that part of the crew that is involved in the pipe laying operation. Does anyone know if she had two full crews, working say 3 weeks on/3 weeks off like on an oil rig?

If not perhaps she had a special 'transit' crew for the journey, maybe even part RuN.