The Political and Commercial Dynamics of Russia s Oil Export Strategy

Transcription

1 OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme The Political and Commercial Dynamics of Russia s Oil Export Strategy Tatiana Mitrova Senior Visiting Research Fellow OIES SWEDEN, MARCH 2016

2 Implications of the stagnating global demand and low oil prices: 1) Russia`s GDP forecast is revised downwards to nearly flat Russian GDP dynamics, % to Energy Strategy-2030 Baseline (2009) Energy Strategy-2035 High (2014) Energy Strategy-2035 Baseline (2014) Energy Strategy-2035 Baseline (2015) Energy Strategy-2035 Risk analyses (2015) Sources: Economic Ministry, ERI RAS 2

3 Implications of the stagnating global demand and low oil prices: 2) stagnation of the domestic demand for liquid fuels Motor fuel demand in Russia in , mln. tonnes Fuel oil Топочный мазут Jet kerosene Авиационный керосин Diesel Дизельное топливо Gasoline Автобензин Source: draft Energy Strategy of the Russian Federation up to

4 Implications of the stagnating global demand and low oil prices: 3) state budget deficit and predictable desire of the authorities to increase taxation of the oil sector Shares of energy sector in Russian GDP, exports and budget Source: Global and Russian Energy Outlook up to ERI RAS-AC

5 Shifting domestic institutional and regulatory framework: oil tax reform is postponed again The tax reform has been under discussion for at least a decade, as the current system of volume-based taxation creates no incentives at all for any modernization and for the development of smaller fields, hard-to-recover and unconventional oil. Oil companies suggest that the current system that takes away incomes of oil companies by taxing their revenues should be replaced with taxation of profits. However, the Finance Ministry is strongly opposing to this approach. In October 2015 at the Presidential Commission, it managed to postpone the reform until The Energy Ministry and oil producers were promoting an idea to carry out at least an experiment at a number of projects by taxing their financial results, but now even this step is questioned. Instead of changes in the fiscal approach, the sector encountered a Tax Maneuver adopted on the 14th of November 2014 that somewhat altered the rules of the game but absolutely did not amend the approach towards fiscal regulations in the oil industry. It includes a gradual reduction in the rate of export duties coupled with an increase in the basic rate of the Mineral Extraction tax in line with the Eurasian Economic Union synchronization process. In summer 2015 President Putin instructed the government to work on channeling to the budget additional revenues of export companies, which they received thanks to the ruble devaluation. An additional tax will be imposed by maintaining export duties at 42% in 2016, though it was previously planned to lower them to 36% in 2016 under the Tax Maneuver. Most likely the direct impact of this tax change is relatively minor, but the overall uncertainty of the taxation regime and fear of further tax changes definitely will further hurt investment. 5

6 Sanctions: restricted access to the investments and new technologies In the short-run it is mainly financial sanctions that impact Russia`s economic growth negatively via weaker investment and consumption. Russia is now facing unprecedented challenges related to the finance availability and access to the international loans, while Russian domestic financial market is also very weak. Rosneft, Novatek, Transneft and Gazprom Neft were hit in a most serious way - now they face very limited access to capital, which is especially painful given their high corporate debt. Technology sanctions are less painful than financial sanctions in the short-term. They concerns equipment which can be used for deep water and arctic oil exploration and production, as well as shale oil projects. Already many of these projects, which were under development in cooperation with the Western majors, were frozen. Oil and gas machine building and services Technology Technology, equipment, and services for the operational wells, enhanced oil recovery Technology and equipment for slant hole directional drilling, horizontal drilling, and drilling of the multilateral wells Technology and equipment for offshore projects Technology and equipment for geological exploration Services in oil and gas sector Oil refining Catalysts for the refining basic processes Dependency on imported technologies Source: Analytical Center of the Russian Federation, Energy Bulletin 27, August Share of import in percent percent percent percent percent percent 6

7 Shifting domestic institutional framework: the share of the private companies will probably further decrease, as statecontrolled giants are bolstered by the special state support 100% 90% Oil production in Russia by company, 2003 and 2013 Others Surgutneftegaz 80% 70% 60% 50% 40% 30% 20% 10% 0% LUKOIL TNK-BP (without share in Slavneft) Tatneft Bashneft Russneft YUKOS Sibneft Slavneft GazpromNeft (without share in Slavneft) Rosneft (former TNK-BP) Sources: Companies data, Rosnedra, ERI RAS 7

8 Implications of the stagnating global demand and low oil prices: 4) low oil prices reduce financial sustainability of the oil companies and result into reductions of their investment plans Most of the large upstream and midstream projects are postponed, such as Arctic offshore oil and gas development and shale oil development. As of the end of 2015, the large oil companies reduced exploration drilling investments by 12% and financing from the federal budget was also reduced by 20%. According to the Energy Ministry, major Russian oil companies have already postponed development of the new oil fields with total production capacity of 26 million tons per annum (approximately 5% of the current oil output). The inevitable result of these cuts will be long-term reduction of the oil and gas production and processing, slowdown in the renovation of the sector`s capital assets, new technologies implementation and efficiency improvements through the whole supply chain. 8

9 Oil production costs comparison: Russian companies are very competitive (especially after devaluation) Ruble devaluation (as the majority of costs is nominated in rubles) as well as peculiarities of the Russian taxation system (e.g., a progressive export duty scale, which means that the state is the main beneficiary of high oil prices and loses a significant part of its revenues at lower oil prices, while oil companies have nearly the same revenues) help oil companies to partially soften the pressure, though it is insufficient to compensate for the revenue decline. 9

10 mln tonnes Status quo: oil production and exports Monthly oil production in Russia in 2013, 2014 and 2015, mln. tonnes Russian crude oil export dynamics by destination in , mln tonnes CIS Europe Asia Sources: Infotek, CDU TEK, ERI RAS 10

11 Million metric tonnes As Europe continues to be the most important market for Russian exports, Russian refineries make it their top priority to adapt to new European standards and regulations Russian liquid hydrocarbon exports to Europe Crude oil Oil products Sources: Infotek, CDU TEK, ERI RAS As of 1st January 2016 most major refineries have switched to produce solely Euro 5 quality fuels. Unless there are some unexpected shifts on the supply or demand side, Russian-European partnership is likely to be quite stable in the foreseeable future. 11

12 Russia and Saudi Arabia Battle for Control of European Oil Market: both have aggressively discounted their crude exports to Europe Since 2014 KSA replaced Russian oil in: Sweden s largest refinery Preem AB Poland s refinery PKN Orlen SA Poland s refinery Grupa Lotos SA Russia in its turn is trying to protect its market niche: Rosneft signed a contract with PKN Orlen SA in December 2015 to increase supplies from 6 mln tonnes up to 8,4 mln. tonnes per annum. In January 2016 Rosneft signed a contract with Grupa Lotos to increase supplies up to 2,7 mln. tonnes per annum. The competition is likely to intensify in Europe next year when Iran, which supplied around 4.4% of Europe s crude before its contribution was halted by sanctions in 2012, plans to return with large volumes if sanctions are lifted. 12

13 In all scenarios Russian liquids production in the long-term it will decline, thought at very different rates, while exports will be quite stable 600 Russian oil and gas condensate production and export, mln. tonnes Oil prices, additional tax pressure, sanctions Oil production in Price Recovery scenario Oil production in Muddling through scenario Oil production in Price War scenario Oil export in Price Recovery scenario Oil export in Muddling through scenario Oil export in Price War scenario 13

14 Idea of a domestic production cut to balance the global market Mln. t Russian oil export volumes and average export price $/t Oil export (left scale) Average reported export price (right scale) Source: Analytical Center of the Russian Federation, Energy Bulletin 33, February would actually mean freezing Russian production at the level of 544 mln. tonnes per annum and growth of the Russian export (as domestic demand is stagnant/declining). 14