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Russian Oil Majors Want Bailout From Moscow

By (Viktor Katona)Stock MarketsMay 20, 2020 12:36AM ET
Russian Oil Majors Want Bailout From Moscow
By (Viktor Katona)   |  May 20, 2020 12:36AM ET
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It shall not come as a surprise that Russia’s leading oil and gas companies are suffering amidst the market depression brought about by the SARS-COV-2. Most of the companies have been directly exposed to the risks of the coronavirus pandemic – be it Rosneft (OTC:OJSCY), Gazprom Neft (OTC:GZPFY), Novatek (OTC:NOVKY) or Lukoil (OTC:LUKOY), the spread of the disease spared no one and brought about unplanned changes to the rules of oil exploration and production.

Yet only one company CEO got to meet the Russian President Vladimir Putin personally, Rosneft CEO Igor Sechin. The Sechin-Putin May 12 meeting was of genuine interest as a platform to foreshadow such future developments as tax exemptions, a routine that has become already traditional when it comes to the state’s handling of Rosneft.

Mr Sechin, one of the most vocal proponents of Russia leaving the OPEC+ production curtailment agreement, suggested that the Russian state ought to take measures that would support Russia’s hard-hit oilmen – omitting the usual topic of transportation tariffs which we will discuss next, the suggestion was to buttress exploration activities and extend the scope of the state’s preferential lending schemes. Let’s start with the latter – the Rosneft CEO suggested to render oil contractors and subcontractors eligible for preferential lending and to increase lending limits.

Aiding exploration would entail the postponement of all tax payments arising from prospecting works towards a later date when “oil prices are higher.” However, there was another request from Rosneft, undeservingly omitted from the top-3 requirements – further exemptions from paying the mineral extraction tax.

Rosneft is seeking further tax concessions to produce natural gas from hard-to-recover reserves in the Berezovskaya formation in Western Siberia. With an assumed reserve tally of 1.3 TCm, the Berezovskaya formation encapsulates the Cenomanian and Turonian layers of producing fields like Samotlor, Vanyegan or Ay-Yaunskoye. However, the main prize is the Kharampurskoye field, co-owned by BP (NYSE:BP) since April 2018 when Rosneft agreed to sell its UK-based partner 49% of the asset. Once put onstream, Kharampurskoye is expected to plateau at a production level of 25 BCm per year (following a 1st phase peak of 11 BCm per year), yet the field’s startup was already delayed several times on the back of “adverse conjuncture.”

The field’s development has been hindered by the overall underperformance of Rosneft’s gas portfolio—the oft-repeated objective of reaching output of 100 BCm per year by 2020 failed to materialize, with gas production actually decreasing year-on-year in 2019 to 66.95 BCm. Now the new deadline is set for 2022, yet skepticism prevails over market watchers on the probability of Rosneft hitting this target. Hypothetically, the Russian NOC could easily reach the 100 BCm per year mark: in Kharampur and Rospan, it has two major assets that could add 40 BCm per year production capacity once at peak output rates. Yet for this to happen it must solve a couple of technological issues (Rospan processing facility) and primarily find viable export outlets.

Graph 1. Russian Gas Production by Company 2000-2019 (billion cubic meters per year).

Russian Gas Production By Company
Russian Gas Production By Company

Rosneft is still barred from contesting Gazprom’s pipeline gas monopoly and thus is compelled to market its crude domestically. Thanks to its prime position as the leading Russian hydrocarbon producer with all the positive political ramifications this entails, the Russian NOC has a domestic marketing portfolio amounting to some 80 BCm per year, i.e. more than it actually produces (and Rosneft needs to buy the missing volumes from Gazprom (MCX:GAZP)). Rosneft’s leading customer is Inter RAO, Russia’s main power and heat generation company, with which it has a long-term contract for the supply of 35 BCm per year right through 2040. Yet Russian gas demand is unlikely to increase substantially, effectively linking Rosneft’s gas output increase to the existence of export conduits. Absent any breakthrough, a public spat with the crude pipeline monopoly might just do the trick.

The Rosneft CEO has claimed that one of the company’s key challenges is to bring pipeline crude tariffs in compliance with current prices. What is genuinely interesting is the comparison Mr Sechin provides, namely that in 2008 a barrel of Russian crude cost around 1100 RUB whilst now it costs 1200 RUB, whilst the crude transportation tariffs of the Russian pipeline transportation monopoly Transneft (MCX:TRNF_p) have risen in the same timeframe from 822 RUB to 2100 RUB (in tons per 100 km). What this description fails to provide is a sense of perspective, primarily the fact that the Russian ruble fell by more than 120% between 2008 and 2020, not to speak of the fact that 2008 witnessed the highest-ever outright prices in Europe and even at their lowest annual point the 2008 prices were higher than those of today.

Transneft took an issue with the Rosneft claim that transportation costs account for 32% of its crude price and reacted with a detailed description of costs along major export conduits (ranging from 11.9% on the Druzhba pipeline to 16.7% on the Baltic port of Ust-Luga). A tempest in a teapot by Russian standards, this marks another episode in the longstanding dispute between two high-standing Russian energy officials, both former Putin collaborators, leading Rosneft and Transneft. Following the 2013 acquisition of TNK-BP, as Rosneft increased its institutional clout within Russia’s energy sector, there have been at least 4 instances of verbal clashes between the two – the apogee thereof taking place in 2016 when Rosneft accused the transportation monopoly of unlwafully taking possession of up to 0.7 million tons of oil in the form of "technical losses.”

Rosneft took Transneft to court, filed a case to Russia’s Federal Anti-Monopoly Office (FAS), raised the issue with then-Prime Minister Dmitry Medvedev. All this against the background of Rosneft refusing to one of Transneft’s costliest projects, the Arctic Zapolyarye-Purpe pipeline, and opting instead to use its self-operated Vankor-Purpe pipeline. The 2019 organic chloride contamination story provided another source of contestation – first Russian media speculated on whose responsibility lies in the contamination itself, then the two firms started to quarrel on the adequacy of Transneft’s operations vis-à-vis the risk of a major supply disruption. In the end, all of the above conflicts were extinguished by means of a timely interference from federal authorities, but confrontation is still simmering.

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Russian Oil Majors Want Bailout From Moscow

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Russian Oil Majors Want Bailout From Moscow

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