What Insulates Russia From Low Oil Prices?

By Andy Tully, Oilprice.com:

If oil can maintain a fairly low price of $60 per barrel, Russian energy companies can survive a drawn-out depression in the global industry, according to Wood Mackenzie, the energy and mining consultancy based in Edinburgh.

The reason is that the costs of extracting oil and gas are based on a devalued ruble, which makes them low for producers such as the state-run Rosneft and Gazprom, respectively. But the two companies products are sold on the world market for dollars, not rubles, making their profit margins higher, according to a Wood Mackenzie analysis published July 17.

The average global price of oil began dropping in the early summer of 2014, plunging from more than $100 per barrel in June to below $50 early this year. At that time, the value of the ruble plunged 41 percent against the dollar as a result of the drop in oil prices and the sanctions imposed by Western countries on Russia because of its role in the Ukraine unrest.

The price of oil has since recovered somewhat. And a month ago, Russia’s economic development minister, Alexei Ulyukayev, said he believed that “the oil market has attained certain stability.” Meanwhile, the ruble also began recovering and is valued at about 56 per dollar.

As a result, oil and gas production in Russia are very inexpensive from a global perspective, not only because of the ruble’s low value but also because the country already has in place a longstanding energy culture and infrastructure, Wood Mackenzie Research Director Valentina Kretzschmar said in a statement that coincided with the release of the firm’s analysis.

“This combination will help Russian producers stay competitive even if oil prices remain low,” she wrote.

That doesn’t mean the news for Russia’s economy is altogether rosy. In December, the World Bank forecast a recession in the country in 2016, saying its gross domestic product was likely to contract by 0.7 percent. And that was predicated on oil priced at $78 per barrel.

Yet if Wood Mackenzie’s analysis is on track, then the World Bank may have to revise its view of the direction the Russian economy is taking. In her statement, Kretzschmar acknowledged that Russian energy companies at first were hit especially hard because low oil prices were followed by the sanctions, which kept some companies from doing business in Western markets.

But she added that “the slight rebound in oil prices this year, [a] stronger Russian ruble and higher dividend yields have led to stronger performance within the industry peer group in the recent months.”

Besides, despite their bite, the sanctions appear to have inspired Moscow to look beyond its traditional Western customers to sell its energy. Russian oil and gas producers have begun to increase their sales in the world’s developing countries with their growing economies, and Kretzschmar said she expects that effort to intensify.

“The sanctions imposed on Russia are pushing its majors abroad to new resource bases in Latin America, Africa and Asia – with most of the global hot spots still open for business with Russia,” she said. By Andy Tully, Oilprice.com

A toxic mix is coagulating: the slowdown in China and continuing oversupply. Read… Shell Warns: Oil Price Recovery Will Take 5 Years

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.



  4 comments for “What Insulates Russia From Low Oil Prices?

  1. It’s a wonder how crackerjack analysts such as Wood-Mackenzie manage to stay in business:

    “The reason is that the costs of extracting oil and gas are based on a devalued ruble … ”

    No, the cost of extracting oil and gas are ‘based’ on the oil and gas needed to run the extraction process; what is counted is the net energy remaining after extraction energy requirements are met.

    Around the world including Russia, the energy-cost of each barrel in oil is increasing relentlessly. No matter how hard they try the world’s drivers do not put any oil back into the ground … they never have, not since 1858 and the first oil well. (They don’t try, either.) What this means is each barrel left to be extracted is more energy intensive.

    At some point (now?) the energy net is too small to allow any economic activity other than extracting fuel. This economic strangulation is what is occurring around the world, we have an oil shortage cleverly disguised as a glut … as a ‘credit crisis’.

    It doesn’t matter what currency is used, the total amount required to extract each barrel is relentlessly higher relative to sales, if this was not so there would be no crisis!

    The low price indicates there are fewer customers with credit, in America, in the Middle East … in Russia, too. Eventually the absence of customers/credit strands the drillers regardless of what currency they use. When shortages emerge from the scrim of lies and wishful thinking, they will impact customers and credit even further stranding more drillers. This is energy deflation and once it takes hold there is no escaping it. Prices will decline to the ‘level’ … where actual return supports extraction rather than credit availability.

    Because there is no return on driving a car in aimless circles, absent credit the price of fuel is likely to fall to zero. You can figure out for yourselves how much fuel will be available at that price.

  2. ERG says:

    “What Insulates Russia from Low Oil Prices?”

    Let’s see…

    Er, um.

    Nothing.

  3. illumined says:

    I think this analysis ignores that Gazprom and Rosneft haven’t really been reinvesting in new extraction equipment and technologies. As is the case with most state owned resource extraction companies priority one is subsidizing government profligacy and priority two is allowing managers to line their pockets at the expense of the company. It’s not a pretty picture.

    http://www.energytribune.com/23640/gazproms-fake-repairs#sthash.cfTTEAXN.dpbs

  4. Teflon Don says:

    And these aforementioned companies have no USD debts? How about the rest of the Russian economy?.. I read somewhere there is actually rather a lot of USD denominated debt in VVP’s Russia..

Comments are closed.