Saturday, May 18, 2024
 
 

Precipitous Oil Price Drop Corrals Putin

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The more than 30% drop in oil price, which is one of Russia’s main exports, placed immense pressure on the ruble, which is also suffering from the Western sanctions against Moscow, and Russia’s President Vladimir Putin.

The ruble has lost 39% of its value against the dollar so far this year. However, the weak ruble compensates the negative impact from the oil price. “It’s not the end of the world for the Russian oil exports. Russia used to export at much lower prices,” Alexander Kornilov, a senior oil and gas analyst at Moscow’s Alfa Bank, told New Europe on December 5.

He added that given how the taxation works in Russia and given the relatively low cost of conventional oil production in the country, oil companies can afford a lower price in terms of their net income. “My analysis shows that the Russian oil companies are breaking even at the price level of $40 or $50 per barrel – that’s the year-average level,” Kornilov said.

Oil was more than $100 a barrel at the start of the summer. Now it’s around $70 a barrel. The Alfa Bank analyst stressed that the low oil price is harmful for the Russian budget. But at the same time it’s more or less compensated with a much weaker ruble, he added. Compared to other countries like Mexico, South Africa or Brazil, the local currency devaluation in Russia is much higher. “That really compensates the negative impact from the oil price so all in all the current level is not really dangerous for the oil companies and for the Russian export,” Kornilov said.

However, low oil prices are likely to delay the development of fields which require high production costs. “A number of projects became real unprofitable with the current level of oil price and I would expect some delays and postponements of some projects,” he said, adding that Russian state oil major Rosneft will probably delay the development of its East Siberian fields.

Even though East Siberian fields are not touched by western sanctions against Russia, they require building a huge infrastructure and that makes those projects really expensive. They need a relatively high breaking-even oil price to be implemented, Kornilov said.

“Given the current oil price level at $70, I think most of those projects have become economically inefficient,” he said, adding that Rosneft will have trouble developing them. “The wise strategy would be to hold on and see what’s going on with the oil price,” he said.

Hard-to-reach oil or Arctic projects face an even bigger problem because West’s sanctions against Russia cut off the technology required and cash needed to fund them.

Izvestia quoted Russian Minister of Natural Resources and Ecology Sergey Donskoy as saying on December 4 that Russia’s natural gas monopoly Gazprom and Rosneft have not declared any change in their plans for the development of the Arctic shelf and other hard-to-reach fields after the introduction of the sanctions.

However, Kornilov said those projects will probably be delayed because there is no way to go ahead without a foreign partner or without any access to international technologies. And the current low oil price makes it even harder.

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​Previously on Energy Insider:

OPEC Keeps Pumping, Vexing Putin, Iran

Israel, Greece, Cyprus see a role in EU energy security

EU Energy Union Chief To Tackle South Stream

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