Following the agreement reached by OPEC+ in April 2020 to cut oil production, Russia, along with other countries, re-evaluated their exploration and production CAPEX. The major global investment cut announced totalled more than US$32 billion, and included cuts by the Russian national oil companies (NOCs) Rosneft and Gazprom neft.
During the pandemic, experts forecasted the Urals oil price to be around the US$20 – 30/bbl mark, and that it would stay within this range until the end of the year. They also predicted that oil demand would slowly start to recover during 4Q20 – but it seems that the real situation is more optimistic.
Upstream economics are getting stronger: netbacks are close to pre-crisis levels, climbing to over US$11/bbl. The downstream sector has resisted the peak of the crisis – many refineries reduced production during the spring, but have since been operating at normal capacities, generating margin despite quite negative predictions.
Petrochemical companies have experienced some disruption, notably in methanol production, with price levels affecting business activity and forcing a number of projects to be put on hold. Russian international oil companies (IOCs) are looking to diversify their downstream activities for the following reasons:
- Decreasing oil and gas reserves and lower production.
- Export and tax policies.
- Attractive examples of large refining/petrochemical clusters operating in the Middle East and Asia, supplying high-margin products.
- Fast-growing demand for plastics and other chemical products globally.
In 2019, Russia had over 80 refineries operating – half of which were small refineries, or ‘pots’ – with a total capacity of 327 million tpy. Since 2000, approximately 60% of the country’s mini-refineries have been closed, and the current tax environment has forced more plants with insufficient levels of deep conversion to cease operating.
Only a few refineries can be considered large on a global scale. Approximately 16 plants with a primary distillation capacity of over 9 million tpy are in operation. Most of these belong to IOCs, were constructed during the Soviet era, and have been continuously modernised. This has led to Russia’s refining market becoming, in general, more monopolistic than its exploration and production market.
Completion of the tax manoeuvre by the government – whereby export duties on the country’s crude oil are being reduced while the mineral extraction tax is increased – led to an increase in state budget revenues: over RUB3 trillion over the next 5 years. What has been the effect on companies? Completion of the tax manoeuvre means a transition from indirect to direct budget subsidising of refineries and end users...
Written by Ekaterina Kalinenko, Euro Petroleum Consultants, Russia.
This article was originally published in the December 2020 issue of Hydrocarbon Engineering. To read the full article, view the December issue here. And to sign up to receive a free regular copy of the magazine, click here.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/29122020/riding-through-the-storm/