Russian oil companies gain at OPEC’s expense

While OPEC members limped through a period of painful production cuts this year, Russian oil companies enjoyed an extraordinary run.

The year that has gone by since Russian officials floated, and then retracted, a proposal to coordinate production limits with OPEC illustrates why the Kremlin is unlikely ever to actually do so. Already the world’s largest oil producing nation, Russia, pumping prodigiously through the downturn, this summer passed another milestone. As Saudi Arabia tightened its belt to live by OPEC cuts, Russia surpassed it to become the world’s largest exporter.

Profits and share prices of Russian companies like Lukoil and Rosneft are up and the Russian budget deficit is coming down: It may beat official forecasts of 7.5 percent of gross domestic product this year. BP, the British oil titan, has benefited through its joint venture in Russia, TNK-BP.

While others shut back wells and idled pipelines, new tax incentives in Russia encouraged companies to continue drilling.

Improbably, the once-neglected oil sector has emerged as one of Russia’s few growth industries, helped by the tax cuts, a devaluation of the ruble that aided exporters and a change of policies that may invite foreign companies back into the sector.

“OPEC made a concerted effort to stem its exports,” said Alex Fak, an oil analyst at Troika investment bank in Moscow. “The result of that action was higher oil prices. So Russia was encouraged to produce more and sell more. Which is what it did.”

Yet, for a time, officials had seemed ready to revise the long-held axiom that Russian national interests were not served by cooperating with OPEC. Sharp price declines had turned Russian oil companies, just a few months earlier seen as money printing presses for the government, into money losers. Far from propping up the Russia government, which relies on oil exports for about 40 percent of its budget, they needed help themselves.

In the fourth quarter, the state oil company, Rosneft, had an unprecedented loss on its pumping assets, though currency gains, refining and gas station profit margins helped it to break even over all. “We were operating at a loss,” Peter O’Brien, the American chief financial officer of Rosneft, said by telephone.

In that quarter, the cost per barrel of taxes and transportation tariffs equaled 99 percent of the current oil price, the company reported. That left almost nothing for operations — Rosneft was losing money for every barrel pumped out of Siberia.

The choice was either to line up with OPEC’s cuts by reining in some of Russia’s output of about 10 million barrels a day, in the hope of producing a global price recovery, or to save teetering companies by coming to the aid of the domestic industry.

Nowhere was the choice more stark than at Rosneft’s showcase project, the Vankor field — the largest Russian oil development since the collapse of the Soviet Union. The field’s derricks, pipelines and tanks were rising out of a featureless northern waste, but at a great expense.

It was the type of investment needed to sustain the industry. But after the oil price collapsed it seemed condemned by taxes, oil transport tariffs and amortization of capital costs, to operate at a loss.

Last autumn, even as Deputy Prime Minister Igor I. Sechin, at OPEC meetings in Vienna, was hinting at a possible production cut, the pressing need to keep projects like Vankor alive was setting a different course for Russian oil policy.

The mineral-extraction tax was lowered and the export tariffs recalculated to the benefit of companies. Oil companies unsuccessfully lobbied for a shift to a tax on profit to replace the extraction and export levies.

Then, in July, Prime Minister Vladimir V. Putin signed a decree waiving export tax entirely for east Siberian crude, creating a significant incentive to invest in those new fields, despite weak demand and excess capacity lying idle elsewhere. That tax exemption has not yet taken effect, but is expected to be retroactive to Sept. 1. At an oil price of $70 a barrel, the tax is $33.30 a barrel.

News Source: New York Times

Tags:  oil companies, OPEC, Russian