Alexey Gromov, Principal Director on Energy Studies gave an interview to the Internet portal BUSINESS-Online of the Republic of Tatarstan about the consequences of the tax maneuver for Tatarstan, crisis in the US shale industry and decline of the era of hydrocarbons.
“There are more and more requests for the final suspension of previously frozen wells,” Alexei Gromov, the oil market expert says. According to him, many wells that were frozen under the OPEC + agreement will never return to operation. But this, is not the main challenge to the Russian oil-dependent economy, the expert believes.
"OIL SUPPLY DEFICIT IS A VERY GOOD SIGN"
- In early December, the OPEC + countries agreed to increase oil production from January by 500 thousand barrels per day. How will this affect oil prices?
- Experts expected that OPEC + countries would not agree to any softening in production at all, because the market situation still looks unstable, even though there was optimistic news about the vaccine. The market, of course, perked up a bit after this news, prices went up a little. It seems to me a reasonable decision to increase production by only 500 thousand barrels per day, while back in May it was planned to increase it immediately by 2 million barrels per day. In my opinion, any sharp movements in the market now can destroy the emerging trend of rising prices, like a house of cards. Therefore, such a cautious easing of restrictions on production is a completely understandable attempt by the oil-exporting countries to see what will happen to the market if OPEC + gradually starts to inject additional volumes of raw materials into the market. We see that the market has accepted this information relatively well. Prices are holding in a good corridor of $ 48-49 per barrel, and a serious decline is not expected yet.
- The pandemic provoked the accumulation of surplus raw materials - is it advisable to increase production in such conditions?
- If we are talking about the accumulated commercial oil reserves, then this is not about Russia. Oil storage facilities have never been created in the Russian Federation for the purpose of balancing either the domestic market, let alone the global one. Of course, there are certain reserves of oil in the storage facilities of Transneft, but they are needed primarily to ensure the stable operation of the oil transportation infrastructure and eliminate the risk of disruptions in the physical supply of oil and oil products both to the domestic market and to export.
If we talk about the situation in the world, we see that in just six months, from January to May, the total volume of accumulated commercial oil reserves, including the reserves of the OECD, China, India and other countries, increased by almost 1 billion barrels. So, if in January of this year the volume of commercial oil reserves in the world amounted to 5.5 billion barrels, which was already the upper limit of the average long-term values of this indicator, then in less than six months it reached 6.5 billion barrels. During the period from May to November, this unprecedented overhang of oil reserves was unloaded by only 250 million barrels. This was facilitated by two factors: an unprecedented reduction in production under the May OPEC + agreements and a slight recovery in global oil demand after the lifting of most of the quarantine restrictions introduced in the second quarter of 2020. Nevertheless, we still have to "unload" and "unload" this overhang of oil reserves. For this, next year the OPEC + countries will have to pursue a rather delicate policy in order to maintain demand on the market by increasing production to further reduce the accumulated commercial oil reserves.
- Analysts say the market remains in short supply of 3.4 million barrels per day, according to Vygon Consulting. And we are talking about an overabundance of raw materials in storage facilities!
- Both statements are absolutely correct, and, moreover, they do not even contradict each other! We can really talk about the current shortage of supply on the market and at the same time about a huge surplus of commercial stocks. It's just that when we talk about a deficit, especially in monthly terms, we are talking, as a rule, about an excess of demand over the volume of world oil production, excluding the previously accumulated oil reserves in storage facilities. Thus, the deficit in the supply of oil today is a very good sign, because it is precisely due to the deficit, the accumulated surplus of oil is taken out of storage facilities. Moreover, until we have solved the problem of excess accumulated oil reserves, we need to maintain, if possible, the situation of a supply deficit. Only in this way will we be able to return the situation with oil reserves in the world to a normal market channel.
"THE TATNEFT'S POSITION IS UNDERSTANDABLE - IF THERE ARE NO BENEFITS, THE PROSPECTS TO DEVELOP DIFFICULT DEPOSITS ARE LOST"
- Russia should increase production in January by 125 thousand barrels per day (1.5-2 million tons). Could problems arise here?
- Considering the scale of oil production in Russia, such a small increase does not seem to be problematic. We have a large group of companies that are dissatisfied with the tough production restrictions that were introduced under OPEC + in May this year, and they certainly have the opportunity to cover this additional volume. Let me remind you that since the introduction of the restrictions, which took effect in May, Russia has cut oil production by almost 10 percent on an annualized basis. By the end of this year, Russia will produce 512-513 million tons of oil, while 563 million tons were produced in 2019. It is clear that 50 million tons of production decline is a huge amount. The dissatisfaction of the Russian oil companies was that the wells that were stopped would never be started up again. And today there are more and more requests for the final conservation of previously frozen wells. If we now, for example, abruptly withdrew from the OPEC + agreement and there was a question about an immediate increase in oil production in the country not by 125 thousand barrels per day, but by 500 thousand or 1 million barrels per day, then we would have to break our brains, how to accomplish this. But it is possible to achieve an increase in oil production in Russia by 125 thousand barrels per day, even in winter, without any problems, this is not at all a critical value for the industry.
- How quickly, in your opinion, will Russia be able to return to the previous levels of oil production?
- According to the estimates of the Institute for Energy and Finance, which I represent, Russia, given a favorable picture of the recovery in oil demand in the world, will be able to return to the level of 2019 - 563 million tons - only by the end of 2023. That is, it will take Russia about three years to restore the pre-crisis level of oil production.
- Recently, the Russian government canceled severance tax benefits for the production of high-viscosity oil. Tatneft possesses the largest reserves of such raw materials. The company has already announced that it has to postpone the launch of new projects due to tax innovations. How do you assess Tatneft's ability to increase production in the future?
- Indeed, Tatneft and those Russian companies that have fields in the Ural-Volga region and in the north of the European part of Russia suffer primarily from the government's decision on high-viscosity oil. The situation for Tatneft, of course, is not easy. It finds itself in the most difficult position among Russian companies, because high-viscosity oil is very important, first of all, for the prospective development of this company's business. Of course, Tatneft will continue to develop existing fields for the production of high-viscosity oil, but what to do next is a big question. But here one must also understand the situation faced by the Russian government amid a pandemic and a sharp drop in export revenues. In fact, due to the fall in world oil prices and the reduction in oil production and exports, the Russian budget at the end of the year will receive 2 times less revenues from the industry than it was planned before the pandemic. In addition, as you know, our oil production has long been, in fact, "overheated" by various benefits and this situation needs to be corrected. To solve this problem, the government chose a fairly simple way - to compare the volume of budgetary co-financing of production within the framework of the provision of various benefits with the real effect on the industry, that is, how much the production of high-viscosity oil was increased during the period while the benefits were provided. It turned out that in relation to projects in the field of high-viscosity oil, production did not increase as expected by the regulator. But the position of TATNEFT is also understandable - if there are no benefits for the production of such oil, then the prospects for developing complex fields are lost. Here, of course, regional interests must be taken into account, we understand that Tatneft is the largest taxpayer in Tatarstan, but there are federal interests as well.
"BY 2025, CARBON TAX WILL BECOME A REALITY"
- Rising oil prices above $ 50 per barrel is considered to allow US shale companies to financially hedge some of their production. What markets can Russia lose as a result?
- Let's recall the previous oil crisis, which happened in the second half of 2014, after which low prices were kept during 2015-2016, until the OPEC + mechanism was launched. At that time, everyone was waiting for the death of the oil shale industry, but it passed the test, which was due to one very important factor that no longer works today. The fact is that shale producers at that time managed to optimize their operating costs and capital investments - they reduced payments to their contractors, due to which the industry not only survived, but also showed good growth rates in the period 2017-2019. In 2020, the possibilities for reducing the cost of contracting services for drilling, well completion and other services in the United States seem to have been completely exhausted. This is the first thing. The second thing we see in the American market is that investors who have been investing in shale projects for five years or more are now demanding a return on their investments. Most of the American companies that dominate the shale industry are under severe pressure from investors who say: normalize your financial situation, show that you can be profitable, because we no longer believe your promises of quick financial returns in the future without concrete results today. Many of our Western colleagues-analysts, Citigroup in particular, predict a full-fledged crisis in the American shale industry in the coming years. We see that this year, against the backdrop of a pandemic and a reduction in OPEC + production, shale companies also significantly reduced production, and not participating in any deals to reduce production, but simply for economic reasons. One indication that the industry is going through hard times is that in recent months there has been a consolidation of assets under the wing of major US oil companies. So, only in the fall of 2020, Chevron acquired the well-known shale oil producer Noble Energy, and ConocoPhillips reached an agreement to acquire Concho Resources. I think that if OPEC + pursues a balanced policy and does not rush for prices of $ 60 per barrel and higher, but adheres to maintaining a more modest range of prices in the market at $ 45–55 per barrel, then American shale will not quickly return to the market. If the situation starts to turn towards a faster recovery in the oil market, then the Americans can return to the game.
- What markets can we lose in this case?
- Interaction with the Chinese has shown that our oil is very competitive there. We now feel quite comfortable in this market along with Saudi Arabia. So I don't see such risks.
- What can you say about Iranian oil exports?
- If the US administration, headed by new President Joe Biden, goes to restore some form of economic relations with Iran, including easing sanctions, then Iran, in order to return buyers for its oil, may well go to price dumping. We have already seen this with the same Saudi Arabia, which offered discounts on the price of its oil this spring. Why doesn't Iran take similar measures? Therefore, of course, in this situation Urals will be under pressure, but the main risk for Russian oil exports is stagnation and, in the future, a reduction in the world oil market. This is the main thing.
- Do you mean the development of green energy?
- The main oil-importing countries have already announced a course towards carbon neutrality. Almost everyone is now claiming this: the European Union, China, Japan, South Korea. And we expect that after 2025 the oil market may begin to shrink like the shagreen skin. The trend that we now observe, will probably lead to a recovery in global oil demand at 100 million barrels per day by 2023, but it is far from obvious that oil demand will go up. It may be, that by this time new regulatory instruments will be introduced, which will have a serious impact on the competitiveness of hydrocarbons in comparison with low-carbon energy solutions. I mean, first of all, the carbon tax, because the European Union is taking this topic seriously. It is clear that in 2021–2022, a large-scale introduction of such a regulatory instrument should not be expected, since first you need to work out pilot projects for its launch in order to assess the pros and cons. However, by 2025, I am more than confident that a carbon tax will become a reality.
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