MOSCOW: In February, Russian oil output averaged 10.88 million barrels/day, a touch down on a post-Soviet record of 10.91 million b/d.
It is an impressive 2% up year-on-year, given the level of the oil prices and the fact that upstream investments were up only 9.6% y/y in rouble terms in 2015 (vs 34% devaluation of the rouble against USD and around 10% y/y inflation in the oil & gas sector).
The lower output did not prevent daily export volumes to go up to 4.98 million b/d in February. It was an extra 30,000 b/d vs January and some 190,000 b/d higher than last year. The share of exports in total output was close to 46%, somewhat elevated compared to previous years.
According to the Russian media, the ministry of energy expects oil companies to maintain the current level of oil output (10.8-10.9 million b/d) until June-August. Taking into account that the energy ministry pencilled in an average output of 10.7 million b/d of oil for 2016, Russian crude output would fall to 10.5-10.6 million b/d in the second half of the year.
Russia might present this expected decline in output as part of a special deal with, say, Iran. Such a move is bound to make a headline or two and keep the oil bulls happy. In reality, of course, the supply from Russia would be exactly the same as expected for the full year and would have little real effect on the oil markets.
Meanwhile, Russian oil continues to flow into the globe, filling available storages and swimming pools, exactly as BP’s CEO Robert Dudley has been predicting
Unlike oil, Russian daily gas output was down 8.6% m/m in February, on much warmer weather compared to the previous month.
While the total production was down, Russian gas exports to Europe seems to be going strong. The official numbers for total exports are not yet available, but Gazprom’s CEO has already reported that it sold 7.5 bcm more in Europe in the first two months of the year. It sounds very good, but extra volumes are partially down to a low base last year.
Gazprom’s joy over re-taking the European market might have been overshadowed by another attempt on its pipeline gas monopoly. Vedomosti reported that Novatek has asked the Russian president for a permission to sell gas directly to the European gas market.
The export sales would still be structured as an agency agreement with Gazprom, allowing the company to retain its export monopoly status, but in name only. In reality, Novatek would be selling its gas to Europe at export netbacks (export prices less export duties and transportation), which are substantially higher than domestic ones.
Novatek argues that its exports would increase Russian gas market share in Europe, rather than cannibalise Gazprom’s volumes.
It seems likely that Novatek will get what it wants. The argument about Novatek taking market share in Europe is weak, but it comes at a fortunate time when Russian exports to Europe are very strong. Novatek also needs some extra cash to finance its $27 billion Yamal LNG venture. The company has received significant state support for the project, but the government finances are running tight and there is still a multi-billion gap in Yamal LNG financing.
The net result would be more Russian gas available in Europe, which could put pressure on prices in the short term. In the long run, it would also mean even more Russian gas on Europe’s door step, when Yamal LNG is complete. Good for European gas prices, not so good for the health of the Russian gas industry.
