‘Tax terms have changed as many as 21 times in the last three years’
What’s happening to the oil market, if a high price can prop up the Russian economy and why we won’t see new social support measures
Last week was marked by a big rise in oil prices, which was a surprise for many functionaries and experts who expected to see over $65 per barrel in summer, not in February. Famous oil market analyst Mikhail Krutikhin told Realnoe Vremya if the current oil price has objective reasons behind, if it can support the Russian economy and favour social support measures.
“At the moment we have a game of ‘paper oil’, not the balance of demand and supply”
Mr Krutikhin, oil topped $65 per barrel for the first time last week, which became a surprise for many oil market players, many expected to see such a price by summer. Can we say the era of low prices for black gold has ended or is it still early to say so and whatever can happen in the hydrocarbons market?
Last week we anyway saw another picture — oil prices plummeted by $1,5 from $65 per barrel within hours, though they bounced back a few hours later. But they didn’t plummet because oil supply to tankers stopped somewhere, not because some tanker suddenly sank and not because demand and supply changed somewhere. This happened because players who sold a part of oil for a good price wished it, though this price was lower than the market showed.
And keep in mind that this price isn’t for the oil that’s now running through pipes but for futures. Of course, the oil price will be the same as now in 2 months, but at the moment we have a game of ‘paper oil’ and see the reaction of players to the state of the financial market, not the balance of demand and supply.
Now the world’s financial market is being injected with money, and we are talking about trillions of dollars, not billions. But all this can collapse. Look, prices not only for oil but also for copper, other primary commodities are growing. And little depends on the state of the oil sector. The case is that there is a game of big players in the world’s financial market, and I won’t dare say where all this game will lead.
Still, is the current oil price not unexpected?
The rates aren’t surprising, we have anyway seen both higher and lower oil prices. The current price in general is within the range of permissible fluctuations. It is profitable for Russia, we know that we have a budget rule with a cut-off price. In other words, if a barrel of Russian Urals fetches more than $43,3, not an oil company that could spend it on exploration or mineral production but the National Wealth Fund will receive all the surplus for a rainy day. Of course, nobody knows when this day will come, but while the price is above this bar, the Fund is replenished.
What is nowadays the difference between futures, this ‘paper oil’ and its real price, since you have said that the prices are permissible in general?
If we are talking about the Russian brand Urals that’s exported via the Baltic Sea, our oil is around $6 cheaper now than the price of today’s futures. As for the oil Russia supplies abroad via the Black Sea, the difference between this oil and futures is already about $7. In other words, the difference between the futures is significant, but there is compliance with the real price too.
Of course, oil price will be the same as now in 2 months, but at the moment we have a game of ‘paper oil’ and see the reaction of players to the state in the financial market, not the balance of demand and supply
“Big boys who own billions and billions of dollars are playing here”
What are the objective factors of the current price — demand for oil in China, a revival of other big economies, vaccination?
A very canny moment arises here. There is an objective picture: the same cooling, publication of data on oil reserves in US warehouses or data on the revival of manufacturing in the USA, which it has really grown. But the focus isn’t on the fact that the objective factor influences something, the focus is made on the way all this is presented and how robots, that’s to say, software in the financial market, respond to it. It quickly reacts to similar news and makes signals in milliseconds to buy or sell some financial instruments.
And here we see overestimation, underestimation of these factors or circulation of truly false information. For instance, a Bloomberg financial analyst started to say a few days ago to have a look at the increased demand for oil in the USA within a day, and oil reserves in warehouses suddenly shrank. But we watch and see that actually everything looks the other way round, demand decreased. But we see both Bloomberg and Reuters that also took up the information about oil demand somehow participate in this game. While big boys who own billions and billions of dollars are playing here. Yes, they can sacrifice something one day but then get everything and even more back.
Is the percentage of this fake information high?
The percentage is high enough, though the same agencies can just publish words or the opinion who is respected in the world financial market, for instance, somebody from the US FRS or some of the FRS executives in one of the states. For instance, a functionary will say something unexpected, and the market will immediately respond. And it will respond much greater than if a Saudi king appeared in front of journalists and said about the ratio of demand and supply. The reaction to financial news is now stronger than any other news.
Famous economist Vladimir Milov said that $65 was a moderate price for the authorities. How can you comment on this?
Everything depends on the coordinate system. If the price of $65 stays for long, there is a question: how profitable will it be for Russian companies to develop the reserves that are considered to be relatively tight?
The focus isn’t on the fact that the objective factor influences something, the focus is made on the way all this is presented and how robots, that’s to say, software in the financial market, respond to it
“Nowadays Russia doesn’t have sufficient conditions for oil companies’ stable operation”
It is a sensitive issue for oil companies as well as Tatneft.
Yes, it is a serious issue. If we see the price was fixed at $65, this is anyway not enough to start to develop the same Bazhenov Formation in Western Siberia. There is plenty of oil there, but the problem is that it is very hard to produce. And to take on a new project for tight oil reserves, oil companies need this price to not only stay but also have the prospect of remaining at $70-80 per barrel. But at the moment we don’t know how stable the current tendency for a rise in oil price is. As I have said, it can collapse at any moment.
Moreover, Russian companies have another factor of uncertainty — it is tax terms. Nobody knows how the government will change taxes for the oil sector in several years. The same Lukoil recently calculated and figured out that tax terms had changed for oil companies as many as 21 times in the last three years! This is why nowadays Russia doesn’t have sufficient conditions for oil companies’ stable operation. Yes, the price now is $65, but it is unknown for how long it will stay and if it will be enough to develop tight reserves. The $65 is now a middling success: the budget will receive some extra money, no more.
Does it mean that oil companies should be supported with concessions anyway? But will the government support them?
Concessions are anyway indispensable here. And the latest trends when concessions for highly viscous oil were cancelled became an alarming signal for Tatarstan. But I think there must be held a big talk with Tatarstan. Yes, oil in the republic is highly viscous, but the republic applies good technologies to produce it. And they apply it actively. Moreover, a big number of independent oil companies operate in Tatarstan, and they can run a risk by using new technologies. They can risk money by producing oil in tight sections. But the problem is different. What the federal government has been threatening with can come true: a refusal of the system in which by exporting your viscous oil, you make an income as if it were Urals. Such proposals have been heard as early as since the 90s. Yes, such a state of affairs stays, but for how long?
Should Tatneft and other companies hope that quotas for oil production will be raised?
Putin recently talked with the king of Saudi Arabia. We don’t know what they talked about, but I think the future decision on oil production was key in this dialogue. As it is known, OPEC and Russia agreed to make decisions on cutting or increasing production every month. The previous meeting had disagreements, and they will go on. I will remind you that at that moment Saudi Arabia insisted that production should not increase and the existing quotas for production cut stay at the previous level. Russia is known to offer some rise in production. By the way, the United Arab Emirates backed it. And Saudis said: ‘Never mind, but we will additionally cut our own production by a million barrels a day in the next two months’.
So what will the picture be like further? Russia says that oil production quotas should anyway be raised. And you are right to say that a lot of companies severely suffer from it. Tatneft lost 13% of production, Bashneft lost 24%, but what will happen next and will there be a sensible decision?
OPEC and Russia will try to come to a compromise, of course. And Putin and the Saudi king have talks beforehand not accidentally. It is very serious, and I wouldn’t dare now to predict something. I think the alliance of OPEC and Russia isn’t stable because it is hard to meet the interests of all exporters. Moreover, Russia doesn’t have legal leverage to regulate the production, consumption and export of oil. Solidarity can be achieved only thanks to some administrative pressure, and it is very hard to distribute all these quotas.
I think the alliance of OPEC and Russia isn’t stable because it is hard to meet the interests of all exporters. Moreover, Russia doesn’t have legal leverage to regulate the production, consumption and export of oil
“China is a very unpredictable thing”
One of the famous political experts told our newspaper in an interview that oil price is determined not by the leaders of oil countries but God knows what factors. Can you disagree with him?
Oil price is fixed by a lot of factors, it is a very complex concept. The balance of demand and supply used to influence in the past. But in the late 80s when all these games with derivates began, all these futures contracts, spread and so on, precisely the financial market that hid all oil pricing processes began to play a bigger role. Who are the members? It is approximately 20-21 organisations — large banks, investment funds, pension funds. As I think these organisations sometimes agree on their position, something they don’t, but they fix the price.
Is the factor of China and its revived economy really important?
When China had negotiations with Gazprom, the Chinese made it clear: ‘We aren’t interested in Russian gas at all, we meet our needs without it. First of all, we are interested in oil, and we will buy as much oil as you can give us’.
Now we supply China with oil as much as we can — all the logistics of our oil to China, including the route via a pipeline through Kazakhstan, shipping from Black Sea ports and by railway hit the ceiling — Russia can’t give China more than 80 million barrels a year.
As for China’s role as an oil consumer in the oil market, this is carefully scanned. Firstly, it is unknown how China will move on the road of refusal of internal combustion engines. The refusal is said to be much faster than now. Moreover, petrochemistry develops in China that needs a lot of oil. And the key moment is that China is building strategic warehouses for oil reserves with completely unclear plans, it is replenishing them, moreover, even when oil is very expensive. This is why China is a very unpredictable thing, at times it behaves illogically: it buys oil when nobody in the world needs it very much and vice versa.
Now we supply China with oil as much as we can — all the logistics of our oil to China, including the route via a pipeline through Kazakhstan, shipping from Black Sea ports and by railway hit the ceiling — Russia can’t give China more than 80 million barrels a year
“Demand for oil will gradually reduce in Russia”
What’s going on in Europe? Can Russian companies count on it in the next decades as a consumer of hydrocarbons?
Europe remains the same — decarbonisation continues there now. If we have a look at Europe’s actions on the transition to clean energy, wind, the sun, these decarbonisation plans are realistic. It means that it is moving towards a gradual refusal of internal combustion engines, to intensive hydrogen energy development. And I think that they will use the latest technology, which means that oil demand will gradually reduce in Europe, this is for sure.
Yes, reliance on gas as a bridge of transition to greener energy will stay for some time there, and here Russia can be concerned. And we hear people say we will export a lot of hydrogen in Europe. I started to stay tuned for the topic of hydrogen and how much Russia can supply to Europe. And I found out that we can’t export too much. Our power generation capacities will be enough only for 3,5 million tonnes of hydrogen. Moreover, Europe insists they need green hydrogen, the one made of the sun, wind and renewable sources, while what can be considered such a product in Russia? Only the product of hydropower plants, 17% of all generation. Nuclear power plants will provide 20%, mud, gas and oil are the rest. And Europeans won’t purchase the product that envisages burning gas or coal. Consequently, the possibilities of green hydrogen in Russia are very limited.
Besides, if hydrogen in Russia is made of methane, neither will this suit Europe. They will say: ‘If methane decomposes into hydrogen and carbon, what will you do with carbon? You don’t have the technology to inject hydrogen back to the stratum. And where are you going to release it? Into the atmosphere? We aren’t going to buy such hydrogen from you’. And it is only a part of the problems for Russia. I think they will be buying our gas until 2030 and, I think, no less than a third of all supplies.
Europe insists they need green hydrogen, the one made of the sun, wind and renewable sources, while what can be considered such a product in Russia? Only the product of hydropower plants, 17% of all generation. Nuclear power plants will provide 20%, mud, gas and oil are the rest
“The ruble is very overestimated, while the dollar is underestimated”
Mr Krutikhin, how much does the current ruble rate help Russian, Tatarstan oil companies? I have noticed when oil crossed the threshold of $50, the rate was high, over 72 rubles. Even now when oil cost $63-64, it is almost the same or even over 74 rubles.
The Central Bank and Ministry of Finance hold the rate of our currency. Of course, investors who invest in federal loan bonds and so on play a role here. But the state and its agencies are the main characters here, and the dollar rate is held in Russia considerably artificially.
Does it mean that the ruble is understated?
The ruble is very overestimated, while the dollar is underestimated. Clearly, it is profitable for our exporters to have a cheap ruble and an expensive dollar. Their incomes are in dollars but they will spend the money in rubles — on salaries for staff, electrical energy and so on. Even though such a situation is profitable for our oil companies, this issue must have a balance because the Russian economy severely depends on imports. Suffice it to say that only 6% of the components of medicines are made in Russia, the rest is imported, this is why medicine production needs an expensive ruble.
Can we assume then that the dollar will cost more than 70 rubles both with the oil rate of $70 per dollar and $75?
I can’t predict this. At the moment, I am anxiously expecting something to change in the global financial market. Due to this, oil prices can go both up and down. Moreover, a serious upsurge in inflation is also possible in the same States. And a lot of scenarios can raise the alarm.
You have said that the current oil prices can’t yet satisfy most oil companies. Is there a price that would suit oil companies and allow decreasing the wave of social stress?
As I have said earlier, first of all, stability, in the same tax rates, would satisfy oil companies. And if there is stability, oil companies will find a way out. I remember oil price fell to $9 per barrel in 1998. One familiar oil worker told me: ‘No problem, we can operate at $7 per barrel too’. This is why the game rules, particularly tax rules, were clear to oil companies.
As for increasing people’s well-being with high oil prices, I will say the following: you saw authorities in many countries opened their money boxes during the pandemic and handed out money to people to support them during this tough period. But this didn’t happen in Russia. Now oil price is good for the NWF, of course, but let’s be frank, in Russia, money isn’t spent on people anyway, though the pandemic hasn’t disappeared yet.
Now oil price is good for the NWF, of course, but let’s be frank, in Russia, money isn’t spent on people anyway, though the pandemic hasn’t disappeared yet
But the situation in the economy isn’t simple, it is rumoured that prices for sausage, eggs, chicken meat will rise, people’s incomes are falling. Are the authorities going to keep the prices if money is not handed out to people?
If the prices are held, there will be a deficit, cards for the poor will appear. Let’s remember how they wanted to fix petrol prices, but it didn’t work — they had to support oil refineries by a damper mechanism and God knows what else what. In the 20s of the 20th century when the New Economic Policy was introduced, the economy blossomed. But a market was created at that moment, while we don’t have a market! There was a market in the 90s, and those oil companies developed in the interests of shareholders, not functionaries.
Still, can we expect serious social support for the needy, the poor from the authorities next year with good oil prices, let’s say, from $60 and more?
Serious decisions aren’t going to be made — some ‘supplementation’ of people will continue on a limited scale, but no more.