Alexander Khurshudov: New Year is coming accompanied by a financial crisis
According to the established tradition, at the end of December we are summing up the year for the Russian oil and gas industry. The results are controversial.
Oil and condensate production this year is expected to reach 556 million tons, a 1.8% increase on 2017 figures. The Ministry of Energy reports new records. Mass media applauds.
However, the global price of the Brent crude has declined by 41% over the last three months and reached $51 per barrel just before Christmas. The following day, though, it won back four dollars, which did not break the downtrend. Consequently, next year we’ll have every chance to get $35 billion less for oil export than this year. Of course, this is bad.
Meanwhile, the first exploratory well drilled by Rosneft and ENI in the deep-water zone of the Black Sea did not find oil. So, the seaside resorts of the Black Sea coast are not at risk of suffering from an oil blowout, as was the case in the Gulf of Mexico. This is not just good, but great indeed.
On the other hand, the production of shale oil in the United States has increased by 1.5 million barrels per day and reached 7 million barrels per day over the year. Without going into details, I’ll name the reason - companies have learnt to extend the life of their wells by plugging water influxes, drilling new horizontal wellbores. It seems to be bad for Russia. Though, everything comes to an end one day. So, let’s not grieve because the shale fest will last for another 3-4 years since nothing lasts forever.
Gas production in Russia increased by 5% to 723 billion m3, a record amount of gas (245 billion m3) was exported. And since the country’s gas reserves are much bigger than those of oil, this is good.
At the same time, the export of American LNG this year also grew by 12%. It seems to be bad for Russia. However, its total volume (about 30 billion m3) is 8 times less than that of Russia, besides, 45% of it goes to Southeast Asia, 26% to the countries of America, and single batches go to Europe, Gazprom’s usual market.
Another good news is that our Yamal LNG complex reached its design capacity of 27.5 billion m3 / year. This is slightly less than the total American LNG export. And now, if there are problems with the Ukrainian transit, Gazprom can compensate for the shortage in Europe by purchases from Yamal. And that, of course, is good.
It is a pity though that the unscrupulous decision of the Stockholm arbitration deprived Gazprom of honestly earned $2 billion, and even ordered to pay Naftogaz another $2.5 billion. This is very bad. We don’t want to deal with such "arbitrators" anymore. Although, it is not yet possible to recover the troublesome money from Gazprom.
Meanwhile, the Turkish Stream gas pipeline is being built as planned and will be put into operation next year. And the Nord Stream-2 is successfully overcoming American obstacles, the pipes are being laid. Which means that Ukraine, in a year’s time, two years at most, will no longer blackmail Gazprom and make hay from Russian transit. And it is wonderful!
We only need to understand what will happen to the oil prices next year. The OPEC + countries agreed to cut production by 1.2 million bpd in early December, but after that the Brent lost 15% of the price. Let us turn to the statistics (Fig. 1).
It turns out that one has to increase production first in order to reduce it. Saudi Arabia began this process in March 2016 and added 420 thousand bpd by October. And then, in January, they reduced it by 500 thousand bpd. Russia carried out the same maneuver: in September-October 2016 they added 350 thousand barrels per day, and then slowly reduced production by 300 thousand bpd. The UAE and Kuwait did the same. All in all, these four major exporters produced 26.7 million barrels per day in the beginning of 2016, and now - 28.6 million barrels per day.
I dare ask what did we “reduce” then? Nothing. We pretended imitating a useful activity. And now we intend to continue this game: since July, Russia has added 300 thousand barrels per day in production, Saudi Arabia - 600 thousand bpd. And in January we will reduce something again.
In addition, the decline in oil prices is fuelled by the fall of stock markets, which has also been going on for three months (Fig. 2).
Fig. 2. Dynamics of the American S&P index futures
Doesn't it look like the period 2008-2009? The New Year seems to be coming hand in hand with a new global financial crisis. And if the exporting countries continue playing giveaway, I would not be surprised if the oil price drops to $20 per barrel.
A crisis is a bad thing, of course, but we don’t need to be afraid of it anyway. By the way, our stock market still looks better than the western one, it has lost only 9.3%. The peak of the crisis in Russia already happened 4 years ago, so now we don't have much to lose.
Happy New Year, my friends! It will be a difficult year, but we are not looking for an easy life. May we all have a little luck this year!