The Russian oil sector seems to be in dire need of seeing the end of Western sanctions, even more than it has been so far, and there is no doubt that they will try to use the current circumstances to change EU countries’ stance on the policy towards Moscow, writes Mateusz Kubiak.
Mateusz Kubiak is an oil and gas expert with Warsaw-based consultancy firm Esperis.
Oil markets are tumbling amid unprecedented oversupply as the energy glut reaches one-third of global consumption, hitting lots of petro-states around the world. Including Russia and its oil sector.
As a result of the crisis, the Russians may need to hasten their planned switch to unconventional and offshore drilling. This, however, will be hindered because of the Western sanctions and Russia may start a new campaign to get the sectoral restrictions lifted.
Challenge for the Russians
The historically low crude prices are a harmful blow to Russia’s economy, as the country remains dependent on petrodollars, with oil and gas revenues accounting for 39% of Russia’s total budgetary spending last year. With Russian crude at 10-20 USD/bbl, the Kremlin’s breakeven oil price for the 2020 budget is now at 42.40 USD/bbl.
Amid these turbulent times, the Kremlin will mitigate the impact of the market crisis by opening their vast currency reserves, some $565 billion as of 10 April, but it does not change the fact that the market situation will still significantly affect Russian oil sector at its core.
In response to the market glut, lots of Siberia’s old and exhausted wells will have to be idled and possibly abandoned as Russia deals with OPEC+ reduction agreements, agreeing to cut around 25% of its domestic production.
Further, Russian output cuts might be also forced by the market itself as Russia’s Urals blend export is on the verge of profitability with a global oil price shifting between $10-20/bbl.
Therefore, when the crisis and COVID-19 pandemic are gone in the future, the Russians might need to rebuild their domestic upstream portfolio in order to retain their previous position on the global oil market.
The situation will ultimately require Russian companies to speed up their already envisaged move towards unconventional and offshore projects, including those in the Arctic, which holds at least 25% of the Russian crude oil.
This shift, however, will come at a cost and is dependent on access to Western technologies for drilling and fracking. In both cases, US and EU sanctions remain an obstacle.
As for now, Rosneft alone possesses 28 production licenses on the Arctic shelf, however, not a single one of them is actually being exploited.
Moreover, last year even Russian government officials admitted that Western sanctions and then-perceived-as-low oil prices (around 50USD/bbl) effectively prevent the development of new offshore oil fields in the Arctic.
EU unity in danger?
As shown above, the Russian oil sector seems to be in need of lifting Western sanctions even more than it was until now. And there is no doubt that they will try to use the current circumstances to change EU countries’ stance on the policy towards Russia.
Especially as the pandemic offers Moscow a new angle to work towards yet another “reset,” this time along a shared humanitarian angle.
The COVID-19 crisis looms over Europe as the coronavirus spreads and the particular countries remain on lockdown. A new recession seems inescapable as economists predict that global GDP will shrink by 2.8% in 2020, and this will hit Europe hard too, despite already relaxing some of the lockdown measures now.
Russia hopes that the socio-economic challenges ahead will make Western countries more willing to discuss lifting of the sectoral sanctions on Russia.
As the Kremlin might work towards fracturing EU unity actively, the European countries should speak with one voice. Especially now – during the troubled, pandemic times.