Russia’s unexpected advantage in the oil price war

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While the ruble is now at its lowest level against the dollar in four years, the cheaper ruble has a silver lining for Russian oil producers in the oil price war for market share with Arabia Saudi. The collapse of the OPEC + deal and oil prices hit the financial markets and the currency of Russia, causing the ruble to drop sharply against the US dollar. The more the ruble slides against the US dollar, the lower the production costs of Russian oil companies in US dollars.

Admittedly, a ruined ruble is not the preferred result of the collapse in oil prices for Russia’s monetary system and currency reserves. This could, however, help Russian oil companies reduce their costs in US dollars for their operations.

According to the calculations of Reuters, the lifting cost per barrel of oil equivalent of Russia’s largest state-owned oil producer, Rosneft, is now lower than the costs of Saudi oil giant Aramco. And this is due to the fall of the ruble against the dollar. On the other hand, the currency of Saudi Arabia, the riyal, is pegged to the dollar at a fixed exchange rate, so the dollar costs for Saudi Aramco are the same before and after the collapse of the prices of oil and the collapse of the OPEC + coalition.

Last year, Rosneft’s average dollar lifting cost per barrel of oil equivalent was $ 3.10. This compares to a cost of $ 2.80 a barrel for Saudi Aramco, according to company financial data cited by Reuters.

The ruined ruble has now reduced the cost of Rosneft to $ 2.50 a barrel, while the cost of Aramco is the same due to the fixed exchange rate with the riyal-to-dollar parity, according to Reuters calculations.

Related: The real reason for the price of oil has crashed Rosneft CEO Igor Sechin, Russia’s most vocal spokesperson for the collapsed OPEC + compact, last week said that Rosneft’s operating costs are comparable to those of Saudi Aramco. Rosneft may even be more efficient because, unlike Saudi Arabia, it does not dump the price of its oil.

“Our operating costs are comparable to those of Saudi Aramco. Our cost is $ 3.10 a barrel, theirs is somewhere between $ 2.50 and $ 2.80, “Sechin told Rossiya 24 news channel.

“We can work efficiently and without dumping on prices, because they [Saudi Arabia] make. Therefore, our efficiency may even be greater than theirs, ”said Sechin.

Not everyone in Russia is as certain as Sechin that his company is beating Aramco in terms of low production costs at a time when oil prices are plummeting.

Leonid Fedun, vice president of the second largest Russian oil producer Lukoil, called the crash in the price of oil “catastrophic” in an interview with the Russian TV channel RBC last week.

Oil at $ 25 a barrel is catastrophic, said Fedun, adding that the following collapse of the OPEC + deal and the following Saudi-Russian “war to exhaustion” are the main reasons for low oil prices. lower for years.

Acknowledging that the coronavirus pandemic is hitting economies and demand for oil around the world, Fedun de Lukoil said that if OPEC and Russia had agreed to continue cutting and cooperation, oil prices would have now been lower. ‘around 50 dollars a barrel.

Asked to comment on Fedun’s assessment of “catastrophically low” oil prices, Kremlin spokesperson Dmitri Peskov said Oil prices collapse on Friday was not “catastrophic” but “a very unpleasant price environment”.

Russia has enough buffers to deal with the situation, Peskov told reporters, reiterating the official Russian position that can live with oil prices so low for up to ten years.

Moscow admitted last week that its oil and gas revenues 39.5 billion dollars (3 trillion rubles) less than expected due to falling oil prices and Russia’s deficit this year.

The collapse of oil prices and the prospects of a sharp destruction of demand during the coronavirus pandemic could prompt some Russian companies to rethink previous policies to increase production from April 1, the expiration date of OPEC + pact, suggest the words of a Russian oil leader.

Related: The Bolder Permian Is Playing To Watch The Oil Market Turn Around The Drain

On Monday, leaders of Russia’s largest oil companies met with Minister of Energy Alexander Novak for the second time in three weeks since the dissolution of OPEC + and the collapse in prices.

Tatneft CEO Nail Maganov, who bragged two weeks ago that even $ 8 of oil is not critical for the company, told reporters after the meeting on Monday that it may not be economically feasible for Russian companies to increase production from April onwards, due to the coronavirus pandemic.

“If it weren’t for the coronavirus, it would have been economical to increase production. Almost no one could have predicted such a price collapse, “said Maganov, quoted by TASS.

Russia would be confident beat the Saudis in the game of the pump at will for the market share. But in the end, the game could turn out to be one whose state finances will withstand the price war that is self-damaging in the midst of such depressed demand that even withdrawing 10 million barrels a day from the market tanker could not balance it.

By Tsvetana Paraskova for Oilprice.com

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