SURVEY: Russia battles against low oil prices and Western sanctions
| DOI | http://doi.org/10.1111/oet.12227 |
| Published date | 01 February 2015 |
| Date | 01 February 2015 |
SURVEY
An analysis of the impact of falling oil prices and sanctions on the Russian oil and gas industries by Oil and Energy
Trends Consulting Editor, Dr Paul McDonald
Russia battles against low oil prices and Western sanctions
esharpfallincrudeoilpricessincethemiddleof
2014 has aected oil producers worldwide. Russia is
oneofthecountriesmostaectedbecauseofitslarge
production; but Russia has the added burden of eco-
nomic and nancial sanctions imposed by the European
Union (EU) and the US over Moscow’s involvement in
Ukraine, which are aimed atrestricting the ability of Rus-
sia’s energ y companies to produce and export their oil
and gas.
Low crude prices and sanc tions have so far had only
a minor eect on Russian oi l production; and output
even rose slightly in 2014. is year, however, may see a
decline, especially if oil prices remain weak: and over the
longer term, oil companies could experience diculties
in bringing on new areas of production to replac e their
older, declining elds. e same applies to natural gas
in Russia, which faces the additional problem that the
EU wants to reduce its reliance on Russia for gas over
the longer term, threatening the futureof some large gas
developments thatwere originally designed to supply gas
to Western Europe.
e Russians themselves realize that majorchanges lie
ahead for their oil and gas industries. In t he short-term,
this means a switch in emphasis from exporting oil
andgasmainlywestwardstoseekingnewoutletselse-
where. For the longerterm there is already recognition in
Moscow that Russia’s economy as a whole must become
less dependent on energy and, especially, oil.
Falling prices
Between mid-June 2014 and mid-January 2015 the
price of Russia’s principal export crude blend, Urals, fell
from $113.70 to $46.05/bbl: a fall of $67.65 or 59.5%.
Gas prices have als o dropped, although not by the
same proportion. e result has been a shar p fall in
national income. Russia’s external trade is dominated by
energy, which accounts for about 70% of its total export
revenues.
e decline in oil prices has caused a major problem
for the wider economy. In particular, it aects spending
by the government. e state budget for 2015-2017 is
designed to balance at an oil price of $100/bbl. Current
prices will require heavy borrowing by the government
to cover the budget decit. Government borrowing will
not be easy, however, because of EU and US sanctions
that are designed to restrict Russia’s access to foreign
capital.
Low oil prices and their consequent eect on state
revenues have, in turn, caused a decline in the value of
therouble,forcingthecentralbanktousesomeofits
foreigncurrencyreservesinanattempttopreventan
even greater decline. e net result is a weakened cur-
rency, leading to an increase in the cost of repaying for-
eign debt, along with higher interest charges for Russian
borrowersfollowingahikeindomesticrates.Among
those aected by increased borrowing costs are oil and
gas companies.
e weakness of the Russi an economy has now
turned into a major political issue. President Vladimir
Putin has accused both the US and Saudi Arabia of
deliberately causing the fall in oil prices with the aim
of damaging the Russian e conomy. At one point in
late-2014, Russia considered the idea of cooperating
with OPEC in a coordinated series of production
cuts that would have seen a fall in Russian output of
approximately 300,000bpd or nearly 3%. Talks were
held privately with OPEC in advance of the organi-
zation’s November ministerial meetings in Vienna,
but it became clear that Saudi Arabia and a number
of its allies were not prepared to take part in a pro-
gram of production cuts, fearing that such a policy
wouldleadtolossofmarketshareintheirmainexport
markets.
Russia’s energy minister, Alexander Novak, has since
made it clear that Russia will not reduce production
as part of any attempt to shore-up world oil prices.
e Ministry’s view is that such an attempt would be
completely futile and would also lead to a loss of market
share for Russian exporters.
Rebalancing the economy
MrPutinmeanwhilehasreturnedtothequestionofRus-
sia’s falling oil revenues, saying that the country must
reduce its dependence on the export of oil. According
to the Russian President, low oil prices could provide
a stimulus to the growth of new and existing manufac-
turing enterprises within Russia: and plans are already
afoottoexportmachinerytovariousnewmarketsand
to expand the service sector inside Russia.
ere may also be a smaller move away from natural
gas exports, although this could have more to do with
sanctions than falling revenues from exports. Plans for
new gas projects are likely to come under scrutiny as
demand from Europe for Russian gas declines under
pressurebothfromfallingenergydemandandthedesire
of the European Commission toreduce the EU’s reliance
on Russia for imports of natural gas [1].
© 2015 John Wiley& Sons Ltd
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