How Will Cheap Oil Affect Russian Petro Firms

By Ivan Shlygin, January 20, 2015

ranged from $30 to $40 per barrel, and oil production began in the Samotlor field – one of the world’s 10 biggest oilfields at the time, and by 1988 the oil price quickly plunged to $15. Davletshin believes that Russia’s petroleum companies will still manage to increase their profit by 30-50 percent within three to five years, owing mostly to new technology and shale projects.

$70 Per Barrel

“The result will depend to a large extent on how quickly the oil price is going to drop,” says Alfa-Capital managing company analyst Andrey Shenk. “Theoretically, even with a price below $70 per barrel, our oil companies could maintain the current level of oil production and operational profitability.”

According to Shenk, the tax policy in the petroleum sector is shaped in such a way that the cost efficiency of production is rather stable at the operating level, and oil price growth boosts growth of budget receipts, and vice versa. “Thus, a drop of oil price has a negative impact on the budget rather than on the oil firms,” says Shenk. “However, a significant price decline will bring about a decrease of investment in drilling and exploration, which will consequently lead to a drop in oil output.”

Shenk believes that a continuing oil price decline below the $70-per-barrel mark isn’t likely since it would cause investments in production to shrink, and, consequently, would create expectations of reduced future oil supply, stabilizing the price based on expected demand.

Verkholantsev supports a similar view: “A drop below $70 will nudge OPEC members to take decisive steps to reduce oil supply; additionally, at these prices many projects in the United States will go below the breakeven level.”

Saxo Bank’s Hansen said that U.S. shale oil producers must ask a relatively high price for their product in order to secure profit, and a further price drop of the WTI crude to $70 could cause the reserves to shrink, which would help stabilize the price. “The U.S. drilling rig fleet went down from the peak figure of 1,609 units in October to 1,568 units, and this could be the first sign that the weakest and the most expensive production facilities are closing down,” Hansen said.

$50 Per Barrel

“It’s more correct to assume that global economy will grow – it will lead to growth of demand for oil, and, consequently, there will be no long-term price decline. But short-term price movement amid panic in the markets could drive prices down even below $50 per barrel as it had happened back in 2008,” Shenk says.

Verkholantsev considers scripts with a price drop below $50 per barrel very unlikely, based on the factors which spurred oil supply in the global market: first of all, the growth of oil output in Libya and the United States, while demand didn’t demonstrate the same pace of growth.

Copyright, Oil&Gas Eurasia, 2015.