Winning and losing is largely a matter of perspective, and that’s no different in today’s low oil price environment. Still, certain data and metrics can provide a more incorruptible viewpoint on the carnage, or lack thereof. In that regard—and to the surprise of many—count Russia’s oil majors among the current winners.
Ranked according to cash flow, profit margins, and share prices, Russian giants Rosneft and Lukoil as well as smaller producers like Gazprom Neft and Bashneft are outperforming Royal Dutch Shell, BP, and Exxon Mobil.
The success is largely attributable to a still-weak ruble and a favorable tax regime that reduces the overall tax burden when oil prices fall. Moreover, Rosneft cites a production cost per barrel nearly five-fold less than what U.S. E&Ps are paying.
Among Russian companies, Rosneft and Lukoil saw the greatest increases in profitability in the first quarter of 2015 versus quarter one of 2014. Exports of both crude oil and refined oil products are up, and the companies are yielding free cash flow at a rate more than two times greater than Shell or BP. After a precipitous drop in 2014, Rosneft’s earnings before interest and taxes (EBIT) are now approaching pre-collapse levels, and are already well above those of BP and Shell.
Bashneft and Gazprom Neft are no slouches either. Bashneft, recently renationalized, is one of Russia’s fastest growing firms by oil output. With production costs well below the global average—roughly $4 per barrel—Bashneft has seen its oil production and operating income grow 12.4 percent and 10.3 percent respectively from a year ago. For its part, Gazprom Neft boosted hydrocarbon production by 20.5 percent compared to the first half of 2014 and EBIT are up 12 percent from the same period.
In Moscow trading, shares of Bashneft, Gazprom Neft, Lukoil, and Rosneft have risen a combined average of nearly 16 percent on the year. Though their growth is more subdued on the London market, they have grown; Shell and BP are down 27 percent and 17 percent respectively.
Adjusting our perspective more long-term however, reveals that future growth aspirations face more than a few hurdles.
While the aforementioned metrics suggest a rosy outlook, revenues are down across the board from a year ago. Production has proved remarkably resilient thus far, and should continue to do well in the medium-term barring any drop below $40/barrel, but Russia expected more from its Arctic and near Arctic reserves to this point. Russia's arctic ambitions will be delayed.
To date, successes with the Prirazlomnoye field and promising discoveries on the Universitetskaya-1 well have largely been overshadowed by troubles with Sakhalin-2 and Yamal LNG, U.S. and EU sanctions, and a slowing Chinese economy.
At Yamal LNG, majority stakeholder Novatek is believed to be finalizing a deal with a Chinese investment fund for a 9.9 percent, $1.4 billion, stake in the consortium. However, financing troubles leave the prestige project an estimated $15 billion short of its target. Rosneft’s Sakhalin LNG project is facing similar troubles. Both will face a grimmer demand situation upon completion.
Further, sanctions and U.S.-made equipment bans have hit the Yuzhno-Kirinskoye field, a key greenfield for Gazprom’s Sakhalin-2 LNG project, and will surely stifle development in East Taimyr, a shelf tender hotly contested by both Rosneft and Lukoil.
Equipment, and not financing, represents the larger obstacle to Russian success in the Arctic. In all, foreign machinery and technology is believed to comprise up to 70 of the equipment in Russia’s oil and gas industry. Offshore, that disparity is even greater – somewhere in the range of 99 percent. There’s a push to boost domestic capabilities and Rosneft’s Zvezda industrial complex seeks to close the gap, but heavy deficits are expected in the medium-term.
To make matters worse, the Russian government is looking to raise more tax revenue from its energy companies. The decline of the ruble has helped shield Russia's oil and gas companies, but that comes at the cost of the Russian treasury. Higher taxes are just around the corner.
With broader economic diversification appearing unlikely any time soon—non-oil GDP has exhibited shockingly little change since the collapse of the Soviet Union—Arctic oil and gas development takes on added importance. International cooperation is what they need, but isolation and indecision is what they’re getting.
First published at Oilprice.com