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<span/>The coronavirus
(COVID-19) pandemic has coincided with a return to prominence for
Russia within the global oil markets. This is not to say that
Russia was a bit player prior to 2020, but the country's role in
the 12 April OPEC+ production cut deal - and the oil price war that
preceded it - has elevated it to the center of the global crude
market. Notably, Russia has secured itself an equal production
quota as Saudi Arabia.
Under the terms of the deal, Russia has committed to a crude oil
production cut target of 2.5 million b/d during May-June 2020, to
be followed by progressively smaller reductions through April 2022.
The planned Russian cut is equal, of course, to that of Saudi
Arabia but far more than the country has ever attempted before.
Russia's oil industry is dominated by state-owned enterprises, but
it is still less centralized than that of Saudi Arabia, so it may
be more of a challenge to ensure compliance. A great variety of
geologic and geophysical conditions also make compliance with a cut
of this magnitude more difficult. Currently, there are more than
1,800 active oil fields in Russia, with the 20 largest comprising
just over a third of production. In contrast, Saudi Arabia only has
around 100 total oil fields, with five "super giants" accounting
for a full 75% of production capacity.
Of course<span/>, given
the current demand environment, significant production cuts from
Russia (and all the world's leading producers) would have been an
inevitability no matter what: if you cannot sell your oil or store
it, you simply cannot produce it. And the government certainly
appears keen to ensure compliance, instructing all Russian
companies to cut output by 18-20% during May.
Figure 1: Russia crude and condensateproduction
Assuming even close to full compliance, Russian producers will
be in uncharted territory whenever the pandemic finally ends.
Reactivating a well is not always a simple as flipping a light
switch. Here, too, the geology of some Russian wells is more
complex; Saudi Arabia's oil fields can more readily throttle down
and then throttle back up once the crisis has passed. Still, IHS
Markit believes the threat of permanent reservoir damage for
Russian producers is overblown. The government certainly
understands the critical role the oil industry plays in its
geopolitical balance sheet.
Russia's refining industry occupies a slightly shakier branch,
however. After much equivocating, the government is in the midst of
a major phased tax reform (over 2019-24) that is, in effect,
removing an indirect state subsidy for export-oriented refiners.
This will put them more on an equal footing with competing
refineries in export markets, which is not a good thing since
Russia's refining industry generally has a high cost of production.
Russia is also a net long market that depends on its ability to
export product. Gasoline is the linchpin; if Russian refineries
cannot find a market to "dispose" of their surplus gasoline, runs
will have to decline now that the industry is no longer
protected.
Figure 2: Russia gasoline supply/demand balance
This is obviously problematic in the short-term, with gasoline
demand collapsing around the world. And, as elsewhere, Russian
refineries are being obliged to cut runs. But, even when the
pandemic passes, Russian refineries are not likely to find abundant
gasoline export opportunities. For one thing, demand in most of the
country's traditional export markets (Europe and the CIS) is
declining. For another, most Russian refineries are not as
competitive in those export markets without the aforementioned
government subsidies.
So, gasoline exports function as both a "safety valve" and a
"weak link" for Russian refineries. If a market for gasoline cannot
be found (or forced), refinery runs will necessarily decline. In
that regard, it was going to be tough sledding for the Russian
refining industry even before COVID-19. But with the pandemic
potentially shifting the long-term demand curve in Russian export
markets downward, the refining industry could find itself squeezed
even more.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
and can be tailored to focus on your areas of inquiry. Book in a
consultation with Rob Smith.
Rob Smith is a Director of the Global Fuel Retail group
at IHS Markit.
