Argus FSU Energy News, prices and analysis from the Former Soviet Union and Central Europe Volume XXV, 15, 16 April 2020 Russia plans flexible approach Russia’s energy ministry and oil firms are still discussing how to approach the distribution of production cuts under the new Opec+ agreement. “The heads of oil companies fully support the parameters of the deal and noted that decisive actions are needed,” energy minister Alexander Novak said at a 15 April meeting between government ministers and President Vladimir Putin. Novak met oil company chiefs on 13 April. Urals Med vs North Sea Dated Russian producers’ cut quotas were distributed proportionally under Opec+ $/bl Diff agreements in January 2017-March 2020. But Novak said after the finalised version 5 North Sea Dated = 0 of the new output cut deal was announced on 12 April that Russia is “flexible” and “other proposals” are possible this time around, insisting that firms can 0 “promptly deliver the quotas Russia has taken on”. - Gazpromneft chief executive Alexander Dyukov told company employees this -5 week that “new large-scale projects are not yet in the active investment phase, which adds to the flexibility of our decision-making”. But he acknowledged that -10 Apr Jul Oct Jan Apr the company will have to re-evaluate its plans and delay “certain projects”. 19 20 The company is ready to deliver its share of production cuts in May, Dyukov told Russian newspaper Kommersant, but reining in output will be “easier in June, when Gazpromneft can reduce [spot supplies] to fit into our quota”. The RTS oil and gas index firm has already sold April-May crude, despite the global demand slump. 300 Lukoil says it has “an understanding of how we will reduce production, but at 280 this stage it is premature to talk about it in public”. The company “consistently 260 supported an extension of the Opec+ deal [that expired on 31 March]… and fully 240 endorses the conclusion of this new agreement”, it says. 220 200 Rosneft declines to comment. Chief executive Igor Sechin was an outspoken 180 15 Apr = 164.56 opponent of Russian participation in previous Opec+ agreements, and Rosneft was 160 the most eager of Russia’s producers to increase output when the Opec/non-Opec 140 alliance collapsed in early March. 120 Apr Jul Oct Jan Apr 19 20 The first cut is the deepest After a production cut of 2.508mn b/d in May-June, Russia is due to reduce output by 2.007mn b/d in July-December and by 1.505mn b/d in January 2021- April 2022 — all against a 11mn b/d baseline. Novak’s “flexible” approach could CONTENTS mean passing much of the burden to producers facing natural decline, rather than those operating new projects with growing production — Gazpromneft lobbied Shell exits Russian joint venture 3 unsuccessfully for such an approach in 2017. Gazpromneft to cut output, capex 4 Most of Russia’s oil companies reined in production at brownfields to cut output in 2017-20, although Rosneft slowed greenfield development. Less efficient Rosneft could reduce spending 4 brownfields are the obvious choice for cuts, some industry observers say, but Gazpromneft plans refining cut 5 others argue that a swift reduction can only come from greenfields, where there Kazakhstan expects output drop 6 are fewer wells with higher flow rates. Gazprom presses on with PoS 1 7 “It is much more efficient to reduce production at large new projects in the Novatek sells less LNG 8 short term — this will cost less and it will be easier to restore output when Duma approves LNG export changes 8 demand recovers,” Sberbank analyst Andrei Gromadin says. In a lower oil price More Urals moves east 9 environment, efficiency at older and newer fields is comparable if crude quality is FSU product exports 21-22 similar, he says. Copyright © 2020 Argus Media group Available on the Argus Publications App Лицензия зарегистрирована на: Ekaterina Sablina, Argus Media (Moscow) Argus FSU Energy 16 April 2020 EDITORIAL Too little, too late Lukoil vice-president and co-owner Leonid Fedun this week likened the new Opec+ production cut deal to the Brest-Litovsk treaty of March 1918, when the “Bolsheviks were, because of various reasons, forced to agree to a deal with Germany, which was humiliating and hard”. The Brest-Litovsk treaty ended the war on the eastern front, allowing belea- guered revolutionary Russia to consolidate and ultimately survive, at the cost of surrendering huge swathes of territory. There are no winners or losers in last week’s Opec+ agreement — all participants have pledged to sacrifice crude output in pursuit of market stability — but the new deal does resemble a fragile peace treaty between great powers, with the participants’ commitment likely to be tested by mutual suspicion and external circumstances. At the heart of the latest version of Opec+ is a deal between Russia and Saudi Arabia that aims to halt the precipitous collapse in prices that followed the unrav- elling of the previous agreement on 6 March. Moscow and Riyadh, unable to compromise then over how to support the market in the face of the initial impact of Covid-19, have found common ground again much sooner than either side would have expected a month ago. The new deal is much harsher than the old one by several orders of magni- tude, reflecting how the pandemic has ravaged the global economy in the intervening weeks. It is meant to take 10mn b/d off the global market in May- June, 8mn b/d in the second half of the year and 6mn b/d in 2021 and early 2022. Russian firms are ready to fall in behind the agreement and deliver the necessary cuts promptly, according to energy minister Alexander Novak (see p1). Gazpromneft chief executive Alexander Dyukov said this week that co-ordinated global output cuts are the only efficient strategy in response to the sharp drop in demand. “It is definitely preferable to reducing production because storage facilities are full,” he added. But exactly how Russian companies will deliver and how the reduction will be distributed among them is not yet clear. The cuts will be a tall order for most Russian firms, even those already struggling to maintain output. Russia’s initial 2.508mn b/d output reduction in May-June will, if implemented, take overall liquids production down to levels last seen in 2005. And unless the agreement is revised, output is likely to remain well below 10.5mn b/d until the end of April 2022. Returning production to earlier levels, assuming market conditions warrant it, will also be a challenge. Do the maths And there is no guarantee that any of this will work. The cuts take place against an expected 18mn b/d year-on-year collapse in global demand in the second quarter, pointing to stockbuilds of 12mn-13mn b/d in April-June, according to Argus estimates. At this rate, global storage capacity is likely to be full by late May, even with the cuts. And the headline 10mn b/d cut should be treated with caution. The baselines — 11mn b/d for Russia and Saudi Arabia, October 2018 output for everyone else — mean that the actual volume removed from the market this quarter may be closer to 8mn b/d, even before factoring in patchy compliance. There will of course be organic reductions from other producers. Infrastructure constraints will trigger shut-ins in the short term, and spending cuts will do the same in the medium term. But this will not radically change the market arithmetic. The Brest-Litovsk treaty referred to by Lukoil’s Fedun bought time for the Bolshevik government. Russia’s participation in the new Opec+ agreement is also an attempt to buy time, but it may be too little, too late. Copyright © 2020 Argus Media group Page 2 of 23 Лицензия зарегистрирована на: Ekaterina Sablina, Argus Media (Moscow) Issue Ref: 130219 Argus FSU Energy 16 April 2020 NEWS Shell exits Russian joint venture Shell is pulling out of a Russian joint-venture exploration agreement with long- term partner Gazpromneft. “Shell will not pursue completion of the deal creating the Meretoyakhaneft- egaz joint venture… because of the challenging external environment,” it says. The major has been reducing investment and withdrawing from projects around the world as a result of the global economic downturn, the sharp drop in oil prices and demand uncertainties related to Covid-19. Gazpromneft and Shell agreed to establish a 50:50 joint venture based on the former’s Meretoyakhaneftegaz production subsidiary in June. The unit holds the licence for the Meretoyakhinskoye field in Yamal-Nenets, and licences for the promising Tazovsky, Severo-Samburgsky and two Zapadno-Yubileiny blocks were to be transferred to Meretoyakhaneftegaz when the deal closed. The companies pledged around Rbs100bn ($1.4bn) of investment to develop the blocks’ combined geological crude reserves of up to 8bn bl. The joint-venture deal was expected to be completed by the end of 2019, but the government com- mission responsible for inward foreign investment delayed approval in November, requesting clarification of “technical and economic issues”. Gazpromneft will continue development of the blocks on its own, in ac- cordance with a previously approved work plan, the company says. It still plans to commission the 76.6mn t (559mn bl) Tazovsky field by the end of this year — Gazpromneft originally indicated that it would launch the field in September- October, but this was before global demand and oil prices collapsed and before Russia agreed to renewed, deeper production cuts under the latest Opec+ deal of 2.5mn b/d in May-June.