The Master of Oil

Why is the President of Russia meeting with the heads of oil companies?

The Master of Oil

Originally appeared at Interpolit, translated by Carpatho-Russian exclusively for SouthFront

On Tuesday, March 1, president Vladimir Putin will meet with the heads of the largest oil companies of Russia. This is reported by Vedomosti [News].

According to the publication, the key points of the agenda appear to be:

  • the possibility of freezing or even reducting production of “black gold” in Russia;
  • taxation of the oil-producing sector;
  • development of the Russian ‘oil industry’ in the conditions of low prices.

Recall that oil-producing countries have already been discussing for several months the possibility of reducing oil production in order to push the prices up. On February 16, the Minister of Energy of Russia Alexander Novak discussed this subject with his colleagues from Saudi Arabia, Qatar, and Venezuela in Doha. They agreed that each of the countries in the current year will keep production at level as of January 11.

For Russia this means that its oil production in 2016 can increase by approximately 1.9 % (in January we had a local peak of production). Now the oil surplus in the world is about 1.75 million barrels per day. According to Novak, if these agreements that have been adopted are implemented, this will reduce overproduction by 1.3 million barrels.

Novak said that the idea of freezing production is supported by countries controlling 75% of world-wide export of oil. So Nigeria, the largest producer in Africa, promised to freeze production at the level of 2.2 million barrels per day.

One more critical issue for the presidential meeting is an increase in taxes on the ‘oil industry’ to solve the budget deficit problem. The last time when the Ministry of Finance suggested raising taxes on the oil and gas sector, the companies were presented with a fait accompli, and Vladimir Putin did not meet with them. But now the situation has changed: the prices for oil fell to $30-35 per barrel, and it is necessary to find the golden mean so as to help the budget but not undermine the development of the sector on which in any case nearly half of the budgetary receipts depend.

Finally, at the meeting there will probably be a bargaining around the operating conditions of the ‘oil industry’. The President and oil industry people can come to some gentleman’s agreement and agree what to do. For example, the companies could stabilize production, and in response the Ministry of Finance not raise taxes.

Why was a meeting with the heads of ‘oil industry’ necessary to Putin, and how might a change of the rules of the game in the sector affect Russia’s economy?

— “The main reason for Putin’s meeting with the oil industry people was, in my opinion, the letter of the Minister of Finance of the Russian Federation Anton Siluanov addressed to the Prime Minister, and the overall situation with financial fleshing out of the anti-recessionary program of the government,” the manager of the “Finance and economy” depatment of the Institute of Modern Development, Nikita Maslennikov, is convinced.

— “I recall that in the 2016 budget there is a presidential reserve — a frozen pension accumulation of slightly more than 340 billion rubles. And Siluanov in the letter suggested requesting from the president up to 130 billion from the reserve to finance the anti-recessionary Plan-2016. “

In this, the government is preparing for privatization of part of the state assets, including Rosneft and Bashneft shares. In particular, today it is suggested to sell 19% of shares of Rosneft to a strategic investor, where the transaction total is estimated at approximately 490 billion rubles.

If such a sale takes place, many problems — both shoring up the financial sources of the anti-recessionary program, and budgetary adjustments, — will appear in a totally different light than now. But I recall that a decision on adjustments to the budget must be adopted by the State Duma in April.

In this situation, problem number [one] is to search for a strategic investor in state assets, and first of all for shares of the oil companies. Present market conditions are not in any way conducive to a classical sale of state assets — it is possible to sell them only very cheaply. Therefore the President will resolve the issue of a search for an internal buyer, from among the largest Russian oil companies.

For this purpose, a meeting with the heads of the ‘oil industry’ was also required. It is extraordinarily important to Putin to probe the situation, to feel it in his finger-tips. The President must discuss with the heads of oil companies: how do you see it, if you chip in together and buy state assets, or someone buys from you?

It is understood that such transactions presuppose a package of compromise solutions. If an oil company helps the country now (acquires state assets), it will clearly request something in exchange. And at this point the President can talk about tax regimes, and how the sector will feel in the conditions of a production freeze.

Essentially, now it is important to Vladimir Putin to decide on a strategy, since this is a question of several interconnected subjects and options for their development.

What kind of subjects?

— “We will begin with a freeze on oil prices. In practice, this is a question of the agreement not to exceed the level of production of January 11. As in January we had a local peak of oil production, it therefore turned out that in 2016 we can even increase “black gold” export somewhat, without exceeding the agreement. “

But the problem is that such an insignificant increase in export does not rescue the sector. All the same, at the present low prices for oil the Russian companies are going to have to reduce investments.

This tendency has already become a universal trend — and the Russian oil companies do not differ from others. So then, in 2015 investments into the ‘oil industry’ were reduced on the average by approximately 20%, and new reductions of approximately15−20% are expected in the current year. This creates a direct threat to plans to develop new Russian fields, and may lead to a significant decrease in production volumes. The problem is that our traditional oil fields will already be on the threshold of exhaustion by the end of the current decade.

Naturally, such a situation can not help but disturb the President. The ‘oil industry’ is a strategic sector, and a great deal depends depends on it today: according to 2015 results, oil and gas receipts made up 45% of the income basis of the budget.

And what can be done in this situation?

— “The President must resolve how to launch investment “motors”. And this is already associated with the tax burden of the sector. And here Vladimir Putin will have to pass a very difficult “fork”.”

On one hand, it is clear that if the tax regime is not changed, very many of the fields planned for development will become unprofitable. On the other hand, the Cabinet of Ministers is experiencing today huge difficulties searching for sources of financing of the anti-recessionary plan and updating the budget. And one of the suggestions of the Ministry of Finance is to take additional money from the ‘oil industry’ at the expense of changing the formula for the tax on mining.

Such a suggestion, naturally, evoked sharp criticism from the side of both private and state oil companies. Oil industry workers consider that in this case the ongoing problems are being resolved at the expense of their investments, and the sector is being pushed to immersion in a systemic crisis.

And here the President must find a compromise: if that is to take from the oil industry people, how much? Obviously, there will be open dialogue about this at Putin’s meeting with the management of the oil companies.

This dialogue will be, most likely, in several rounds, all the more as it needs to be synchronized with meetings of the presidential commission on the fuel and energy complex.

How will negotiations on searching for strategic investors conclude?

— “I do not exclude that the results of a meeting could be declared: Bashneft to buy Lukoil. Regarding Rosneft, a pool of investors and dominating positions in which Surgutneftegaz will participate could buy its shares. I recall that Surgutneftegaz possesses considerable volumes of cash – according to some estimates, over 20 trillion rubles — thanks to which it can go into everything, where and when desired. All the more as rumors have long circulated in the market that exchanges of assets between Surgutneftegaz and Rosneft are possible …”

— “Taxes on the Russian ‘oil industry’, privatization of shares of state oil companies, and the low world prices for oil form a unified overall agenda which will be discussed at the president’s,” considers the head of analytical management of the Foundation for National Energy Security, Alexander Pasechnik .

— “Against the background of low prices, everything has indicated that it is not necessary to hurry with privatization of the state oil companies, although issues with filling the budget are pushing the Russian authorities both to privatization and to an increase of the tax burden on the ‘oil industry’. “

It must be understood that now the chief task of the Russian authorities is to provide stability of the budgetary parameters. Otherwise, in the conditions of the mean annual price for oil of $35-40 per barrel, there is a risk that the budget deficit will reach speeds of 4−5% of gross domestic product. And stopping up gaps in the budget will be possible only due to privatization.

As President Putin emphasized, it is impossible to sell state assets for a trifling sum. The decision as this to make in the “low” market will adopted during the meeting on March 1. And one thing is now clear: the Russian assets will hardly interest external buyers in the present conditions, so buyers will have to be found among representatives of the Russian elite …

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