Four years have passed since the European Union and the United States imposed economic sanctions on Russia for its annexation of Crimea and its military involvement in Ukraine. Although the economy has suffered with the ruble falling by 50 percent against the greenback, the oil industry, as strange as it may seem, has benefited from these developments.
The latest piece of evidence is that in the first half of this year, as the United States added more sanctions to its list, Russia’s five biggest oil companies booked a combined profit increase of 50 percent to US$18 billion (1.25 trillion rubles), Bloomberg has calculated.
The thing is that the cheaper the ruble, the lower the production costs of local oil companies. At the same time, the oil they pump becomes more expensive in dollar terms, which is how they sell it abroad. In other words, Russia’s top oil producers actually have reason to hope that the sanctions will stay in place forever.
If you ask analysts, however, the sanctions are dampening their share price. Rosneft, for example—the leader of the pack—is trading at seven times its estimated 12-month earnings, which compares to 11 times that for Shell, more than 12 times that for BP, and 15 times that for Exxon. Still, Rosneft’s first-half results have been a lot more robust than the supermajors’, which provides some food for thought.
On the other hand, Rosneft’s stock is up 44 percent since the start of 2018 and up 55 percent over the last 12 months, according to TheStreet, so even the negative effect of sanctions on the stock performance of Russia’s Big Oil is not as bad as might have been expected when the sanctions were imposed.
More sanctions, specifically targeting Russia’s oil industry, are being considered in Congress following accusations of Russian interference in the 2016 presidential elections. They would likely hurt Russian oil, but at the same time they would hurt Russian oil’s partners from the West. There is already active lobbying against the DETER bill from the U.S. energy sector. According to a Reuters report from July, the new sanctions would hurt U.S. oil companies, providing European rivals with an advantage over them. Related: The Bullish Case For Gas In Europe
Yet given that the European supermajors are also global companies, further sanctions targeting the domestic and international operations of Russian companies, some of which involve partnerships with Western Big Oil, would hurt pretty much everyone.
So for now, the effect of further sanctions is negative but hypothetical, while the effect of existing sanctions has turned out to be positive. A lot has been said about the lack of access to international funding and production technology as per EU and U.S. sanctions from 2014, but the financial data from Russia’s producers suggests that they are somehow making do without these and are increasing their production.
In August, Russia pumped 11.21 million barrels of crude daily, almost the same as the July daily production rate and close to the highest since the disintegration of the Soviet Union: 11.25 million bpd from October 2016. Between June and July Russia added 250,000 bpd to its crude production, and remained the world’s top producer as Saudi Arabia stalled on its pledged production boost.
Rosneft is buying back stock to the tune of US$2 billion, and is cutting capex by 20 percent while raising working capital by US$3.15 billion by the end of the year. Gazprom, which like Rosneft is under sanctions, has the biggest spending plans in the global oil and gas industry, ahead of Sinopec and Shell. Lukoil, Russia’s number-two oil producer, has been cutting its exposure to high-cost projects, and this strategy is paying off. All in all, Russian oil is doing well despite the sanctions or even because of them.
By Irina Slav for Oilprice.com
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