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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Russia’s Oil Giants Feel The Crunch But Stay In The Black

It takes quite a bit to shock a Russian oil company, especially one operating amid economic sanctions on top of a crude oil price slump. To date, big Russian oil can pretty safely say it’s ready for anything the government, forex rates or international oil markets can throw its way. The latest evidence of this is Rosneft’s and Lukoil’s first-quarter results and their upbeat attitude for the future.

Lukoil was the first to report Q1 figures in June. Russia’s #2 booked a 59 percent drop in profits and a 32 percent fall in earnings before interest, tax, depreciation and amortization. A different outcome from the first quarter of 2016 would have been extremely surprising, given that Brent fell below $30 in January, but even so, Lukoil’s figures beat the expectations of analysts polled by Bloomberg. At the same time, production rose, albeit modestly, to 214 million barrels of oil, up from 213 million a year earlier.

Lukoil is looking to grow its presence in Iran, where oil production is ramping up. Lukoil is also exploring in Nigeria, which is not the best place for such activities right now, although things might be starting to look up. In short, it’s business as usual for Russia’s largest privately-owned oil company.

State giant Rosneft, which reported Q1 figures two days after Lukoil, also seems to be unruffled by the decline in performance. Rosneft booked a 75 percent drop in profits in rubles (80 percent in dollars) and a 14.4 percent fall in EBITDA (26 percent in dollars). Rosneft was hit not just by low international prices, but also by sluggish demand at home. However, like Lukoil, the company benefited from a weaker local currency, which lowered its costs.

Rosneft is continuing with production expansion plans despite the Q1 figures, hiking its Q1 capex by a fifth from a year earlier as per its 2016-17 business plan. Related: Expert Commentary: Volatility Vanishes In The Oil Markets

The short conclusion from these reports is that Russia’s Big Oil is pretty resilient to any crisis. Going forward, the industry is preparing for worse things to come, despite the recent rally in international prices, and so is the government.

Russia’s central bank announced last week that it was assuming a base oil price of $38 for 2016. The worst-case scenario is for oil at $25, although the probability of this happening was estimated as low.

According to Finance Minister Anton Siluanov, there are no fundamental reasons for the price rally to persist, so it seems that the overall expectations in Russia are for cheap oil. At the same time, production is set to grow, according to Energy Minister Alexander Novak, as the country looks to cement its place as the world’s top oil exporter. Related: L.A. Fights To Become Greenest City In The U.S.

It seems counterintuitive to ramp up production when you expect prices to remain low over the near-term, but it’s all about market share as Russia’s main global rival, Saudi Arabia, has made so abundantly clear in the last year or so. Russia does not have the same financial cushion that Saudi Arabia has, but it has trained its oil industry well, enabling it to survive even at low prices, and not just survive but remain in positive territory.

Cash flow and rising debt are growing problems for Russian oil companies, but with the government’s backing, these problems don’t seem unsolvable. Russian oil has learned the hard way to avoid complacency, and that’s why it has remained resilient whatever the price of crude.

By Irina Slav for Oilprice.com

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