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Gazprom Weathers Price Rout, Sets Ambitious Plans for Future

Gazprom Neft, the oil-producing and refining arm of gas giant Gazprom, has reported a 21.3 percent increase in its oil and gas output for 2015, the highest increase among its sector players in Russia. The company also said it plans to expand crude production by 33 percent until 2025 in Russia alone.

Against the backdrop of a global oil glut, with energy companies shrinking production and reporting losses or significant profit drops, Gazprom Neft looks quite resilient and unusually optimistic about the future.

Its competitors, Rosneft (Russia’s number one), Lukoil and Surgutneftegaz, reported production increases of, respectively, 11 percent, 2 percent, and 1 percent for 2015. Compared to these, Gazprom Neft’s 21.3 percent output increase looks even more impressive.

Related: Oil Fundamentals Could Cause Oil Prices To Fall, Fast.

Along with the production rise, the company reported IFRS net profit of 109.66 billion rubles ($1.51 billion), down 10.2 percent on 2014, which given the circumstances is a pretty good result. What’s more, Gazprom Neft attributed the decline not to the oil price trends harrowing the industry globally, but to unfavorable foreign exchange moves with relation to the revaluation of certain debt and to the higher cost of borrowing in the country.

In other words, had it not been for the forex effects, it might have actually turned an increase in profits.

The robust performance could also be attributed to Gazprom Neft’s net revenue per barrel (referred to as netback, which represents the revenue left after subtracting operating costs and royalties), which fell less sharply than the international benchmark, Brent, last year.

Related: Six Reasons The Current Oil Short Covering May Have Legs

In its financial and operating results presentation, the company showed that while Brent dived from $120 to almost $40 a barrel over the 12 months, its own oil netback fell by about $20 – from a little over $40 per barrel. The refining netback of Gazprom Neft dropped more sharply, from nearly $60 to about $25 a barrel, but still a far cry from the benchmark’s nosedive.

Another factor behind the success could very well be the proportion between crude for local refining and retail marketing, exports to the CIS and exports outside the region. In 2015, this proportion looked like this: 43.1 million tons of crude were refined at home (down 0.9 percent on 2014), 8 million tons were shipped domestically and in the Commonwealth of Independent States (up 56.1 percent Y/Y), and 8.6 million tons were exported outside CIS, meaning that the bulk of what Gazprom Neft extracted was fed into the local and adjacent markets.

Related: The $9.2 Billion Bet Against OPEC Dominance

It is now interesting to see how the company will, if at all, change its production expansion plans for the near term in light of the recent agreement between Russia and Saudi Arabia to free oil production at January levels. If the deal is sealed, it is likely to have a negative impact on these plans.

Another thing that could disrupt Gazprom Neft’s growth plans is the possibility of higher taxes. The energy sector in Russia is already subject to the heaviest taxes of up to 42 percent, and now the government has confronted the industry with plans for raising this by removing the tax breaks companies now enjoy for some of the fields they operate.

Should the new tax system become a reality, Gazprom Neft might have to reconsider its ambitious growth plans.

By Irina Slav for Oilprice.com

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