Oil’s freefall amid a deepening price war and a global pandemic threatens to complicate Russian efforts to turn the Arctic into a major new energy zone. Saudi Arabia’s finance ministry had asked government agencies to propose a 20-30 percent cut in their budgets. Two sources with knowledge of the plans told Reuters on last Tuesday.
U.S. shale oil companies have asked oilfield service providers for price cuts of at least 25 percent. Just last month Igor Sechin, the boss of top Russian producer Rosneft PJSC, told President Vladimir Putin regarding this. Asian refiners are increasingly looking to book smaller tankers to load oil from the Middle East.
Demand for dollars has spiked in Azerbaijan amid fears of another currency devaluation following a plunge in oil prices. The largest independent oil trader in the world, Vitol Group, is discussing the purchase of Venezuelan crude oil. The company would invest more than 10 trillion rubles ($134 billion) in its Vostok Oil project on the Taymyr peninsula.
President Donald Trump announced on Monday that the U.S. government would be ramping up its efforts. The infrastructure costs is dependent on crude prices, and they have crashed to a four-year low. Shale drillers have made their spending plans based on oil prices of between $55 and $65 a barrel of West Texas Intermediate.
A drop in funds from the state could be a setback for Rosneft, which estimates potential resources in the new region at more than 37 billion barrels of oil equivalent. Malaysia’s state oil company Petronas has provisionally booked a Suezmax, capable of carrying 800,000 to one million barrels of oil.
Vasily Tanurkov, director of Russia’s ACRA Ratings says “Amid low oil prices, Rosneft may minimize investment in its Arctic project”.
The production plateau equal to “the largest projects in the Middle East”. A feud between Saudi Arabia and Russia led to a sharp drop in oil prices on March 9 and they have remained low. Vitol hasn’t traded Venezuelan crude oil since the beginning of last year when the U.S. tightened sanctions against Nicolas Maduro’s regime.
In return for investing in the Arctic province, the government has offered tax breaks to one of Rosneft’s flagship fields in East Siberia. To compare, the supertankers, the so-called very large crude carriers (VLCCs), can transport up to 2 million barrels of oil. Administration has further increased the pressure on Maduro and Venezuela’s oil industry by sanctioning last month.
It appears that President Trump is finally beginning to take the outbreak seriously. Before the OPEC+ meeting last week, the Saudis were already planning government spending cuts. This is particularly bad news for producers who have not hedged their future production at higher prices.
That would allow the company to reduce annual extraction-tax payments by as much as 60 billion rubles in the next 10 years. The government maintains a de facto peg of the currency, the manat, against the US dollar. Vitol is negotiating the purchase of Venezuelan oil from Mexican firm. Azerbaijanis were seeking to trade their manats for more reliable dollars.
Under the current bill, awaiting final approval from Putin, Rosneft would get tax breaks for Vankor as long as oil trades above $42.45 a barrel this year. Company plan to discuss whether to return to (cooperation with) OPEC or not. A list compiled by Banker.az showed that while some banks were still selling dollars others have imposed limits.
Such prices set down in the budget would allow the government to cover all spending without seeking extra funds. The rates for the VLCCs, however, have jumped five to ten times in one week after the Saudis snapped up supertankers. Yet benchmark Brent crude is currently trading near $30, having been battered by the simultaneous shocks of the coronavirus.
The Azerbaijani government has given little indication of what it plans to do and has given rosy public assessments of the situation. Libre Abordo had received the oil in a barter deal with Venezuela in exchange for aid. The price war unleashed by Saudi Arabia after OPEC+ talks broke down earlier this month.
The Kingdom was also expecting tough negotiations with its now former ally Russia. The energy ministry has called the meeting days after Russia refused to play ball in OPEC’s umpteenth proposal for production cuts. Some Indian refiners also look for smaller vessels for the relatively short trip from the Middle East to India.
The extent of any pullback will depend on the duration of crude’s recovery. Reuters quoted Parsley Energy’s chief executive David Del-Osso as saying the company had sent a letter to oilfield service. There is enough potential in the country to manage the situation without making any emotional decisions.
Arctic Bet. Rosneft has been among the staunchest opponents of cooperation with OPEC. The director of the state-run think tank Center for Economic Reforms and Communication. Vitol fully complies with any existing laws and regulations, including sanctions on Venezuela. The country’s economy is more stable than during the global financial.
Recent collapse of the deal to cut supply may help frame its view of future production. Asadov insisted that Azerbaijan had sufficient foreign currency reserves. Reuters reported that privately owned Libre Abordo had received so far 6.2 million barrels. Parsley Energy and Marathon Oil were among the first to announce cuts in their spending plans.
Russia expects its Arctic reserves to drive long-term output growth as most of its crude currently comes from declining Soviet-era fields. Illegal actions and cases of abuse of the situation will be resolutely suppressed. The Mexican company received the barrels of crude from Venezuela’s state oil firm PdVSA in exchange for corn and water.
The Finance Ministry hasn’t received any request from Rosneft or from government authorities to review the oil-price base level in the draft tax legislation. The spike in rates will push people to restrict VLCC use for faraway crudes and prioritize shorter voyages in Suezmax. The contract between the Mexican firm and Caracas was signed last year.
ACRA’s Tanurkov says “In the long term, Vostok Oil is likely to remain the company’s priority”.
Rosneft is ready to finance the construction of infrastructure at Vostok Oil with its own funds and offset those costs once it receives tax breaks for Vankor. The president urged Americans to avoid social gatherings of 10 people or more. More companies are likely to follow suit with such announcements. Saudi Arabia responded with an attempt to grab market share from Russia.
Vostok Oil includes several fields on the Taymyr peninsula in the Krasnoyarsk region. Trump also painted a rather gloomy picture, suggesting that the crisis could last until July or August. It including the Lodochnoye, Suzunskoye, Tagulskoye and Payakha deposits. Azerbaijan’s unsteady progress toward diversifying its economy away from such a heavy dependence.
The license for Payakha is held by operator Neftegazholding, a company owned by former Rosneft president Eduard Khudainatov. Strategic roadmaps and promotional mechanisms have been prepared. Each and every one of us has a critical role to play in stopping the spread and transmission of the virus. Russia issued a statement yesterday that it had enough resources to cover budget shortfalls amid oil.
Rosneft also created a joint venture with BP Plc to explore fields in the area. Oilfield service providers were forced to cut their prices during the last crisis to keep afloat. President Trump followed up on Tuesday morning, highlighting a new plan to help put some cash back. If history repeats itself, the industry is once again facing tough times ahead.
Aframaxes can carry between 500,000 and 800,000 barrels. In addition to Trump’s proposal to cut payroll taxes. Some buyers may find the surging supertanker rates too steep to book in the coming month. Crude’s plunge may lead to underinvestment across the global industry, resulting in lower output and subsequent price growth in the future.