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Oil Markets

Russia Pushes for National Oil Price Index

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The St. Petersburg International Mercantile Exchange (Spimex) is pushing ahead with initiatives to establish Russia's own price assessment for crude oil and says constructive talks are under way with state officials. The efforts were intensified last year after foreign pricing agencies like Platts left the country. They were given a fresh push after price assessments still being made by Argus became irrelevant as Europe’s trade in Urals has dwindled to almost nothing.

The initial aim is to have a national price assessment for tax purposes rather than for defining the Urals price on global markets, which is however, still an ultimate goal. But even those efforts face a lot of hurdles, industry players admit.

Spimex head Alexei Rybnikov reiterated last week that the need for a national price index now is crucial. He added that since Spimex sees all the deals — exchange and over-the-counter deals — with Russian crude, it has accumulated enough knowledge and experience to provide such an index. In fact, Spimex has already started showing how it works to various Russian bodies.

Recent news that a cargo of Russia's Urals crude was sold at $37.80 per barrel in the country's flagship Baltic Sea port of Primorsk, according to an Argus assessment, demonstrated that current assessments are irrelevant and that the need for a national price indicator is crucial, experts say.

Taxing Issue

Rybnikov in particular pointed to the fact that the country's current tax system is based on Argus assessments for Urals in the Mediterranean and Rotterdam, but European markets have become closed to most Russian cargoes following the seaborne crude embargo by the EU and G7 nations, and efforts by the G7 to cap the price of Russia’s crude on the global market. “These markets for Russian oil have ceased to exist,” Rybnikov said. “It's time to stop that now."

Rybnikov said Russia doesn't need to create its own pricing agency to establish a national price index for crude oil, as there are already mechanisms that can help establish sovereign price indexes. “Exchange, auction mechanisms" and the government decree that regulates over-the-counter deals "are enough to solve this problem," he explained.

However, Russia’s finance ministry reiterated this week that it would consider using Spimex indexes in the first quarter, while continuing to use indexes from Argus when calculating the mineral extraction tax and other duties. Sources say the ministry is reluctant to introduce changes into the way taxes are calculated because it would be a massive shift of the current tax system with no one knowing exactly how the new system would work and what the consequences for the budget would be. The ministry will also have to hold discussions with oil companies as the tax changes could impact their performance.

Global Stage

Meanwhile, the national price index could also help Russia to establish a price that it could use for Urals trading globally. Russia has tried to establish Urals as a benchmark grade several times over the past two decades with little success. Spimex made the last attempt in 2016 when launching its Urals deliverable futures contract, which failed because of skepticism from Russian companies and international traders. Spimex later launched online auctions in a move to turn Urals into a benchmark, but the mechanism was only used by state-controlled Zarubezhneft. Spimex and Zarubezhneft stopped revealing any data on auctions after Feb. 24, 2022.

"Russian companies are actively using the mechanism of electronic trading to sell their oil, including using the system of online auctions," Rybnikov said. "Each company holds its own auctions, including those not with us." He said that the quotes for Urals that Spimex sees after those auctions do not differ much from those of Argus.

Sources say that Russian companies are now using online auction mechanisms for finding buyers for their barrels at a time when European markets are closed. The terms of auctions are individual for each company, and many include non-dollar currencies such as Chinese yuan, UAE dirhams, Indian rupees and rubles.

As markets for Urals become less transparent, such auctions allow companies to find buyers and to agree on prices and other terms, including shipping and insurance, after the price cap mechanism was introduced that bans the use of Western tanker fleets and insurance unless crude is sold below the price cap set at $60/bbl.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Topics:
Oil Prices, Ukraine Crisis
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