Moscow Satisfied With Opec-Plus Decision

The Opec-plus decision to extend the group's voluntary oil production cuts until the end of 2024, and Saudi Arabia's plan to additionally reduce output by 1 million barrels per day suit Russia perfectly well.

The moves don't require additional steps from Russia, but are aimed at helping to balance the market and keep prices from sliding, something that Moscow keenly needs to support its revenues.

Additional cuts could have been a problem for Moscow, since it requires bigger volumes to support high exports and growing domestic needs in the summer season. Russia's mineral extraction tax (MET), which accounts for a big chunk of inflows into the state budget, depends on the output volumes as well.

On the corporate level, Russia's biggest oil producer Rosneft already said that the impact of the output cut would have a substantial impact on the company's financials in the second quarter. This could be reflected in future dividend payouts and the company's investment program, analysts say.

Russia's closing down of official information on its output gave ground to speculation that it is producing above its committed volumes. Deputy Prime Minister Alexander Novak said after the meeting in Vienna that Russia is in full compliance with its 500,000 b/d production cut level.

Exports Growth

The lower output volumes did not impact Russian exports, however, which in May reached their highest levels since last July. Crude oil exports to non-Commonwealth of Independent States markets averaged 4.94 million b/d in May, Energy Intelligence estimates based on vessel tracking and sources close to official data. May exports were up by over 100,000 b/d from April. Shipments to domestic refineries, meanwhile, dropped by some 230,000 b/d on the month in May to 5.38 million b/d.

Last month, Russian exports increased at almost all outlets, excluding only shipments bypassing the trunk network of national pipeline operator Transneft. Shipments from the Baltic Sea ports of Primorsk and Ust-Luga jumped by 85,000 b/d to 1.75 million b/d, a level not seen for almost two years.

Exports from the Black Sea were also up by 40,000 b/d, while shipments from the Pacific port of Kozmino jumped by 25,000 b/d to 890,000 b/d, the port’s second highest level since the start of operations in 2009.

Moscow is considering expanding Kozmino capacities from the current roughly 840,000 b/d to a possible 1 million b/d — an effort that will also require the expansion of the East Siberia–Pacific Ocean (Espo) pipeline from the current 1.6 million b/d — as shipments to the Asia-Pacific region are poised to increase further.

Russian pipeline exports to Europe via the Druzhba pipeline, which currently only supplies Hungary, Slovakia and the Czech Republic, were also slightly up on the month in May as Russian imports remain the cheapest option available.

Discounts Narrow

Meanwhile, the price for Russia’s Urals export blend dropped in May, which partly explains the decrease in the country’s oil and gas revenues last month even though Urals discounts to dated Brent narrowed further, in line with Moscow’s expectations.

Russia’s finance ministry said that the average price paid for Urals in May was $53.34 per barrel, down from $58.60/bbl in April. The decline of dated Brent was bigger on the month, at roughly $9.40/bbl, narrowing the average Urals discount to $22.18/bbl in May from $26.39/bbl in April.

Moscow continues to look at alternatives to the dated Brent pricing benchmark with Rosneft having reportedly suggested linking Urals to Dubai, which is the way crude oil is priced on the Asian market, Russia’s core export market today.

Russian oil and gas revenues declined by 12% in May from April. Higher income from MET and export duties were not enough to offset the overall drop, which was largely due to lower additional budget income from the so-called excess profit tax (EPT). Moscow managed to receive additional revenues from EPT of 220.6 billion rubles ($2.84 billion) in March and of another 185.4 billion rubles in April, while in May those payments totaled just 5.4 billion rubles. EPT payments are not made every month.

Looking for ways to protect budget income, the government planned to reduce by half payments to oil companies made under the so-called buffer mechanism, which compensates for the difference between the netback on exports and the low domestic prices for gasoline and diesel. However, the measure was postponed until September at least, largely for fears of causing a price increase for petroleum products on the domestic market during the summer season.

Under the buffer mechanism compensation, oil companies got 103.5 billion rubles in May and 107.2 billion rubles in April.