GENERICO.ruEconomicsRussia is fighting to reduce discounts on its oil

Russia is fighting to reduce discounts on its oil

“It remains to convince the Chinese and Indians that geshefts for raw materials are a thing of the past”

Russia has reduced discounts on oil supplied abroad to a minimum. According to the federal law, which came into force on April 1, the cost of a “barrel” of our export grade Urals should not lag behind the North Sea Brent grade by more than $25. Prior to this, Russian companies traded their “black gold”, one might say, at bargain prices, which have already begun to approach the level of the cost of production of raw materials. Now, oilmen will have to fight for every dollar, otherwise they will be forced to lose revenue or reduce production.

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The cost of the North Sea grade Brent has always exceeded the quotations of the West Siberian grade Urals. The quality of the Russian mixture is inferior to the super-liquid hydrocarbons extracted in the Middle East. After deep processing, Russian viscous oil containing a significant percentage of sulfur is used to produce cheap fuel: diesel, fuel oil, gas oil and bitumen. In turn, Brent oil is mainly used to make ready-made motor fuel with a high octane number: such gasoline is considered more acceptable for car tanks and, of course, is more expensive.

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As a rule, the difference in the cost of Brent and Urals has always been small – $ 2-3 per barrel. But the sanctions war unleashed against our country last year dramatically changed the situation. Western sanctions, in particular, a moratorium on the supply of “black gold”, restrictions on insurance and transport services, as well as a price “ceiling” forced domestic exporters to reorient supplies from Europe to Asian sales sites. The countries of the East gladly began to buy our energy resources: in just a year, India and China came out on top in the consumption of Russian hydrocarbons. However, in exchange for increased purchases of “black gold”, Asian importers demanded financial concessions, or, more precisely, discounts on purchased barrels. Our mining companies were forced to provide a discount, since domestic raw material storage facilities have extremely modest volumes: hydrocarbons must be sold as they are produced, since their accumulation and maintenance require significant costs.

As a result, discounts on Russian oil have actually become equal to the cost of production and logistics costs. From each “barrel” domestic suppliers lost up to $25-30. According to the Ministry of Finance, in annual terms, Urals quotes have almost halved. If in February 2022 one could earn $92 per barrel of the main Russian export grade, which was close to the cost of Brent, then in February 2023 the difference reached enormous values: the international reference brand was estimated at $85, and for our hydrocarbons they offered no more than $50 . As a result, our country's revenues from oil exports sank dramatically, which, in particular, affected the federal budget deficit, which sharply increased to almost 3 trillion rubles in the first months of this year.

The government decided to reduce monetary losses from oil exports with the help of a special law. From April 1, the discount on oil exported by Russian holdings should not exceed $34, and in July the discount should be reduced to $25 per barrel. The legal requirement is slowly bringing positive results: if in the period from December 15 to January 14, the spread reached 43%, then from March 15 to April 14, its size decreased to 36%.

According to Freedom Finance Global analyst Vladimir Chernov, an additional factor that strengthened the Urals quotes was Moscow's decision to reduce oil production by 500,000 barrels a day. There is reason to hope that against the background of such events, in about six months, the discount on Russian raw materials should be reduced by 30-50%, which will actually equate the cost of “black gold” from our country to the prices of Brent. This development was announced by Deputy Prime Minister Alexander Novak, who believes that the difference in quotes will smooth out after the stabilization of supply chains. The last time a sharp increase in the discount was observed in the spring of 2022, when Brent quotes fluctuated at $110-115, and the cost of the Russian export grade fell to $70 per barrel. By the fall of 2022, the average price of Urals rose again to $80. “Last time it took about four months to stabilize prices. This time it will be about the same,” the Deputy Prime Minister believes.

Meanwhile, one cannot rule out numerous risks that could prevent the reduction in price differences between Urals and Brent barrels. “Anti-Russian economic pressure is growing every day,” Chernov argues. – The next package of sanctions, as the representatives of the European Union say, will include an improved system of the mechanism for tracking the fulfillment of the requirements presented to our country by the rest of the world community. This will affect the same China or India. With the build-up of Western sanctions pressure, it will become much more difficult to keep importers and reduce the discount.”

Foreign deliveries of Russian hydrocarbons may also be subject to other geopolitical blows. The dynamics of the cost of our energy resources may turn in the other direction,” warns financial analyst and private investor Fedor Sidorov. The United States, as well as some members of the European Union (Estonia, Lithuania and Poland) propose to lower the “ceiling” for raw materials supplied from our country (from $60 to $50 per barrel). Then, in order not to violate these restrictions and not fall under secondary sanctions, buyers will again demand a discount. The cost of a “barrel” of Urals risks falling to $40 and below.

However, the federal budget, in connection with the new formula for calculating exported raw materials, should not suffer. The essence of the new fiscal penalties was explained to us by the investment strategist of Arikapital Management Company Sergey Suverov. The market value of Brent will be taken as a basis (currently $81-82 per barrel). Starting from July, $25 will be deducted from this amount – this is the maximum discount that domestic miners can provide to their foreign clients. The resulting figure will be considered the sale price of Urals, therefore, taxes will be charged from this level accordingly. If a domestic company gives its customers a larger discount, its taxes will still not decrease from this. Therefore, in order to increase their own revenues, oil companies will have to fight for every dollar per barrel. Companies will be forced to negotiate higher prices with their counterparties, reducing the discount and returning Russian hydrocarbon quotes to pre-sanction levels. Otherwise, commodity holdings will either have to pay more taxes, reducing the amount of dividends to shareholders and ruining financial statements; or simply reduce production, which reduces the possibility of attracting investment for new projects. “In fact, the state has granted the right to conduct commercial negotiations to private companies, taking out the “brackets” of sanctions claims against government departments,” the analyst believes. “A pretty reasonable maneuver. All that remains is to convince the Chinese and Indians that geshefts for Russian oil are a thing of the past.”


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