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Resilient Russia

In 2016, the country defied the doubters. Oil production kept rising and new energy-export plans made progress

Russia's oil sector got off its knees in 2016, thanks partly to a rally in crude prices and partly to sheer (and unexpected) resilience. A privatisation plan stuttered, though, and sanctions, together with geopolitical disputes over Ukraine and Syria, overshadowed progress.

Many market watchers expected Russian energy output - which accounts for almost half of its budget - to wilt in the face of cheap oil and a saturated global gas market in 2016. Recession, said the doubters, would surely deepen.

Instead, oil output rose steadily, hitting a post-Soviet high of 11.1m barrels a day in September; Gazprom's shipments to its core market of Europe hit a record in October; and analysts said the economy was on the up. By the third quarter of the year, Russian oil was in such rude health that Vladimir Putin and his energy minister, Alexander Novak, were happy to talk of supporting Opec's putative deal to cut supply and raise prices.

The depreciation of the ruble helped all this, making it cheaper to pay for services in local currency, while hoovering up dollars in exchange for exports.

Oil producers also got back to basics, shifting the emphasis from the Arctic to Soviet-era brownfield developments. State-controlled Rosneft and Gazprom Neft boosted production, despite Western sanctions on Russian shale projects. Rosneft reported a 48% jump in development drilling in September; most came from Yuganskneftegaz, its main production unit in Siberia.

The Kremlin flirted with and gave verbal support throughout the year to notions that it might freeze oil production in coordination with Opec. It seemed possible in a meeting in Qatar in April - until a Saudi-Iran spat killed the talks. Novak walked from the Doha hotel room in disgust. To the surprise of many, the Saudis managed later in the year to persuade Russia it was ready to deal. Many remained unsure of the intentions of both Opec and Russia.

Some restructuring of Russia's energy sector seemed to be on the cards in 2016, as the ballooning federal deficit forced the government to restart its privatisation programme - and hit companies with demands for higher dividends and additional taxes. Gas-export monopoly Gazprom looked likeliest to lose most from the tax grab.

But state-controlled Rosneft landed on its feet again. In October, it beat off privately owned Lukoil to acquire a controlling stake in Bashneft - a hugely controversial deal worth $5.2bn. It puzzled many observers, including some government officials, who wondered quite how the sale of one state-controlled asset to another would raise money for the treasury.

In late April, prime minister Dmitry Medvedev signed an order instructing state-controlled companies to pay more dividends under International Financial Reporting Standards. That gave the firms another headache - and another task: finding ways to wiggle out of obligations to their minority shareholders.

More significantly, Putin's much-vaunted "pivot to the East", a policy to expand trade and financing with China and India, made progress in 2016. The Arctic Yamal liquefied natural gas project signed a $12bn-loan deal with Chinese lenders in April after almost two years of talks. Rosneft also said in June it would sell a 24% stake in its Vankor oilfield to an Indian consortium, just a month after offloading a 15% stake in Vankorneft, the subsidiary that runs the field, to ONGC, another Indian firm. As Petroleum Economist revealed in April, ONGC and China's CNPC also tabled bids worth about a fifth of Rosneft stock.

Gazprom had a trying year thanks to weak prices in Europe, where its contracts track the price of oil with a time lag of around nine months. Exports perked up towards the end of the year, reaching a record daily high in October. Some analysts said it signalled the start of a price war between the Russian firm and LNG exporters targeting Europe.

Gazprom also revived its ambitious plans to build new pipelines under the Baltic Sea to Germany and under the Black Sea to Turkey. TurkStream, a major gas pipeline that could open a new route for Russian gas in Europe, looked in doubt after Turkey shot down a Russian fighter jet. But relations thawed and the project found itself back on the table. In 2016, Russia flexed its energy muscles.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

 

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