Alexey Gromov: "The Russian budget will have to forget about oil and gas windfall profits"

Yekaterina Maksimova

And what will happen to Russia's oil and gas revenues - in an interview with Chief Energy Director of the Institute of Energy and Finance, Associate Professor of the Russian State University of Oil and Gas named after I.M. Gubkin Alexey Gromov.

- For half a year, and not without anxiety, the Europeans' ban on the purchase of Russian oil and the introduction of a price ceiling were discussed. How did the first five days of the embargo go?

-The first five days showed that the market practically did not react to this situation. It can be said that he did not notice her. And this is understandable. The first explanation lies in the sanctions restrictions themselves, which were announced back in May as part of the sixth EU sanctions package.

And I must say that Russian oilmen have shown, if not miracles, of course, then enviable efficiency in solving problems with the redirection of Russian oil supplies to alternative markets.

Therefore, by this time, 85% of Russian oil, which was sent by sea to Europe, had already been redirected in one form or another. First of all, these are India, China and Turkey. Therefore, the situation has not fundamentally changed.

Now with regard to the price ceiling, which was really discussed for a long time and noisily. Here, to some extent, the general decline in world oil prices played against him. And it so happened that by the time the price cap was announced ($60 per barrel), world oil prices had fallen. Now oil is sold for $79 per barrel.

And on the world market, it is Russian oil that, in principle, is sold for less than $60. With the exception of individual deliveries that come, for example, from the Far East. This oil, which comes through the Eastern Siberia-Pacific Ocean oil pipeline, is then sent to foreign partners. There the price is slightly higher than the price ceiling, but not by much.

Therefore, the price ceiling tool is essentially not working right now. And can't work. And we already know cases of Russian Urals oil being sold to customers in Asia at a price of $50-52 per barrel.

-And if oil starts to rise in price again?

- The main impact that we are now seeing is the risks of a global recession. It is this factor that overshadows all the others today. More and more economic agencies, investment banks are sharing fears that 2023 could be the year of a global recession.

Forecasts of global GDP growth for this year are expected to be significantly less than 2%, but next year this figure may fall to almost zero. And a recession could start in both Europe and the US. And it is even possible that some significant problems may persist in China if the country continues the policy of covid restrictions. Due to this, China's economic growth rate for the current year is estimated at less than 4%.

This global recession is pushing oil prices down and, of course, this is driving Russian oil prices down as well. Therefore, we are now witnessing such a trend as a decrease in budget revenues. As a result of November, Russian budget revenues from oil exports sank sharply. It is because of the general decline in world oil prices.

- The Ministry of Finance specified that in November the state budget received less than 90.2 billion rubles, but in December we will more than make up for it.

- It is very difficult to talk about whether it is possible or not to catch up, because everything depends on the conjuncture of world markets. So far, there is a feeling that if there are no additional corrective actions from, for example, the same OPEC +, then the oil market situation will decline. And, most likely, to decline at least until the New Year. And then we'll look further.

The general negative dynamics of our oil and gas revenues, which is observed in November, is primarily affected by the general macroeconomic background, which we, in turn, cannot influence. And now the main background is the expectation of a global recession.

Is that why OPEC+ decided in advance to cut production to 2 million barrels per day?

- I would call the position of OPEC +, say, conservative, given that 2 million barrels is a reduction on paper. In fact, this is a reduction, taking into account the fact that the OPEC + countries have not chosen their production quotas before. In fact, the reduction is 700-800 thousand barrels per day. Naturally, this is not enough to balance the markets. Now there is no shortage of oil, which was observed in most of this year. As a result, prices go down.

- What can and should Russian exporters do to maintain their positions, taking into account both the embargo and the global recession?

- If we talk about the long-term or medium-term history associated with the latest sanctions restrictions on December 5, then, of course, two tasks remain for the Russian oil complex. And the oilmen must solve them as quickly as possible.

The first is to build our own financial and logistics system for the delivery of Russian oil cargo to export markets. The second problem is tankers. These two tasks will be the main ones that will have to be addressed in the first months of 2023.

With regard to insurance, it is necessary to complete the work on the formation of Russian insurance instruments. Such tools, so that they fully comply with the requirements adopted in the oil market. They were not inferior to British insurances, which, of course, cover not only the cargo itself, damage to the tanker, but also environmental damage, which is possible due to the risk of an oil spill.

- How expensive is it to create such an insurance instrument from scratch?

-In fact, we do not need to create a new structure. There are Russian insurance companies (such as Ingosstrakh, for example) that already insure Russian oil tankers. This is already happening. And there is even a Russian reinsurance company that provides reinsurance for the risks of our insurers. Another thing is that we need to offer our partners from China and India exactly the kind of insurance that is identical to the British in terms of its parameters.

The process has begun. The Turks already recognize our insurance. Separate contracts for the supply of our oil to China and India are subject to Russian insurance coverage. True, the process has not yet been completed and it needs to be brought to its logical end in order not to depend on the Western insurance market for Russian oil supplies. I think that this issue can be resolved within the next 6-8 months.

And the second problem, as I already said, is tankers. There is no former sharpness, because the level of the price ceiling is higher than the level of real selling prices for Russian oil. At the same time, in general, more than 50% (and earlier it was almost 70%) of Russian oil is transported by ships of such European countries as Greece, Malta and Cyprus.

Of course, these countries are dependent on European, British and American sanctions. And they will fully and strictly monitor their observance. Therefore, we systematically need to continue our work on the formation of our own tanker fleet for the transportation of Russian oil.

- Yes, all tankers are being bought up, even those that are too old... This is before the first serious accident with an oil spill somewhere off the coast of Europe.

- In less than eight months, more than 100 tankers were purchased in the interests of Russia, and these were purchases by Russian legal entities, Chinese companies and Middle Eastern companies. I think that this process will be continued next year in order to ensure the bulk of supplies through the tanker fleet. A fleet that will be independent of European shipowners.

As for the quality and age of the tankers, there was incorrect information in the media. Russia has new tankers of its own and they are in active use. These are Sovcomflot tankers. There are also new ships. Everything is good in terms of quality.

Another thing is that now we are forced to switch to almost one hundred percent use of our own fleet. Such a goal has never been set before for Russian oil companies. It's just that there are independent ship owners on the market, they offer favorable economic conditions for partnership. Why reinvent the wheel. But in the conditions of sanctions pressure, such a task is worth it. And the fact that more than 100 tankers have been purchased since the beginning of the NWO is a great success.

In addition, transportation from third countries is also developing against this background. Again, the Far East has become more active, Chinese carriers are also ready to offer their services for the transportation of Russian oil.

- So many new options: switching from the European market to the Asian one at a discount, buying a fleet, new logistics, etc. Will the margin remain minimal, at the cost level?

- Yes, the costs will be higher. And in any case, the marginality of Russian oil exports will be less than this year.

And Russian insurance instruments are still more expensive than British ones, and freight has become more expensive. And most importantly - logistics.

For example, the delivery of oil from the western ports of Russia to India and China doubles the route. And taking into account the fact that all this is included in the final price, the profitability of such exports becomes less.

-In 2022, for various reasons, the record for oil and gas revenues was broken. In 2023, the budget should receive 9 trillion rubles. What is your forecast: will the Ministry of Finance not have to report in a few months that the forecast figures are not feasible?

- Yes, this year was a record year, as you rightly said, for various reasons. This is both the rush demand and the problems of shortage of energy resources, which manifested themselves especially strongly on the world market in spring and summer. Against this background, world prices were high. And Russia, of course, as one of the world's leading hydrocarbon exporters, got the cream of the crop.

In general, the excess of oil and gas revenues over the level of 2021 can be from 40 to 50%. Probably by the end of the year it will be 40%. This is a very large amount in one year. And next year, Russia will not have such oil and gas revenues in principle. And this is also understandable.

There are several factors that will not allow us to maintain the level of income that we had this year. First of all, as I said, the decline in world oil prices. If in the first half of the year prices were above $100 per barrel, then we end the year at $80. And so far there is no reason to believe that oil prices will go up in the near future. Rather, on the contrary, they are likely to stay at the level of today's quotes.

Secondly, this is, of course, the reconfiguration of logistics routes, the refinement of insurance, and so on. All this will have a particularly tangible impact on export volumes in the first months of 2023. For oil directly, this impact in terms of volumes will be small.

I think that in just two or three months the problem can be solved. And subject to the availability of demand, our black gold will be sold in approximately the same volumes as in 2022. Only in other markets.

-From February 2023, another European embargo comes into force - on oil products from Russia. At the end of 2021, crude oil export revenues amounted to $99 billion. The export of oil products exceeded $70 billion.

- And this is a big problem, because Russia cannot find alternative markets for oil products outside the EU. As for the export of oil products, we can significantly drop next year. And this problem will not be solved in one year. It will take time.

Last year, Russia as a whole exported 144-145 million tons of oil products, of which more than 100 million tons were sent to the EU countries, Great Britain and the USA. The States and the British have already imposed an embargo, the Europeans will do it from February.

To this serious problem, I would add gas exports, which by the end of the year had dropped by more than five times. And at the same time, as we all know, the European market was the most profitable for our exporters. The reduction in export earnings from gas in the aggregate will also dramatically affect the level of oil and gas revenues.

I expect that next year the level of oil and gas revenues will return to the average multi-year values that were observed until 2022. The canopy of the current year will be "eaten" by all these factors.