Top events of April 2020

The National Energy Security Fund introduces top-ten events in the oil and gas industry in April 2020 and is ready to comment on them in detail.

1. OPEC+ 2.0 deal

   It was obviously the main event in April and beyond. Russia came back to the agreement a month after its March 6 withdrawal from the deal. Aggressive policies of Saudi Arabia led to Urals oil prices plummeting to below $10, which certainly shocked Vladimir Putin. It seems the President decided to fully reverse the situation, and so he joined the deal with the Saudis. The idea was simple: to buy time and send a signal to the market counting on some restoration of oil prices. In mid-May, Urals oil was approximately $30 per bbl, which was undoubtedly far better than $10. However, the cost is very high – Russia should lose approximately 20% of its national oil output. It is an unprecedented case and a heavy price for Russia, because when the market starts reviving, the main question will be about restoration of our production quantities. This is a vulnerable spot of this deal, and everybody realizes it very well.

2. WTI oil prices fall to minus $37.63 in the USA

   This case inspired a great number of memes, as people do not understand how this commodity can cost minus $37 per barrel. It turns out that oil is not just free, but you are even paid to take it. It is obviously a unique situation. It can be attributed to the influence of market algorithms, but we would like to focus on two things. Firstly, this case shows how strong the factor of market speculations is and how strong speculative aspects can be. Secondly, reports coming from the market of physical supplies are projected onto speculators, and you cannot ignore them. The WTI oil case was directly linked to the physical market. Over the pandemic, world demand for crude oil indeed fell in fact by one third, and the situation was that Cushing hub storages were practically overfull, and there were no free capacities available. Therefore, if holders of oil futures had been paid with physical supplies, they simply would not have had place to store that oil. This is the influence of the physical market. This disastrous decline in demand over COVID-19 created the reality that crashed directly into the speculative reality. Thus, the case of negative prices of American oil is very remarkable and interesting.

3. OPEC+ implementation agreed in Russia, Vladimir Putin holds a meeting

   There were two variants to fulfill the deal. Variant 1: to consider commitments on a national level and prepare some national strategy. Companies have different wells: some have old wells; some have newer wells; some wells enjoy preferences; some companies produce more condensate that, by the way, is not included into the deal cut requirements. Variant 2, however, was easier, and Russia chose that one: commitments were divided between all producers proportionally to their production. It was the simplest, no-frills way. These commitments were shared between small, medium-sized and even PSA producers. Putin seemed to be upset that the oil industry had failed to foresee developments. At the meeting on April 29 the Russian President made it clear that he was not going to personally manage this case: instead of holding a meeting devoted to the new OPEC+, Putin listened to reports about problems of the fuel and energy sector. The meeting was attended not only by oil producers but also by representatives of gas, coal, electrical and nuclear power companies and even lobbyists of the Russian renewable energy, German Gref and Viktor Vekselberg in particular. Speaking about the deal implementation was obviously impossible to such a lineup. Thus, the meeting acknowledged the oil cut deal and went further to discuss access of foreign specialists to critical facilities, meaning that access of foreigners to Russian facilities is a more important topic for Putin than the OPEC+ deal implementation.

4. Situation on the gas market

   Gas prices fell below $70 per 1,000 cu m at the TTF hub in the Netherlands on April 22. Developments on the gas market resemble the situation on the oil market. And it is not only the pandemic influence – there are several factors peculiar to the gas market: full gas storages (they were filled on expectations of a gas war with Ukraine), warm winter and overproduction – combination of these factors creates a perfect storm on the gas market. The situation is very difficult and complicated. The year 2020 will be sad and tough not only for oil producers but also for gas companies.

5. COVID-19 outbreak at Chayandinskoye and NOVATEK’s project in Murmansk

   The coronavirus pandemic is a global disaster, and large producers in Russia obviously could not escape it. Oil and gas projects are naturally implemented through efforts and with involvement of a great number of people. If someone gets infected in a camp of workers, it creates a serious risk of mass infection. It actually happened at Chayandinskoye and Murmansk projects. And this information certainly became a weapon in customary wars of Russian companies against each other in the mass media. However, the coronavirus is everyone’s problem that leads not only to decline in oil and natural gas demand, but this infection also affects the health of industry representatives. By the way, quite a number of companies in the world have found coronavirus at their production facilities.

6. Transneft head Nikolay Tokarev’s contract extended by five years

   Following a year-long war between Rosneft and Transneft, Tokarev has managed to secure prolongation of his employment contract. It is no secret that Rosneft was lobbying his retirement. However, May events demonstrate that the war is not over, and it will definitely get into our next rating.

7. Akademik Cherskiy pipelayer arrives in Kaliningrad

   Wanderings of Akademik Cherskiy are over. Its itinerary was attentively followed by everybody wondering about its destination, although the pipelayer was evidently supposed to reach the Baltic Sea. There is no other variant to build the Nord Stream 2, as the project has to be completed. The ship’s destination was regularly changed, it was said to return to the port of Nakhodka – these tricks had to be employed. Unfortunately, the Nord Stream 2 is turning into a political project, and it was not Russia that started this metamorphosis. By the way, Akademik Cherskiy was escorted by ships of the Russian Navy throughout its journey, which just proves the simple truth: à la guerre comme à la guerre. Well, it is possible to laugh at it, but otherwise, some mysterious “Somali pirates” would have already hijacked the pipelayer. This supposition would hardly be a strong exaggeration.

8. State Duma offers Minister of Energy to cut the dampening mechanism in exchange for reduction in petrol prices

   Minister of Energy Aleksandr Novak rejected this idea. The situation is actually complicated. On one side, oil companies obviously have been affected by decline in oil prices and commitments under the new OPEC+ deal. On the other side, it is also clear that they have some reserves, unlike many other industries. It is also evident that oil producers will not cut domestic fuel prices voluntary. It is where the State Duma’s idea comes from, and it does not seem to be pure populism: it is suggested to cancel the dampening mechanism to enable oil companies to decrease petrol prices. Moreover, the current situation is illogical: oil prices have collapsed, but petrol prices stay unchanged. This situation can be attributed to excises and other factors; yet, it is incomprehensible for ordinary people. It is like negative prices: it is possible to explain them, but common sense offers a contrary vision. Common sense does not begin to understand the situation where world oil prices plunge multi-fold, but petrol prices remain intact. However, amid the pandemic and transport restrictions, oil demand is no longer volatile, i.e. reduction in oil prices does not lead to growth in its consumption. Oil companies understand that very well. This is why, it is a question to address to state regulators.

9. Cabinet decides to ban petrol imports

   This move comes in actually to replace the option of cancelation of the dampening mechanism. It is how the government assists oil producers – banning petrol imports. From the economic point of view, petrol imports seem realistic. However, importing petrol would be a disgrace to the reputation of the energy superpower.

10. Cabinet approves an updated draft of 2035 Energy Strategy

    It is certainly very difficult to imagine the Energy Strategy to be so far away from the reality: the document was passed on April 2, and already on April 10, OPEC+ 2.0 commitments were agreed. The draft of the Strategy does not say anything about decline in oil output by 20%. The document seems to be from a different epoch. However, the market had already collapsed by the time it was passed; the industry was facing challenges that it would have to respond to in the near future. The industry evidently does not follow the Strategy. The question is why this document is necessary if, probably, nobody reads it?