Buyers of Urals pounced on the discount

According to Kommersant, oil production in Russia continues to grow in the first half of February and increased by 1% compared to the average level in January, despite the authorities’ plans to reduce production in March. Analysts attribute the increase in production to high demand for Urals, which is offered at a huge discount to Brent. At the same time, the government will legally limit the maximum size of the discount from April, which may lead to a decrease in production.

In the first half of February, the Russian Federation increased oil and gas condensate production by 1% compared to the average values ​​of the previous month, to 1.497 million tons, Kommersant’s interlocutors familiar with the situation said. Relative to the first week of February, the increase in production amounted to 0.4%.

Oil companies have come close to the pre-sanction level of production, which was 1.508 million tons per day in February last year.

The most powerful growth is demonstrated by Sakhalin-1, which is already producing almost 170 thousand barrels (b / d) per day and is gradually reaching the planned levels.

Russian oil companies are increasing production, despite statements by relevant Deputy Prime Minister Alexander Novak that the industry in March will have to reduce production by 500 thousand barrels per day (about 5%) compared to January of this year. Oil production (excluding condensate) in January was about 9.8 million bpd. The growth of oil production is stimulated by the increase in oil quotations and takes place against the backdrop of a slight decrease in the Urals discount to Brent, which now stands at about $34 per barrel.

The Russian authorities, in the face of a growing budget deficit, are seeking to reduce this discount and bring the price of Urals closer to the budgeted price of $70 per barrel. On February 15, the State Duma in the first reading approved a bill that establishes a maximum fixed discount for Urals to Brent for calculating oil taxes.

According to the document, from April 1, the maximum discount will be gradually reduced from $34 per barrel to $25 per barrel by July.

Deputy Finance Minister Alexei Sazanov said on February 15 that the current change in the parameters of the tax system provides for a future decline in production, and the budget in 2023 will receive 660 billion rubles by fixing the size of the discount. “This is not a source of additional budget revenues, this is a struggle to maintain budget revenues at the level at which they are laid down by the budget law,” Mr. Sazanov believes.

Oil companies are increasing production due to increased demand from consumers who are seeking to make the most of the current big discounts on Urals, Dmitry Kasatkin from Kasatkin Consulting believes: additional volumes can be sent for processing to Asian countries, and from there to consumers of states that have joined the embargo on Russian oil.

It is possible, however, that companies are ramping up production and exports in February simply because they benefit from the high Urals discount situation and are eager to take advantage of it while they still can. The upcoming tax changes, according to Lokoinvest’s investment director Dmitry Polevoy, are designed to “reduce incentives for possible manipulations with selling prices by oil companies, because one of the hypotheses is that part of the discount settles on offshore accounts of carriers associated with oil companies.”

Dmitry Kozlov