Novak allowed a decrease in oil production in Russia by 3.7% in 2023

Oil production (including gas condensate) in Russia may decrease by 20 million tons in 2023 (by 3.7% – Vedomosti) to 515 million tons, Deputy Prime Minister Alexander Novak, who oversees the fuel and energy complex, announced this on April 27.

“Compared to last year, we had 535 [млн т], that is, minus 20 million tons,” Novak said (quote from Interfax). In 2022, according to the Ministry of Energy, oil production in Russia increased by 2% to 535.1 million tons.

According to the Deputy Prime Minister, Russia in April began to reduce production by 500,000 barrels per day compared to the average level in February 2023. In February, Novak said that Russian companies would voluntarily reduce oil production by this volume in March of this year, and then this measure extended until July, and after – until the end of 2023. Eight OPEC + countries, including Saudi Arabia, also joined the voluntary reduction. The total decline in production of these countries and Russia will amount to 1.66 million barrels per day.

At the same time, on April 26, Rosstat did not publish monthly statistics on the oil market. On this day, the agency was supposed to disclose production data for March 2023 in the report “On industrial production”, as well as the report “On the oil market in January-February 2023.”

The Vice Prime Minister noted that the world oil market is now balanced, and there is no need for new production cuts yet. “Plus [был] winter period, now consumption will start to grow, let’s see how the situation develops,” Novak added. According to him, OPEC + does not expect a shortage of oil in the market, and if the situation changes, countries have the opportunity to adjust production.

Novak also said that in 2022, Russian companies redirected to China, India and other countries 40 million tons of oil and oil products out of 220 million that were previously supplied to the Western market. This year, he expects a reduction in supplies to the West by another 100 million tons, and 80-90 million tons, according to Novak, will continue to enter this market.

After the strengthening of anti-Russian sanctions in 2022 due to the NWO in Ukraine, a number of Western countries, for example, the United States and Great Britain, announced the rejection of oil and oil products from Russia. On December 5, 2022, the European Union (EU) embargo on offshore oil supplies from the Russian Federation came into force and the price ceiling for it at $60/bbl. On February 5 this year, similar measures began to apply to petroleum products. The price limit for more expensive oil products (for example, diesel and gasoline) is set at $100/bbl, for cheaper ones (fuel oil) – $45/bbl.

As a result, Russian companies began to redirect supplies from the European market to the Asian one. The largest buyers of Russian oil in 2022 were China and India, which imported 86.25 million tons and 33.4 million tons, respectively.

Novak also announced on April 27 that the discount on Russian oil to the benchmark Brent had fallen to $26-27/bbl. This is less than the discount established in the legislation when calculating taxes. That is, the tax base for oil trading is now higher than expected.

Previously, several laws were adopted, according to which the discount in the price of Russian Urals oil to Brent will be taken into account when calculating the mineral extraction tax (MET), additional tax (ATD), export duty and reverse excise on oil. The Tax Code stipulates that in April the maximum discount is $34/bbl, in May – $31/bbl, in June – $28/bbl, and from July until the end of the year – $25/bbl. If this level is exceeded, the Brent price minus the specified discount will be applied for tax calculation.

The discount for Russian oil is decreasing as stable supply chains are formed, as well as against the backdrop of a gradual normalization of insurance conditions, freight and an increase in the share of settlements in national currencies, Nikita Blokhin, senior analyst at Alfa Bank, believes. He believes that given favorable market conditions and growing demand for Urals by the end of the year, the discount may drop to $22.5/bbl.

Senior analyst “BCS A world of investments” Ronald Smith believes that against the backdrop of voluntary oil production cuts in Russia, companies are likely to maintain a high level of activity in anticipation of the opportunity to increase production again in one to two years. “But you can’t expect companies to use unused production capacity forever,” he says. Blokhin clarifies that the companies could probably cut production at the expense of low-rate wells, which are not very efficient and have a certain level of depletion.

June Brent futures traded at $77.8/bbl on April 27, according to ICE. The cost of Urals in March 2023 decreased by 1.86 times in annual terms to $47.85/bbl, the Ministry of Finance reported.