So get it – Newspaper Kommersant No. 34 (7479) of 02/28/2023

According to Kommersant, Russian oil production in February for the first time reached the pre-sanction level and may exceed the February 2022 figure. Thus, relative to January, production according to the results of the month can grow by about 2%, to more than 1.5 million tons per day. Oil producers are increasing production, which in March they will have to reduce by 500 thousand barrels per day from the level of January. So the government wants to achieve higher oil prices to solve problems with budget revenues.

Russian oil companies in February increased the average daily production of oil and condensate by almost 2% compared to the previous month, to about 1.508 million tons per day, Kommersant sources familiar with the situation say. Thus, the industry, a year after the introduction of sanctions against the Russian Federation for the outbreak of hostilities in Ukraine, reached the level of production in February last year. If we extrapolate the data for the last days of February, then oil production in February 2023 will exceed last year’s level.

Last year, in January-February, production was actively growing against the backdrop of an increase in quotas under the OPEC+ deal. But since March, oil production in Russia has plummeted amid the Ukrainian conflict, the imposition of large-scale sanctions and the refusal of many Western buyers to buy Russian raw materials. Later, production gradually recovered, but it has only now reached the level of February 2022.

The Russian oil industry, after the imposition of sanctions, has significantly changed the logistics of supplies, redirecting most of the volumes from Europe to Asia. However, rising freight costs and a decline in the number of buyers are forcing oil companies to sell raw materials at significant discounts. If before the sanctions, the Russian Urals grade was traded against the world Brent benchmark at a discount of several dollars per barrel, then after the introduction of restrictions, the discount exceeded $40 per barrel.

Now oil companies are ramping up production amid a reduction in the export duty on oil: the duty set for March at $14 per ton is three times lower than the December value. In addition, the industry is stimulated to increase oil exports by a slight decrease in the discount of Urals to Brent: the cost of Urals in February increased by 8% compared to the previous month.

The Urals discount to Brent increased after the EU imposed an embargo on Russian oil on December 5, 2022, and the US and other G7 countries joined the price ceiling for Russian raw materials, which is currently set at $60 per barrel. “The discount should decrease over time, as we observed during 2022, when the discount grew strongly in March and April, then it began to gradually fall and halved,” Russian Deputy Prime Minister Alexander Novak said in February.

As a result of the collapse in the cost of Urals, the Russian budget deficit in January amounted to about 1.8 trillion rubles. (with a plan of 2.9 trillion rubles for the whole of 2023), which forced the authorities to urgently make changes to the taxation system for the oil industry. Thus, from April the government will limit the Urals discount to Brent in order to calculate the severance tax. In addition, subsidies to oil companies for the supply of fuel to the domestic market will be reduced. It is assumed that the measures should bring the budget 600 billion rubles.

At the same time, the government decided to reduce oil production in March by 500,000 barrels per day from the January level in an organized manner. Oil companies are offered to reduce production in proportion to their share in the total volume. It is assumed that the decline in oil production will support the price of Russian raw materials.

Oil-only production (without condensate) has held just below 10 million barrels per day since November and likely topped that level by 1% to 2% in February, says Renaissance Capital’s Boris Sinitsyn. There are fewer days in February, and oil companies may increase daily production “for economic reasons” before a possible cut in March, he notes, but now, compared to January, the drop in production in March could be almost 7% mom, or about 650 thousand barrels. per day. The latter, the analyst believes, can support oil quotes, since so far the market sees that the dynamics of production in the country is more likely to exceed initial expectations, that is, it does not fall.

Dmitry Kozlov