Unpredictable energy transition: how the domestic oil and gas industry lived a year under sanctions

In general, the energy transition is understood as the replacement of carbon-based energy with alternative energy. Its adherents believe in the rapid replacement of hydrocarbons with renewable energy sources (RES). But the timing of the “green” revolution is constantly shifting – from 2030 to 2040 and even 2060.

While there are debates around the “green” agenda, the concept of energy transition can easily be extended to multidirectional trends in Russian and global oil and gas.

Our energy transition is primarily associated with a radical turn in export geography. At the end of last year and at the beginning of this year, Russia, as is known, was deprived of the premium oil and gas European markets for a long time, if not forever. Let us recall that at the beginning of 2022, the US, Canada and the UK imposed an embargo on the import of Russian oil and petroleum products. On December 5 last year, the European Union announced an embargo on crude oil supplied from Russia by sea. On February 5 this year, the EU applied the same sanction against petroleum products. True, the European Commission allowed Bulgaria to accept small volumes of Russian oil by sea until the end of 2024. But on December 18, the Bulgarian parliament decided to completely cut off these supplies from March 1, 2024. In addition, the export of Russian oil continues through the southern branch of the Druzhba pipeline (250 thousand barrels per day).

In addition to the maritime embargo, within the framework of the entire G7 (plus Australia and Norway), on December 5, 2022 and February 5, 2023, price ceilings were built for oil ($60 per barrel) and petroleum products ($100 per barrel of diesel and gasoline, $45 – fuel oil). By the way, initially, US Treasury Secretary Janet Yellen, justifying the project of a price ceiling for Russian hydrocarbons, suggested limiting them. The essence of this idea is to maintain the volume of supplies of Russian oil to the world market so as not to lead to a supply shortage. But this will significantly reduce Russian budget revenues. Why are transport and insurance companies and banks not only of the G7 countries, but actually the whole world, obliged to sharply raise the cost of their services.

But the governments of the countries of the collective West decided to apply both the embargo and price ceilings. Moreover, control over the implementation of these restrictions is constantly increasing. Secondary sanctions against tanker owners, including those registered in countries of the Global South, have already been put into effect.

A number of domestic experts initially did not take Western oil sanctions too seriously. There were some reasons for this. It is, of course, impossible to tear the Russian fuel and energy complex to shreds. But a serious blow was still dealt to him. It was especially noticeable in the first quarter of this year and ultimately led to the loss of a large part of European consumers of Russian energy. And, accordingly, to a collapse in the profitability of our exports. Thus, in June 2023, Russia’s oil and gas export revenues amounted to just over $11 billion, a third less than a year earlier.

The fact is that until 2022, more than half of Russian oil exports were sent to the EU. More than 120 million tons (2.4 million barrels per day) were supplied to the European market in 2021. Diesel – more than 1 million bpd.

Gazprom pumped up to 140 billion cubic meters through pipes to the EU annually (up to 70% of total exports). The European Union, let us clarify, did not impose direct sanctions against Gazprom. But, firstly, Poland did this on an individual basis on April 26, 2022. As a result, the Yamal-Europe gas pipeline (capacity 33 billion cubic meters per year) was finally stopped. In Germany, Gazprom’s property was actually requisitioned. Secondly, on September 26, 2022, three of the four branches of the Nord Stream 1 and Nord Stream 2 pipelines were blown up. In total, gas exports to the EU fell by 7–8 times in 2022 alone.

In addition, the coal embargo was introduced back in August last year. And only LNG supplies to the European market continue to grow. However, restrictions may be introduced against him in the foreseeable future.

The fall in the overall profitability of the fuel and energy complex could not but lead to a shortage of budget revenues. Moreover, this happened against the backdrop of a significant drop in oil prices. This spring, Brent fell to $71 per barrel. The situation worsened due to the growth at the beginning of the year of the price discount between Brent and Urals up to $35 per barrel.

As a result, in the first nine months of this year, according to calculations by the Accounts Chamber of the Russian Federation, the share of oil and gas revenues of the federal budget fell to a minimum in 16 years and amounted to 28.3% of all revenues. Based on the results of three quarters of 2023, the share of oil and gas revenues of the federal budget fell to a minimum in 16 years and amounted to just over 28% of all revenues, having decreased by 15 percentage points. compared to the same period a year earlier. The share of oil and gas in GDP fell by 2% compared to 2022 to 16%. Among the reasons listed by the Accounts Chamber are not only the decline in world oil prices and sanctions, but also a tax maneuver, according to which export duties will be zeroed out by 2025.

Thus, even in the third quarter the situation in the fuel and energy complex did not inspire sustainable optimism. Although it was expected that the budget plan of 8 trillion rubles. oil and gas revenues 2023 will be realized. For comparison: a year earlier the industry collected 11.6 trillion rubles.

However, the situation on the global oil market is changing, especially recently, almost daily. From September 15 to October 14, according to the Russian Ministry of Finance, the average price of Urals exceeded $83 per barrel. At the same time, Brent was quoted in the range of $90–95. The production cuts introduced within the framework of OPEC+ had an impact (though, unfortunately, not for long). By that time, they exceeded 4.2 million barrels per day compared to November 2022. These figures confirm the Ministry of Finance’s conclusion that the discount will be reduced from $35 per barrel to $9.6 by October. Although the International Energy Agency, based on Argus calculations, assured that the difference in price between Brent and Urals at that time was a little more than $14.

As a result, oil and gas budget revenues showed record results in October, exceeding 2 trillion rubles. Their share in the monthly balance reached 31%. In November, the figures decreased, including due to the restoration of the fuel damper coefficient from 0.5 to 1 and, accordingly, full compensation to oil companies.

Nevertheless, this year the budget will receive oil and gas revenues, according to preliminary estimates of the Ministry of Energy, in the amount of 8.9 trillion rubles. (30% of all budget revenues).

However, December trends in the oil market again inspire concern. Despite the fact that OPEC+ cut production by another 700 thousand barrels per day on November 30, plus Russia is already this month starting to further reduce exports by 200 thousand barrels of diesel fuel, prices for Brent oil are quoted in the range of $75–78 per day. barrel. There are reports that Urals are shipping for $60. Many experts therefore believe that tightening US control over the implementation of the price ceiling is bearing fruit.

However, overall, the Russian energy transition this year is definitely completing successfully. European flows of oil and petroleum products are almost completely redirected to Asia, Africa and Latin America. Thus, China has recently imported up to 2.2 million barrels per day from Russia, India – 1.8 million. This is 80% of crude oil exports. After the lifting of temporary bans on the export of gasoline and diesel, Turkey and Brazil again became the largest consumers of Russian petroleum products.

Changes to the Tax Code adopted in November legislate a fixed discount amount. In 2024 – $15 per barrel. In 2026 – $6. It is expected that this measure will ensure more stable budget revenues. At the same time, the previous formula of the fiscal rule is returned with a cut-off price of $60 per barrel of Urals.

The position of the OPEC+ alliance in the global market is being strengthened, to which Brazil will join on January 1, 2024. After this, OPEC+ will control about 50% of global production. And this could contribute to the introduction of additional production cuts within OPEC+ next year. Which, despite the growth in production in countries outside the alliance, primarily in the United States, should keep the price corridor at least within $80–90 per barrel of Brent.