Cheap oil runs out in Russia

Experts at the Saudi company Saudi Aramco have estimated that oil production in Russia is more expensive than in the Middle East or Latin America.
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Saudi oil company Saudi Aramco published data on the total cost of oil in different countries, including taxes. According to her, production in Russia is expensive, more than $ 40 per barrel, which is twice as expensive as in Saudi Arabia.

Saudi Arabia’s state-owned oil company, the most profitable in the world, published a 658-page prospectus (.pdf) on its initial public offering (IPO) on November 9. It presents specially collected and processed data for this about the total cost of oil production in different countries of the world, including taxes (see infographic).

According to Saudi Aramco, the cost of Saudi oil along with Kuwaiti oil is the lowest in the world - only about $ 17 per barrel. Russian oil is located in the upper part of the spectrum - more than $ 40, even more expensive than US oil produced in the Gulf of Mexico.

The assessment of Saudi Aramco is close to the assessment of the Russian government, but a little overpriced, says a source close to the Cabinet of RBC. According to him, the most expensive new deposits are located in the Arctic and the Far East, taking into account existing benefits, the cost of their development is estimated at $ 50–55 per barrel.

According to consultant Saudi Aramco

The oil cost assessment for Saudi Aramco was conducted by its industry consultant, IHS Markit. She considered the so-called break-even price of oil (breakeven costs), that is, one at which production on the project is acceptable cost-effective. IHS calculations had the following features:

the price was calculated for the "typical" new oil projects of the country, launched in 2019;
this price should cover all production costs of the company with a full development cycle of the field;
costs include taxes;
project costs are accounted for in 2030, the profitability of production should be 10% per year (industry standard).

Oil is more expensive in Russia than in most countries

According to IHS Markit estimates, such a break-even price of oil for new onshore oil projects in Russia is on average about $ 42 per barrel of Brent grade. For offshore projects - about $ 44.

For comparison: in Saudi Arabia, the price of breakeven for onshore and offshore fields is estimated at about $ 16-18 per barrel. Separately, IHS indicates that the threshold for profitability in existing fields in Saudi Arabia (respectively, exploration and development costs are not taken into account) is less than $ 10.

From the point of view of IHS Markit, in the whole Middle East the cost of oil is lower than in Russia: in Iraq - about $ 20, in Iran - $ 22, in the UAE - $ 20/30 (for onshore / offshore fields).
In Nigeria (onshore projects), the break-even price is estimated at about $ 28 per barrel.
In Venezuela (projects on land) - $ 36.
In the UK (North Sea) - a little less than $ 40.
In the USA (Gulf of Mexico) - $ 40.

More expensive than in Russia, oil production in Kazakhstan ($ 46/51 on land / offshore projects), on land projects in the USA ($ 49), Angola and Thailand (about $ 50, offshore projects), in Azerbaijan, India and China ($ 55 –60).

It's all about taxes.

For Russia, the bulk of the total cost of oil is taxes. In February 2019, Deputy Minister of Energy Pavel Sorokin said in an interview with Vedomosti that the cost of Russian oil today is $ 25 or less, "everything else is taxes." “The country is gradually moving to the development of more expensive reserves. This means that the cost will increase and the tax system should be adjusted to this. If yesterday and today $ 25 per barrel was enough to develop, then for the development of reserves tomorrow with an oil price below $ 60–70 this is not enough, ”Sorokin said.

According to Rosstat, the total cost of Russian oil (in actual prices, excluding VAT, excise taxes and similar mandatory payments) in the second quarter of 2019 amounted to 2508 rubles. per barrel, or $ 31.9 at the average exchange rate for the quarter.

In 2018, the tax burden on production in Russia amounted to 65% of the company's revenue, while for the largest oil and gas companies operating around the world, this value is much lower - 18–35% of the revenue (excluding projects that are implemented under the partition agreements products), notes the director of the Moscow Oil and Gas Center EY Denis Borisov.

The tax burden on oil projects in Russia is very high, so the government provides incentives for the development of new fields in remote regions or the commissioning of hard-to-recover reserves, said Daria Kozlova, director of fuel and energy regulation regulation at Vygon Consulting. Without benefits, production costs, including taxes at such fields, may exceed the current price level of $ 60–65 per barrel, she points out.

But the benefits are growing

Oil and gas tax benefits in 2019 reached almost 1.6 trillion rubles. - a trillion increase compared with 2016, follows from the data of the Ministry of Finance. Since 2013, the share of preferential oil production increased from 27 to 56.6% in the first quarter of 2019. However, “a more than twofold increase in the benefits provided to oil companies did not lead to a comparable increase in investment in production,” the Finance Ministry said. If current trends continue, by 2024 the share of preferential oil production will increase to 67.5%, and by 2036 - to 90%.

Competition of tax regimes

Recently, the ministries conducted an inventory of stocks, which showed that, depending on macro-conditions, 50–65% of them are unprofitable in Russia, Kozlova recalls. But this was only the first stage. Now the Ministry of Energy, on behalf of the government, has to analyze how effective the incentives are and what the optimal fiscal system for the industry should be, she said. Formally, a report on the results of this work should be submitted by June 2020.

The head of the largest Russian oil company Rosneft (more than 40% of all Russian production) Igor Sechin said in June 2019 that competition between tax regimes in the oil industry is intensifying in the world. “In the USA, in recent years unprecedented measures have been taken to support the industry by reducing the tax burden and regulatory barriers. <...> The decrease in the tax burden in Saudi Arabia since 2017 (the income tax rate decreased from 85 to 50%) led to the fact that in 2018, the national oil and gas company Saudi Aramco showed a world record for net profit, exceeding $ 100 billion, ”Sechin explained. In Russia, according to him, “multidirectional trends - the Russian regulator balances between the tasks of filling the budget and stimulating economic growth while searching for solutions to social problems at the expense of the market”.