Russian oil sector gains from global demand growth

This year, Russian oil companies are getting the profits they lost in 2020. Rapid growth in demand and a weak ruble allowed them to increase their earnings by 11-23% year on year in the first quarter of 2021.

The rosy outlook of the fossil fuel industry is good news for Moscow and its political ambitions, says adding that as long as there is demand for fossil fuels somewhere in the world, Russian companies are expected to be the last to leave the industry behind. Last year, most of the world’s economies were paralysed by government measures to combat the pandemic, which was devastating for the global oil and gas sector. However, the situation has improved significantly this year thanks to rapid progress in vaccination programmes in the majority of industrialised countries.

Brent crude is currently trading above $70 per barrel, which is the highest since May 2019. As economic activities are increasing globally, oil demand is improving faster than supply prompting calls for OPEC+ to increase production. In the Russian fossil fuel sector, earnings in the first three months of 2021 were up by 11-23% compared to the corresponding period of the previous year.

Besides increasing production, Russian oil and gas companies benefit from another important factor helping them to outperform their peers — the weak ruble. The Russian currency has been seriously affected by geopolitical tensions and economic fundamentals, which is favourable for the Russian oil sector, as most sales are still executed in dollars, while operating costs are settled in rubles.

However, Moscow should be wary of excessive comfort, warns referring to the energy transition, which will gradually affect the demand for petroleum products and natural gas. Western oil majors are expected to eventually divest their interests in fossil fuels due to the growing pressure they are experiencing to decarbonise. Russian companies also feel the need to diversify, and some of them are already gradually diversifying into CCS (carbon capture and storage) and hydrogen, as their European customers are aiming for rapid decarbonisation.

At the same time, Moscow’s adopted policy of reducing greenhouse gas emissions is not ambitious at all, and state-backed companies aren’t expected to change their course in the near future. Rosneft, for example, is investing $110 billion in a large-scale Vostok project, which is supposed to deliver 100 million tonnes of oil per year by 2030. Besides, Russian oil has some of the world’s lowest production costs ($3-5 per barrel), so hydrocarbons are likely to remain the backbone of the Russian energy sector.

By Anna Litvina
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