The value of the Russian oil and gas market fell by 15.2 percent in 2019 due to a decline in oil and gas prices this year. This decrease marked the end of a period of double-digit growth recorded in 2017 and 2018. A sharper decline is expected in 2020, amid weaker demand and a sharp decline in oil prices. For the rest of the next five years, the market is expected to return to double-digit growth rates, as oil and gas prices are expected to pick up again after 2020, in line with the recovery in demand and a reduced supply.

The mean price of Brent, WTI, and Dubai crude oil fell by an average of 10.2 percent in 2019. Specifically, the price of Brent international benchmark crude oil in 2019 was USD64 per barrel, almost USD7 per barrel below the 2018 average. West Texas Intermediate (WTI) U.S. crude averaged USD57 per barrel in 2019, almost USD8 lower than in 2018, while the price of Dubai crude oil averaged USD63.2, USD6 lower than in 2018.

Crude oil prices began to fall in late 2018, owing to a sharp increase in U.S. shale oil production and a simultaneous increase in oil production from other non-OPEC countries, while global demand remained weak. Production increases limited any upward movement caused by the heightened uncertainty about oil supplies in the major oil-producing countries amid geopolitical tensions, including the September 2019 rocket attack on Saudi refineries, U.S. sanctions on oil trade from Iran and Venezuela, and the decline in oil production in Libya as the country’s civil war continues.

Gas prices fell by an average of 25.4 percent in 2019, the lowest average price since 2016, according to the World Bank’s index, which includes natural gas from the U.S. and Europe and liquefied natural gas (LNG) from Japan. The price of U.S. natural gas fell by 18.4 percent, based on spot prices at Henry Hub, averaging USD2.56 per million British thermal units (MMBtu). The price of European natural gas fell the most in 2019, dropping 37.5 percent to USD4.8 per MMBtu, while the price of LNG bought in Japan fell only one percent to USD10.57 per MMBtu. Strong growth in natural gas production, coupled with growth in oil production, pushed down prices in 2019, as supply outstripped demand. LNG exports in particular have increased the supply of natural gas sharply this year.

In 2019, Russia’s oil and gas market generated total revenues of USD115.0 billion, representing an average annual growth rate (CAGR) of 4.4 percent from 2015 to 2019.

Oil prices have fluctuated significantly in recent years. In response to growing U.S. shale oil production, OPEC countries increased supply as well to protect their shares, with prices dropping sharply from USD96.2 in 2014 to USD50.75 per barrel in 2015, and even lower to USD42.8 in 2016.

Lower oil prices, however, hurt OPEC countries’ oil revenues, so OPEC tried to reverse the trend. As such, an additional group of countries, led by Russia, OPEC+, was invited to join OPEC’s efforts to increase its influence in setting production quotas in 2016. In September 2016, OPEC and OPEC+ countries jointly agreed to reduce production by 1.8 million barrels per day from the first half of 2017, extending these cuts for the rest of the year. Hence, oil prices rose 23.4 percent in 2017 to USD52.8 per barrel. The production cut agreement has been extended until 2018, with prices rising 29.5 percent this year to USD68.35 a barrel. In 2019, the alliance decided to withdraw an additional 1.2 million barrels per day from the market amid concerns about weak global demand, while shale oil production in the U.S. continued to rise. OPEC decisions did not prevent oil prices from falling, as output growth in non-OPEC countries not only offset OPEC countries’ supply constraints but also led to growth in global supply that depressed prices.

Natural gas prices follow a similar pattern since natural gas is often a byproduct of oil production. Indeed, oil and gas prices have correlated almost perfectly over the past six years. Natural gas production has been increasing since 2009, with increased drilling and capacity growth at LNG terminals ultimately leading to a supply shortage that depresses prices.

In addition, the industry is facing increasing environmental concerns about carbon dioxide emissions worldwide. Stricter emissions targets set by countries in the 2016 Paris Agreement, as well as increasing efforts by consumers to improve energy efficiency and use sustainable energy sources, mean that the oil and gas industry has lost momentum.

With a CAGR of 0.7 percent between 2015 and 2019, the market consumption volume rose to a total of 3,933.2 million barrel of oil equivalent (BoE) in 2019. The market volume is expected to increase to 4,259.3 million BoE by the end of 2024, corresponding to a CAGR of 1.6 percent for the period of years from 2019 to 2024.

Demand on the Russian market declined by 2.7 percent in 2019, reflecting a decline in gas consumption. Specifically, consumption of natural gas was reduced by 4.5 percent as industrial users’ demand declined with their production. Consumption of refined petroleum products increased by 0.8 percent, with lower oil prices boosting demand for gasoline and diesel.

Stable domestic oil and gas production has supported demand in recent years despite economic woes.

The refined petroleum products segment was the most lucrative segment of the market in 2019 with total sales of USD78.6 billion, representing 68.4 percent of the total value of the market. Natural gas contributed USD36.4 billion to revenue in 2019, representing 31.6 percent of the market’s total value.

Refined petroleum represents the largest share of consumption, as refined petroleum is widely used as a motor vehicle fuel. In contrast, natural gas is mainly used for electricity and heating.

According to data from the Joint Organizations Data Initiative (JODI), diesel accounted for nearly 42 percent of total refined products, with gasoline being the segment’s second most profitable product at nearly 10 percent.

Market development is expected to slow, with an expected CAGR of 2.5 percent for the five-year period from 2019 to 2024, which should propel the market to USD130.1 billion by the end of 2024.

The market is expected to decline sharply in 2020 due to the COVID-19 pandemic, which is exacerbated by a combination of demand shock and supply congestion. The decline in demand due to pandemic containment was the most significant factor that caused the collapse in oil prices in early 2020. In particular, demand for petrol and fuel oil in road transport and aviation has fallen dramatically due to lockdown measures in early 2020 and will remain limited for as long as these measures apply. Demand for diesel and marine fuel, used mainly in trucks and ships to transport goods, is also affected, but the impact is less acute.

Mitigation measures have a less direct impact on gas demand from electricity generation, as electricity consumption has only been reduced by commercial and industrial installations that have had to be decommissioned, while household consumption has remained relatively unaffected. By contrast, demand for petrochemicals produced from naphtha and natural gas liquids is increasing due to rising demand for consumer packaging and personal protective equipment. Demand is expected to remain weak in the second half of the year, although it will improve slightly in line with the expected gradual removal of containment measures, with consumption in the Russian market expected to decline by 1.2 percent for the full year.

In supply terms, the failure of OPEC to reach an agreement to cut production and put a floor on oil prices before April 2020, when the average price of crude oil plummeted to a 20-year record low of USD20 per barrel, is expected to be devastating for the market’s revenues.

The agreement reached in April 2020 between OPEC and OPEC+ countries to reduce production will only slightly reduce revenue losses for 2020. Daily production has been reduced by 9.7 million barrels from May 2020 to the end of June 2020. For the six months to December 2020, the agreed reduction amounts to 7.7 million barrels per day. From January 2021 to April 2022, production will also be cut by 5.8 million barrels per day. The starting point for all production cuts is production levels in October 2018, with the exception of Saudi Arabia and Russia, for which the starting point is 11 million barrels per day.

The average 32-percent drop in the price of natural gas since the beginning of the year was less severe than that of crude oil, as the impact on the demand for natural gas was less negative. In the case of natural gas, prices could fall further, as the supply that last depressed prices will take longer to end.

Market demand is expected to recover after 2020, as the pandemic is contained, and the resulting recession will be short-lived. According to revised OECD (Organization for Economic Co-operation and Development) forecasts, Russia’s economy will contract by 14.1 percent in 2020 and grow again to 5.9 percent in 2021. The relaunch of economic activity following the relaxation of containment measures, will revive the demand for transport fuels and electricity generation by industrial and commercial end-users. Nevertheless, consumption in the Russian market is expected to decline between 2019 and 2021 as a medium-term consequence of the economic downturn.

From a supply perspective, the planned production cuts by OPEC and OPEC+ members are likely to drive up the price of oil over the next two years and support oil revenues in the market. Important parameters for oil supply and prices during this period, i.e. the development of the U.S. oil supply and the U.S. government’s sanctions policy against Iranian oil exports, are still uncertain. Natural gas prices are expected to follow the upward trend in oil prices, albeit more slowly. In addition, investment in the market is expected to decline significantly over the forecast horizon as oil and gas producers reduce their exploration and drilling activities and reduce existing production to maintain financial health and prices at sustainable levels during the recovery.

The five largest oil producers have already announced they will reduce their investments by about 15-25 percent.

Finally, the transition to alternative and sustainable energy sources (including solar and wind) will continue to have an impact in the medium term, gaining a greater share over oil and gas in electricity generation, especially if their costs are to remain stable.