Global picture

The average monthly price of Brent crude oil in November went down from the level it reached in the previous month by 2.4 percent to USD109.1 per barrel. The price of West Texas Intermediate (WTI) crude oil went down by 2.0 percent to USD86.6 per barrel. By mid-December, the price of Brent crude fell to USD107.39 a barrel, and the price of WTI to USD85.89.

In the short term, analysts at the International Energy Agency (IEA) predict slower growth in oil consumption. In 2012, the global demand for oil will increase by 670 thousand barrels to 89.6 million barrels per day. As such, the IEA lowered its growth forecast for oil demand in 2012 to 60 thousand barrels per day. Global demand will grow in 2013 by 830 thousand barrels to 90.4 million barrels per day.

Gas production in Russia

In November of this year, gas production in Russia totaled 57.7 billion cubic meters, or 95.8 percent of the level where it had been in November 2011. In general, from January to November 2012, the total volume of natural and associated gas produced in Russia decreased by three percent compared to the corresponding period of 2011 to 589.4 billion cubic meters.

The decline in production was due to the reduction of both foreign and domestic demand. According to the Ministry of Energy, domestic gas consumption from January to November decreased compared to the corresponding period of the previous year by 8.5 percent to 403.9 billion cubic meters.

Production decline within the industry is attributable to production decreases at Gazprom. Over the 11 months of 2012, the company reduced its production by 6.2 percent compared to the previous year, down to 430,036 billion cubic meters. The company reduced gas sales on the domestic market from January to November by seven percent to 243 billion cubic meters. At the same time, other companies have increased production. As such, NOVATEK from January to November of this year extracted 46,263 billion cubic meters of gas (up 6.2 percent), and the oil companies produced 61,375 billion cubic meters (an increase of 6.07 percent).

In November, gas supplies from Russia fell by 20 percent to 14,285 billion cubic meters. Overall, from January to November 2012 Russian gas exports decreased compared to the corresponding period of the previous year by 10.7 percent to 165,345 billion cubic meters. The decline in demand for Russian gas on the international market was due to increasing competition from other providers and a reduction in gas consumption in the Eurozone. Also, there was a significant decline in exports to neighboring countries. From January to October 2012, gas supplies to the C.I.S. decreased by 12.5 percent to 52,998 billion cubic meters as a consequence of the reduction of the supply of gas to Ukraine.

M&A activity in the oil and gas production and refining sectors in October significantly increased compared to the previous month. Two deals worth USD245 million took place, versus just one worth USD47.2 million in September. Overall, in the 10 months of 2012, there were 16 transactions in the industry with the cumulative value of USD5,187.1 million, which is 2.5 times more than in the corresponding period of the previous year (USD2,080.5 million).

A new and very noticeable trend took form in the fall of 2012, namely the involvement of non-core market players, such as transportation companies, in oil and gas asset acquisition. For example, in November, Sovfracht that specializes in the transportation of petroleum products said it will buy the Mari El refinery. A Turkish unit of BP agreed to sell the assets for the storage and sale of liquefied petroleum gas in Turkey to the Russian United Transportation forwarding company. Such transactions themselves are not new and are the result of the companies’ intentions to build a vertical chain, including production, transportation, and sale of products. For example, it is with these same goals in mind that Gazprom is participating in the tender for the purchase of the Greek DEPA and in the exchanges of assets with Wintershall. At the same time, it is noteworthy that the first phase of consolidation in this market is beginning with the transportation companies, as opposed to production companies.

Extraction of oil

Oil production in Russia continues to grow, but growth rates remain low. According to Rosstat, in October 2012, the volume of oil production in the Russian Federation (including the production of gas condensate) amounted to 44.0 million tons, only 0.2 percent more than in October of last year.

According to the Ministry of Energy, oil and gas condensate production in October was 44.2 million tons, surpassing the level reached a year ago by 1.1 percent. In November, production was 43.0 million tons (1.5 percent compared to November 2011). Overall, in the 11 months of 2012, oil production increased compared to the corresponding period of 2011 by 0.9 percent to 473.7 million tons.

Production growth was entirely due to an increase in domestic demand. According to the Ministry of Energy, the supply of crude oil for refining in Russia from January to November of this year increased compared to the corresponding period of the previous year by 3.3 percent to 242.4 million tons. Meanwhile, exports of oil decreased compared to last year’s level by 0.8 percent.

In the long term, production growth can be intensified as fields with heavy oil are commissioned. In December of 2012, President Vladimir Putin signed the law extending tax benefits for hydrocarbons obtained from hard-to-reach reservoirs. The measure provides for the application of a lower oil export duty to heavy oil, a duty in the amount of 10 percent of standard export duties. The reduced rate will apply to extra-heavy crude oil, to the oil with special physical and chemical characteristics, as well as to the oil produced in regions with severe climatic conditions or offshore. Analysts predict that the favorable tax treatment for hard-to-reach deposits of oil will increase oil production by anywhere from 40 to 100 million tons. The new federal law takes effect on January 1, 2013, and the subpart as to the tax benefits extended enters into effect on April 1.

The maximum rate of oil production growth from January to October 2012 compared to the corresponding period of the previous year was demonstrated in the Irkutsk region (+60.3 percent), the republic of Sakha (+22.7 percent), and the Krasnoyarsk region (+19.6 percent). The largest decline was in the Nenets autonomous district and the Stavropol territory.

The general positive trends in oil production persisted at most Russian oil companies from January to October 2012. Rosneft demonstrated absolute leadership in terms of oil production (with an increase of 2.3 million tons from January to October 2011) and reserve increases due to increased production at the Vankor field, which was 21 percent more than last year’s level. The increase in oil production at TNK was 0.8 million tons for the reporting period, a figure that was achieved by increasing production at the Verkhnechonskoye and the Uvat fields.

The largest decline in the annual comparison took place at Lukoil, which exhibited a 1.2-percent drop in oil production due to lower-than-expected performance at fields in the South Khylchuyu Timan-Pechora region. However, in the third quarter of 2012, the company was able to stabilize production. In October, production volumes exceeded the previous year’s level by 0.2 percent.

Gas production

Negative trends were prevalent in October of this year in the Russian gas production industry. According to Rosstat, gas production for the month of October was 53.9 billion cubic meters, which is 4.3 percent lower than one year earlier. According to the Ministry of Energy, gas production in October was a little higher – at 54.1 billion cubic meters. Even this figure, however, is four percent lower than the level of production seen one year earlier.

In November, gas production was 57.7 billion cubic meters, or 95.8 percent compared to November 2011. In general, from January to November 2012, the total volume of produced natural and associated gas in Russia decreased by three percent compared to the corresponding period of 2011 to 589.4 billion cubic meters.

The decline in production is attributable to the reduction in demand on the internal and the global market. According to the Ministry of Energy, domestic gas consumption from January to November decreased compared to the corresponding period of the previous year by 8.5 percent to 403.9 billion cubic meters. During the period, there was a reduction of gas exports.

Production decline within the industry was due to Gazprom’s reduced activities. Analysts suggest that the position of Gazprom in the domestic market next year could further deteriorate. The state-controlled company Mosenergo signed a contract with the independent gas producer NOVATEK for the supply of gas in 2013-2015 in the volume of 27 billion cubic meters, or nine billion cubic meters per year. Previously, the energy company bought its gas solely from Gazprom. According to Mosenergo, the value of the contract does not exceed 121 billion roubles.

As the head of NOVATEK Leonid Michelson explained, in 2013, the company expects to increase its sales in the domestic market from 60 to 70 billion cubic meters. By 2020, the independent producer plans to increase gas sales in Russia to 90 billion cubic meters.

In the future Rosneft can become a serious competitor to Gazprom and NOVATEK. The Russian oil giant is actively expanding its presence in the domestic gas market. In November, it was reported that Rosneft signed a five-year gas supply contract with Fortum for the volume of 2.3 to 2.5 billion cubic meters annually. Rosneft also signed a cooperation agreement with RusHydro for joint work in the field of gas and oil power generation within the Far Eastern federal district. The agreement provides for gas supplies to power projects of RusHydro in the Far East. In addition, Rosneft already has an agreement with Inter RAO UES and E.On Russia.

At the regional level, the highest growth rate of gas production from January to October 2012 occurred within the Tomsk region and the Sakha republic. At the same time, the major gas producing regions of the country, including the Yamal-Nenets autonomous district, saw natural gas production decrease compared to the corresponding period of 2011 by 4.5 percent.

In the last days of November, President Vladimir Putin signed into law a measure imposing new extraction taxes on gas for 2013-2015. From July 1 to December 31, 2013, the tax rate for Gazprom will be 622 roubles. In 2014, the tax rate will be 700 roubles. In 2015, the tax rate will be 788 roubles. For independent producers, discounted rates were introduced at 0.646 percent of Gazprom’s duty for 2013, 0.673 percent for 2014, and 0.701 percent for 2015. As such, independent producers will pay extraction taxes in the next three years in the respective amounts of 402 roubles, 471 roubles, and 552 roubles.

Oil exports

According to the Ministry of Energy, Russian oil exports in October 2012 stood at 20.3 million tons, or 97.4 percent compared to October 2011. In November, exports stood at 19.2 million tons, or 93.1 percent compared to November 2011. In the 11 months of the year, oil exports from Russia were at 219.6 million tons, which is 0.8 percent lower than a year earlier. Oil supplies to foreign countries increased during this period by 0.3 percent to 194.54 million tons. Oil supplies to the C.I.S. countries decreased by 8.2 percent, to 25.31 million tons. The fall of exports to the C.I.S. countries was due to reduced supplies to Ukraine by 5.9 times to 0.73 million tons.

Oil exports through the terminal at Kozmino from January to November 2012 increased by 4.4 percent compared to the corresponding period of the previous year to 14.4 million tons. In the 11 months of this year, the largest amount of oil was shipped to Japan (more than 30 percent), to China (25 percent), and to the U.S. (almost 20 percent). Smaller volumes were imported to South Korea, Taiwan, Singapore, Indonesia, Thailand, the Philippines, and Malaysia.

The oil export duty in December 2012 decreased by two percent to USD396.5 per ton. As of December 1, 2012, the reduced rate of export duty on oil for a number of fields in Eastern Siberia and the Northern Caspian stood at USD193.3 compared to USD199.4 per ton in the previous month.

Gas exports

The decline in Russian gas exports seen earlier in the year resumed in October. According to the Ministry of Energy, gas supplies from the Russian Federation in October amounted to 14,858 billion cubic meters, which is 2.7 percent less than in October 2011. Until then, from July 2012, gas exports from Russia increased compared to the same month of the previous year.

In November, Russian gas supplies were down even more to 14,285 billion cubic meters. Overall, from January to November 2012, Russian gas exports decreased compared to the corresponding period of the previous year by 10.7 percent to 165,345 billion cubic meters. The exports of pipeline gas to foreign countries amounted to 98,959 billion cubic meters, or 92 percent compared to the corresponding January-to-November period of 2011. The reduced demand for Russian gas on the international market was attributable to the increasing competition from other suppliers and a reduction in gas consumption in the Eurozone.

Furthermore, a significant decline in exports to the neighboring countries took place. From January to October 2012, gas supplies to the C.I.S. countries decreased by 12.5 percent to 52,998 billion cubic meters, in large measure due to the reduction of the supply of gas to Ukraine.

Because of high energy costs, Ukraine has declared its intention to reduce purchases of Russian gas in 2012 to 27 billion cubic meters. However, under the current contract for the supply of natural gas between Gazprom and Naftogaz, the volume of Russian gas to be purchased by Ukraine in 2012 is expected to be around 52 billion cubic meters. The contract has a “take or pay” clause, which says that Naftogaz will be obligated to pay for up to 80 percent of the contract amount regardless of actual deliveries. Accordingly, for 2012, Ukraine has to pay for not less than 41.6 billion cubic meters of gas. Russia has also claimed that the time for negotiations on the volume of gas purchases for this year has already passed, as the annual contract amount may be amended no later than six months before the start of deliveries.

Still, Ukraine intends in the future to reduce the volume of purchases of Russian gas. According to the Minister of Energy and Coal Industry of Ukraine Yuriy Boyko, Naftogaz in 2013 will reduce imports of Russian natural gas to 18 billion cubic meters. Earlier, Boyko said that Ukraine’s actions in reducing Russian gas imports would be contrary to the terms of the existing contract and will cause disputes with Russia. However, the Minister has said that Kiev is ready to defend its position in court.

Reductions in purchases of Russian gas may be due to reversible supplies from Europe. On November 1, 2012, Ukraine started to import gas from Germany via Poland. Naftogaz’s agreement with the German company RWE provides for the supply of 1.4 billion cubic meters per year with a possible increase to four billion cubic meters.

Domestic prices for oil and gas

After reaching a peak in September, the oil producers’ price in the domestic market began to decline in October. Also, the producers’ price of gas decreased due to seasonal factors. The decrease in producers’ prices in this period occurred in previous years.

The financial situation in the industry

The companies’ net financial performance result in the energy minerals extraction sector from January to September of this year decreased compared to the corresponding period of 2011 by 1.4 percent.

Reduced earnings in the extraction sector were caused by the fall in world oil prices in the second quarter of 2012, the decline in gas production, and the increase in the tax burden on the gas industry. The share of profitable companies in the industry declined over the previous year to 65.3 percent from 67.8 percent in January to September 2011.

However, as is reflected in the statistics supplied by individual companies for the reporting period of January to September 2012, the financial position of some producers improved. In particular, despite the reduction in domestic consumption in Russia, NOVATEK was able to show a significant increase in profits (22.9 percent for the nine months of this year).

Due to rising prices for oil and oil products in the third quarter, as well as the increasing volume of oil production and processing, positive results were achieved at Rosneft, which showed growth of 5.4-percent, Gazprom Neft, which showed growth of 8.8-percent, and Bashneft, which showed growth of 1.5-percent. At the same time, TNK showed a significant drop in net profits of 13.3 percent. The company attributed the decline in profits to its relatively high cost of depreciation as a result of increasing the share of production from new fields.

In general, the financial situation in the industry remains stable, as the level of profitability of sales is at around 30.2 percent. The level of sales profitability declined 2.3 percentage points compared to the corresponding period of the previous year.

Oil refining in Russia

The ongoing decline in the exports of Russian oil generates supplies for domestic refinery feedstock. The volume of primary oil processing in October 2012, according to the Federal State Statistics Service, was 22.0 million tons, up two percent from the level seen in September and up three percent from the level of October 2011.

According to the Ministry of Energy, the volume of primary crude oil processing in Russia in October 2012 was 21.5 million tons (102 percent compared to October 2011), and in November 23 million tons (110.9 percent compared to November 2011). From January to November of the current year, the primary processing of oil rose over the corresponding period of 2011 by 4.1 percent to 242.2 million tons.

The production of all kinds of petroleum products in October 2012 was higher than in October of the previous year. The maximum growth rate was observed in the production of gasoline. Meanwhile, the supply of petroleum products to the domestic market declined. As such, according to the Ministry of Economic Development, refineries in October delivered 2.4 million tons of gasoline to the domestic market (85.1 percent of the volume for October 2011), 2.8 million tons of diesel fuel (94 percent), 1.4 million tons of fuel oil (97.7 percent). The depth of crude oil processing from January to October 2012 was 71.6 percent compared to 71 percent for the period from January to October 2011.

The exports of oil products from Russia in January to September of this year increased compared to the corresponding period of the previous year ин 10.6 percent. Growth in exports was recorded in categories such as diesel and fuel oil, while exports of gasoline amounted to only 91.5 percent of the January to September 2011 figure. The decline is attributable to the introduction in May 2011 of exports duties on gasoline at 90 percent of the duty on oil. The exports of petroleum products continue to take a larger share of the volume of liquid fuels exported from Russia. The share of petroleum products in total exports increased from 53.6 percent in January-September 2011 to 55.2 percent in January-September 2012. The exports of liquid fuels continue notwithstanding the effect from the introduction of new “60-66” taxes for the oil industry.

According to the Ministry of Economic Development, from January to October 2012, growth in oil refining was registered at the refineries of Gazprom, which demonstrated a 111-percent increase compared to January to October 2011, TNK, which showed a 109.5-percent increase, Tatneft, which exhibited a 106.7-percent increase, Slavneft, where a 104.1-percent increase was noted, and at the Khabarovsk refinery, which had an increase of 105.9 percent. Processing volumes decreased against the corresponding period of the previous year at the refinery facilities of Lukoil, which showed a 2.5-percent decline, Surgutneftegas, which showed a 3.1-percent decrease, as well as Bashneft, which reported a 1.9-percent decline in its processing volume.

In terms of absolute volume of oil refining, the leaders were Rosneft, with 42 million tons, Lukoil, with 36.7 million tons, Gazprom Neft, with 26.3 million tons, TNK, with 22.8 million tons, and Surgutneftegas, with 17 million tons. These companies accounted for 65.1 percent of the total volume of oil refining in the country.

Domestic prices of petroleum products

In October 2012, producers’ prices for gasoline continued to increase, but the growth rate went down. As such, in October the price of gasoline increased in Russia on average by 5.1 percent, while in September, the price went up by nine percent.

Many analysts attribute the price increase to renovations at Russian refineries and a seasonal increase in fuel demand. Analysts predict that the situation will change after October. In effect, fuel prices have stabilized in November. As such, consumer gasoline prices rose in that month by 0.5 percent. The increase in October was 2.5 percent. At the same time, despite the decline in the price of diesel fuel, retail market prices for petroleum grew rapidly. In November, consumer prices for diesel fuel increased by three percent. In October, the price increase was 2.5 percent.

Effective January 2013, Russia will ban the sale of gasoline and diesel below the Euro-3 standard. According to Deputy Energy Minister Pavel Fedorov, not all manufacturers have yet prepared for the transition, but the turnover of substandard gasoline will be under one million tons. Oil companies have pledged to send excess volumes of unusable fuel out of Russia.