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Opinion: Saudis Planning For A War Of Attrition In Europe With Russia’s Oil Industry

by Nick Cunningham of

Russia’s central bank recently warned about the growing financial risks to the Russian economy from Saudi Arabia encroaching upon its traditional export market for crude oil. Russia sends 70 percent of its oil to Europe, but Saudi Arabia has been making inroads in the European market amid the oil price downturn.

The result is a heavier discount for Russia’s crude oil, the so-called Urals blend. Bloomberg that the Urals typically lands in Rotterdam, a major European destination, at a discount to Brent of around $2 or less. But the discount has widened to $3.50 lately due to increased competition from Saudi Arabia. “Oil supplies to Europe from Saudi Arabia are probably adversely affecting Urals prices,” the Russian central bank warned in a recent report.

Russian officials have accused Saudi Arabia of “dumping” its oil in Europe, a that Rosneft chief Igor Sechin said would “backfire.”

Russia’s economy has been battered by the collapse in crude prices, compounded by the screws of western sanctions. The Russian economy could by 3.2 percent this year.

Oil exports account for around half of the revenue taken in by the Russian government. And for an economy so dependent on oil, it is no surprise that the plummeting crude oil price has led to a dramatic of the ruble, although over the past month the currency regained some lost ground. The weakening currency has pushed up inflation, which creates a conundrum for the Russian central bank.

To stop the ruble from plunging further and to keep inflation from spiraling ever upwards, the Russian central bank took aggressive action by to as high as 17 percent at the beginning of 2015. However, that has negatively impacted the economy. As the ruble stabilized, the bank dialed the interest rate back to 11 percent, where it stands today.

In response to the tough financial circumstances that Russia has found itself in, it sees no choice but to squeeze as much oil out of its aging fields as it can. So far, it has succeeded to some extent. Russian oil production is expected to rise by a modest 70,000 barrels per day in 2015, averaging 10.75 million barrels per day (mb/d) over the course of this year. Output hit a post-Soviet record of 10.78 mb/d in October, according to OPEC’s .


However, the upside to Russia’s oil production is limited. The Russian government needs revenue, so is not keen to cut taxes. The government is mulling a delay in the planned cut in export taxes, which, according to OPEC, could result in oil companies paying an additional $2 to $3 billion more in taxes. That could modestly cut into overall Russian oil production, perhaps pushing output down by 0.1 to 0.2 mb/d. In any case, Russia probably can’t boost output any further. OPEC predicts Russia’s oil production will remain flat through next year.

Globally, the competition between oil exporters won’t ease in the near term. There are still too many barrels of crude floating around. OPEC predicts that non-OPEC supply will contract by just 0.13 mb/d in 2016, a rather trivial amount considering the extreme cut backs in investment and drilling activity.

Despite the fact that OPEC officials have consistently put on a brave face in public, insisting that markets will balance relatively quickly, OPEC’s numbers tell a different story. The cartel sees U.S. shale contracting by just 100,000 barrels per day in 2016 from 2015, a volume that is nearly offset by several new projects beginning operations in the Gulf of Mexico.

Which brings us back to Europe. Saudi Arabia could be playing a longer game, intensifying its market share strategy by encroaching on Russia’s traditional market in Europe. An increase in Saudi oil flowing to Europe threatens to undermine Russia’s principle market. In its November report, OPEC reported that the Urals discount to Brent “almost tripled in October amid plentiful supplies, sagging refinery margins and wide availability of alternative grades from the Middle East.”

Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on at @nickcunningham1.

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Comments

SJC

I did not think we would see $50 oil again, glad we are though. Iran will come on the world market soon, Russia needs the revenue and a Saudi declared we would "never see $100 oil again.

Something about stones and the stone age... If the world uses less oil, uses it more efficiently and finds substitutes, the steps we should have taken 40 years ago will finally come to pass.

Roger Pham

Russia has vast expanse of land to install wind turbines. From Wikipedia, "Russia is estimated to have a total potential of 80,000 TWh/yr for wind energy, 6,218 TWh/yr of which is economically feasible." By comparison, the entire electricity consumption of the USA is 4,000 TWh/yr, and under 900 TWh/yr for Russia.

Europe has far more energy consumption than Russia, yet the potential for new on-shore wind turbines installation is not so good due to the lack of potential new sites.
The lower population density of Russia means much less objection to new wind turbines in sparsely populated lands of very economical wind potential. HVDC power lines can connect from Russia to Europe for electricity exportation. Additionally, the excess wind electricity not consumed can be used to make H2 that can also be exported to Europe via upgraded existing NG pipelines.

As they say, when God closes one door, he opens many other doors.

mahonj

@roger, I agree that Russia has huge wind potential but Europe is trying to reduce its dependency on Russian energy, not increase it.
Thus they might not be too keen to buy it.

It is a pity the Saudis and Russians are so addicted to oil sales, they should reduce sales, keep it in the ground and plan to sell it in 20-50 years time. There will always be a market for oil for air and sea transport, even if they electrify road transport in developed countries.

The trouble is that oil economies tend to kill off all other manufacturing via the so- called Dutch disease, and it is hard to get off oil while you still have it.

The curse of oil. It is a shame because Russia has achieved great things in space and aerospace, science, art and maths.
I can't say the same for the Saudis.

mahonj

+ Southern Europe has good solar resources, from Greece to Spain, and there is probably lots of space in Finland for wind.

They are proposing new, lower wind speed turbines for the midlands of Ireland to feed into the UK grid (not sure if it will fly, but it is technically feasible).

You will have to build a lot of HVDC interconnectors to move the power around, and that won't be cheap.

Or they could just press on with Nuclear - as they get used to the new designs, the costs will come down.

Alain

@Mahonj

There will most probably Always be a market for luiquid fuels, but the price will never be high anymore.
The price of crude used to be absurdly high because nobody was able to deliver milions of barrels per day. So they could "produce" a barrol for 6$ and sell it for 100$.

Now (and in the future much more) that liquid fuels can be made from so many sources (like wind + water + air) and energy will become ever cheaper, even liquid fuels for airplanes will be made from all different sources. Competition will drive the price down.

They might still make a profit because pumping their oil is so cheap, but the profits will never be enough anymore to pay for the budget of a whole country.

I think they are "clever" to try to sell as much as possible for the time being because it will become even less worth in the future than it is today.

Trevor Carlson

The U.S. should be importing and storing as much of this cheap crude as it can while OPEC is playing this game of pump and dump. Seal and fill all the salt and coal mines throughout the U.S. Then when WW3 breaks out in earnest and wells get bombed in the middle east, we can turn around and pump that sweet crude back out and bring it to market at a premium. It could be used to help stabilize prices by driving up the price slightly in the short term but in the future when stability in the middle east breaks down we could open the taps and drive prices down. This would decimate the OPEC countries economically just when they need the money the most. Maybe just the prospect of us doing so could get them to throttle back their pump and dump business philosophy designed to ruin the business cases and businesses investing in alternative sources of energy.

Trevor Carlson

It wouldn't even have to be the government as they're already deeply in debt.
Who knows, maybe the Warren Buffets of the coal, salt and oil-rich property owners in this country could be doing this.

If I owned a coal mine and couldn't get coal out of it anymore due to burdensome regulations I'd be looking really hard at investing in filling my mines with something that'd be profitable in the future. They could seal the mines and instal piping to make it really efficient to pump the oil back out in the future. No fracking required and it'd be the highest grade sweetest crude possible.

The middle east has never been described as stable so it's only a matter of time before the price sky-rockets again and your investments would start paying off in a big way. Doing so would be the height of Patriotism as it'd serve to help buffer the U.S. economy from price shocks.

Maybe they could sell shares in a co-op to fund the purchases to fill the mines a bit like the government used to sell war bonds. Who wants to make a couple trillion dollars?

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