Interview to Business newspaper - Stepan Demura

— At a meeting between Vladimir Putin and Energy Minister Alexander Novak, held on April 29, with oil workers, it was announced that our oil industry is ready for a decrease in oil production by about 2.5 million barrels per day, which started on May 1, as part of a new OPEC + deal. Do you think our oil industry is ready for such an unprecedented cut in production?

- Naturally, she is not ready for anything. The volume of production cuts is too great, and Russia should cut its oil exports by about half. Add to this the dramatic drop in domestic fuel demand. As a result, as part of the deal with OPEC and due to the economic collapse caused by coronavirus isolation, oil production in our country must be reduced by 30 percent. We have nowhere to store oil, and accordingly, the fields will have to be stopped. Mothballing wells. Deposits developed since the Soviet times will simply become unprofitable in terms of restoring production after conservation. The same is with the northern fields, where, after conservation, the water in the wells will freeze, which will make their de-conservation an unrealizable task. The situation in the industry will develop according to the most severe scenario. The fact that the authorities said that they were ready ... Our government is always ready for anything, but then everything turns out as it turns out. On May 1, there was a very powerful blow to the Russian oil industry. I'm not talking about budget losses.

— In April, no preparations were noted for a reduction in oil production in Russia. On some days of the last month, production even increased. Is it really possible on May 1 to close the valve, put a plug and suddenly reduce production by a quarter, if not a third, as you say?

- The head of Lukoil, Vagit Alekperov, said that his company will reduce production by 40 thousand tons per day (about 300 thousand barrels), and the volume of drilling in Western Siberia - by 20 percent. In my opinion, even Rosneft has announced something about the conservation of wells. But it should be borne in mind that during the last OPEC + agreement, the Russian authorities and companies also said that they were reducing production by 100-200-300 thousand barrels per day. But in fact, they increased production. But now they will be closely monitored - within the framework of the new agreement, a monitoring mechanism is being created, in which the first role will be played not by Russia, but by the United States and Saudi Arabia. They will not control production in Russia, but its oil exports. Our companies will be able to extract as much as they want, but where to put this oil? In some fields, oil will have to be dumped into an open field or burned. And this, by the way, is not the worst option. If the wells are suspended, our oilmen will lose (possibly forever) very large production capacities. After all, we have only 15–20 percent of our black gold reserves concentrated in the fields where the so-called easy-to-recover oil is produced. At the same time, it is most profitable to reduce production at these high-yield fields. After withdrawing from the agreement with OPEC, it is easy to increase production on them. But this is not enough. After reducing the production of easy-to-recover oil, it will be necessary to cut the production of heavy oil. And there it will no longer be possible to reopen the wells.

- About burning oil ... This is a figure of speech or a real perspective?

— Well, what is the alternative? Wells abandoned? In this case, the reanimation of many of them will be unprofitable given the oil prices that exist and will be in the foreseeable future. So what is the way out? To pump oil into storage facilities that we do not have, or discharge it onto the landscape. And then either the locals will throw the match, or the oilmen will set it on fire.

- Some experts talk about some kind of torches, apparently confusing oil with associated gas ...

- This is our quality of experts. What torches! The pits will be dug and oil will be drained there, and when filled, they will be set on fire. From space it will look like a big wildfire. After all, they have already begun in the east of the country, you can blame everything on them. The emissions from burning oil, however, will be much more destructive to nature.

- The idea was also expressed that it is possible to fill railway tanks with "excess" oil ...

- The question is how long they will last. Probably not for long.

- Does Russia have a tanker fleet, which can be temporarily filled with oil unclaimed by the market?

- The tanker fleet around the world is already full of oil. Firstly, the cost of freight for tankers increased by 7-10 times. Therefore, storing oil in them is very expensive. Secondly, there are practically no free tankers left - everything has long been chartered for oil transportation and storage.

— Are Russian oil companies in a difficult situation?

- Extremely difficult. The survival of our oil companies will depend on the price situation in the oil market in about six months. And there the situation is stalemate for our oilmen. The Americans have already cut about a million barrels a day. But all the same, the unclaimed demand volume of production in the world remains at the level of 20-25 million barrels per day. According to all estimates, in two to three weeks there will be no empty oil storage tanks in the world. None at all! Plus, the Saudis are now seizing the European market, since they agreed with the Americans on the division of the world oil market. The Saudis will go to the European market, the Americans - South-East Asia. The Saudi state-owned company Saudi Aramco simply floods the EU countries with oil at a discount of about $ 10 per barrel to the price of Brent (as of April 30, this reference grade cost more than $ 26 per barrel - editor's note). Saudi oil supplies to the port of Rotterdam have doubled in recent days. Our oil industry is still saved by the fact that the Europeans need Russian Urals oil for their refineries. The factories are tailored for it. But the discount and payment by installments provided by the Saudis quickly solve this problem.

— Let's go back to cutting production. Alexander Novak said that in May oil production in our country will decrease by 19 percent, and by the end of this year - by 10 percent. Does this forecast seem realistic to you?

- Under an agreement with OPEC, we must cut 23 percent of production. From the peak, I think, all 27 percent. Where does 19 percent come from? The forecast for the compression of our oil production by only 10 percent by the end of 2020 is nothing more than the dreams of the Minister of Energy. I think that non-publicly, our authorities, together with the oilmen, agreed that we will kill everyone again, promising a deep reduction in oil production without intending to fulfill these obligations. But the export of Russian oil will not be hidden, it is easily tracked. If Russia does not fulfill the terms of the deal, the West will very soon impose an embargo on our oil supplies.

- The same Novak said that all leading Russian oil companies agreed to reduce oil production in proportion to their production.

- Then Rosneft will suffer the most, which, according to estimates, will have to shrink by more than 600 thousand barrels a day. Of course, I don’t want to do this, but the "big uncles" gave the order, and our authorities and oil workers, by and large, have nowhere to go. How the sequestration of oil production will be distributed, who will eat whom, that is, absorb whom, is not so important. This is not important for the Russian economy.

— But takeovers are still possible. Any small oil companies can donate?

- It is quite possible. But why only small ones? There will be a fight for the remaining fields in the ranks, where easily recoverable oil is being produced. Small oil companies do not have such fields. But Igor Sechin (head of Rosneft - editor's note) has long been eyeing the assets of Lukoil, the second largest Russian oil company. I think we have a fun year ahead of us in this regard.

- There has been a certain tension between Rosneft and Lukoil for a long time, their press secretaries, for example, spoke out publicly and harshly against each other. What is the reason for this, in your opinion?

- Lukoil is a family company. Rosneft - St. Petersburg. Both are part of the Family, but there is an old Yeltsin Family, which was handed over to the USSR, and there is a new one - the so-called St. Petersburg one. Sechin wanted to crush everything under himself, but he could not besides Yukos, since the old Family was in power. Now all this will come out, because now everyone is for himself. The Americans told our "family": "Guys, you have not fulfilled your obligations." One of the agreements when the USSR was falling apart was that the new Russia in the international arena, including in the oil market, would behave decently (from the West's point of view). That is, focus on the interests of the United States and its allies. But, as we can see, lately Russia has not been behaving in accordance with the set line..

— There is information from the Argus agency that in North-Western Europe in May it is expected to reduce Urals oil supplies by 40 percent. Is this true?

- Yes, of course, our oil exports, as I said, will be reduced by about half. The Saudis have already flooded Europe with their oil with discounts, and even with a delay in payments for three months. No one has received the same proposals for supplies from Rosneft. It is not noticeable that our oilmen somehow defend their market share. Therefore, I think they are going to extract how much they mined, and say that they are reducing it. But I repeat, nobody will be able to cheat when exporting. Russia will lose its share, and a large one, of the world oil market. The Americans and the Saudis are just waiting for a reason to say: “It's useless to negotiate with the Kremlin. If they leave the market, everyone will be fine. " This is how it ends.

- But if you look at oil prices, the situation looks, perhaps, in our favor. On the eve of the entry into force of the agreement on production cuts, futures for Brent rose to $ 26, Urals - to $ 24, but the American WTI dangled just above $ 17 per barrel. Is this not the success of Russia and personally of Vladimir Putin, Igor Sechin and Alexander Novak?

- I don't see any success here. I repeat, our Urals is needed mainly for supplies to European refineries. Since it is a heavy oil, not so many light fractions of oil for motor fuel are obtained from it, but mainly heavy fractions, which are used in the chemical industry, are isolated. As a result of this idiocy with the closure of the economy in Europe due to the coronavirus, the market for light petroleum distillates used to produce gasoline has been the biggest blow.

— American oil costs $ 10 less than Russian oil, and earlier it went into negative values ​​altogether. What is the reason?

- These are exclusively fluctuations in supply and demand in the securities market - futures, which have nothing to do with the supply of physical oil. This is traders' panic caused by the fact that the vaults in the US are almost full. The futures for WTI are deliverable, theoretically it will be executed in the form of deliveries of real oil to a giant oil storage facility in Cushing, Oklahoma. Already on April 21, Cushing was 76 percent full, now it is even more. Moreover, the remaining capacities are reserved. Therefore, traders could not physically enter the supply of oil, they had to dump the May futures at any price, even negative. Plus another big fund decided to play the spread (price difference) between the May and June futures. Well, they played to almost minus $ 40 per barrel.

- Nevertheless, the June contract for WTI is $ 10 cheaper than Brent. What explains this?

- The same - all storage facilities in the US are filled with oil. And one more thing: there are 25 or 30 supertankers off the coast of the United States filled with oil. I'll tell you more: in Texas last week, light oil was charged at minus $ 50 per barrel. These were transactions in the physical market. Minus 50 a barrel, just to get caught! But even this is not a disaster for the American oil industry. It takes them a week to mothball a well, and to reactivate it for three weeks. Unlike us, the Americans are doing well. Prices will rise - they will immediately start producing oil again. At the same time, many American companies, like Mexican ones, are hedged. Simply put, they once bought insurance against falling oil prices. And now the financial companies that have sold them such insurance pay the oil companies $ 40-50 per barrel. They have no crisis. Those who have not been hedged start to close wells. The rest are fine.

— Is Russian oil more expensive than American oil because there is still somewhere to sell it?

- No, she too will soon have nowhere to go. For the time being, it saves that European refineries have not yet rebuilt refining for Saudi light oil. But with the price tags, deferred payments, and funding from European energy companies that the Saudis came to Europe with, it won't be difficult to rebuild technology. The Poles have practically given up Russian oil. A year ago, they rebuilt the technology at their refineries and now live on Saudi oil.

- What are the Poles! Our ally, President of Belarus Alexander Lukashenko, began massive purchases of oil from the Arabs. Tankers come to Klaipeda Lithuanian, and from there the oil is transported by rail to Belarus.

- Exactly. At the beginning of the year, US Secretary of State Michael Pompeo came to Minsk and said there that the United States and its Saudi allies would help Belarus with oil independence from Moscow. Old Man asked, and they helped him. The Kremlin kicks him, and the Americans offer help.

- Nevertheless, the Russian authorities hope to create OPEC ++ with the participation of the United States. Alexander Novak said that he is in constant contact with the head of the Texas Railroad Commission (which regulates the oil market in the state) Ryan Sitton. Say, if the United States at the federal level cannot make a decision to cut production, then why not the main oil-producing state?

- Americans are guided in this game by the principle that the frog must be cooked over low heat, so that it does not have time to jump out of the pan, realizing that it is very hot. Yes, you can sit down and talk. The conversation costs nothing, while the market will regulate itself. For the Americans, production is decreasing by itself. I have seen estimates from the US Department of Energy that US oil production will decline by 3-4 million barrels per day in the next two months. But this is still not enough to balance the oil market. Everything will depend on how quickly the world economy will recover from the coronavirus fiasco. I think the pace of recovery will not be very fast, to put it mildly.

— Recently, the first deputy head of TATNEFT for exploration and production Rustam Khalimov said that the industry has already sent proposals to the Russian government to support oilfield service companies ...

- There are many powerful companies in Tatarstan conducting geological exploration and servicing wells, so this initiative of Tatneft is understandable.

- Yes, but why does Tatneft and other oil giants expect that the current crisis will deal the main blow to the oilfield services?

- How else? Why do we need services, why service wells and oil production and transportation infrastructure when nothing is being produced there? It should be understood that a huge share of the economy "hangs" on gas and oil in Russia. Oilfield services will now begin to wither away, along with capex from vertically integrated oil and gas companies and rising unemployment among drillers and other field service personnel. Therefore, support, do not support oilfield services, it is clear that with such a reduction in production, the consequences for the entire oil and gas industry will be severe. It's the same with oil and gas processing. What should be done to help them? Yes, just zero excise taxes on gasoline! Cancel this damper mechanism. But no, no one even stutters about this in the government! Because this is in the budget of receipts, these are national projects that can be successfully "sawed".

- What other measures can be taken to support oilfield services and oil refining?

- Yes, in fact, none. Of course, the authorities will not allocate money directly to the oilmen.

— Obviously, only the rise in oil prices can correct the situation. Alexander Novak expects the market to stabilize by the end of this year, however, the minister did not say at what price levels prices for black gold will stabilize. Some experts call $ 60 a barrel again by the end of the year. What's your prediction?

- I have unpleasant news for our authorities: there is an agreement between the United States and the Saudis to keep the oil price around $ 20 for 6 months to a year.

- Why would the States need it, which have always been against cartels and for the market price of oil?

- This is where geopolitics comes into play. In this way, the States will try to get rid of the uncontrollable player on the oil market in the person of Russia.

- Get rid - in what sense?

- In the sense of destroying our oil exports and depriving the Russian leadership of the main source of funding, primarily foreign policy initiatives.

- Trump seems to be relatively friendly towards Russia. Yes, he slowed down the completion of Nord Stream 2, but he did not declare a full-scale trade war, as in the case with China.

— Leopold the cat also encouraged mice to live in harmony, until he became brutal with their impudence.

- So, according to your version, there will not be a recovery of the oil price level, which is comfortable for the Russian budget, above $ 40 per barrel by the end of the year?

- Of course not. This is no chance. On average, oil prices will be much lower this year. Some short-term bursts are possible. One of these we saw on the eve of May 1. But even here, as we can see, the price of Urals could not grow to $ 25. And our budget needs 42.4 dollars to be deficit-free. On average for the year, the US with the Saudis, as already mentioned, will keep the oil price at $ 20 or even lower.

- What is their purpose?

- The West needs a low oil price in order to achieve the next geopolitical changes in the post-Soviet space. A concrete cleansing of the remnants of what in the West is still considered the Soviet evil empire begins. The states will change regimes, primarily in Russia and Kazakhstan. Alyaksandr Lukashenka has already gone over, there are no questions for him. There is nothing to say about Ukraine. There are only those who have a resource instrument of geopolitical influence. And this, of course, is primarily Russia. And this alignment is the fault of the Russian authorities, whose actions, including on the oil market, pissed off the West.

— Last time the change of the political system in our country took place precisely through low oil prices ...

- Yes, the question, as always, is about money. The Russian leadership will soon run out of funds.

- The Central Bank of Russia has recently been selling 20 billion rubles worth of currencies daily to maintain the ruble exchange rate. At the same time, Elvira Nabiullina, like Finance Minister Anton Siluanov, say that the money in the reserves will last for six years. How big is our safety margin?

- The reserves will last for a very short time, since there are no reserves in the volumes that our authorities declare. At the same time, they support the ruble exchange rate exactly when there is no need to support it. The ruble has not been dependent on oil for a long time. As a result of such support of the exchange rate, the cost of a barrel of oil in rubles turns out to be very, very low for the budget. Its income is falling at an unprecedented rate and in volumes unprecedented in recent years. International debt markets are closed to the Russian authorities. This means that they will sell more currency from the gold and foreign exchange reserves. Or the Central Bank will simply start printing rubles. The latter, by the way, is not the worst option in the current situation.

- How do you feel about the idea of ​​repeating the Western experience of fighting the "coronacrisis" in our country and simply distributing money to the population in order to revive the demand for gasoline?

— In Russian conditions, this will not push up consumer demand. You will barely try to fill the demand that has left the market during the period of so-called self-isolation. Now our authorities are repeating all the mistakes that were noted in different countries during past economic crises, and even adding some finishing touches from themselves, exacerbating the depth of the crisis. This is the degradation of the elite, when it becomes incapable of adequate action.

- Is the self-isolation regime or the fall in oil prices the main reason for the Russian version of the crisis?

- In our country, by and large, there is now a man-made crisis precisely because of the self-isolation regime. The collapse of oil prices by itself, of course, would provoke a serious crisis, but there would not have been such a sharp impoverishment of the population and the fall of the economy. Take the United States. There, the government has already made estimates: if in the second quarter GDP falls by 20-25 percent, the States will be very lucky. In our country, Elvira Nabiullina says that in Russia the GDP will decrease by 5-6 percent in the same second quarter. This means that in a much more stable and powerful American economy, the fall will be at least 20 percent, and in the “raw materials colony” only 5-6 percent, while the prices for Russia's main export commodity have dropped three to four times. Plus, the export of this product is still sharply reduced. How is this possible? .. How does this agree at least with common sense, not to mention the laws of economics?

- If Vladimir Putin lifts quarantines from May 12, how quickly will the Russian economy start to revive?

- I'm afraid it won't. A huge number of small and medium enterprises have already died. We have no real help to business from officials.

- Statistics do not show a sharp decline in the number of working companies or an increase in unemployment.

— Of course it doesn't. Bankruptcies in our country are prohibited until the end of the special period. Many people take advantage of this, build up both creditors and receivables, since banks and counterparties do not know that the company is bankrupt. The Russian crisis with economic and labor market shocks is still ahead.

- Will the Russian authorities still be forced to take radical measures in the economy? In particular, to devalue the ruble, which many businessmen, including oilmen, are calling for it?

- Judging by the fact that the Kremlin is very sensitive to reports of the impoverishment of the population, the authorities will try their best to prevent social upheavals. At the same time, our monetary authorities for some reason believe that the well-being of people depends on the ruble exchange rate, hence the desire to maintain it. However, even according to the official statistics of the Central Bank, in March only 4 billion dollars left the OFZ, but the ruble fell by 15 points. That is, the dollar has risen in price by 15 rubles. In total, in our ruble government and corporate bonds of foreign money, according to my very rough estimates, 60-80 billion. The only thing that saves us from leaving this money from the country, and hence the collapse of the ruble exchange rate, is that the US Federal Reserve in the era of the "coronacrisis" buys everything from private investors, including bonds of developing countries and their companies. But this relative stability will not last long, because the banking system around the world, consider it, was covered with a copper basin due to huge losses in the economy due to quarantine measures. A wave of defaults on mortgages, consumer and commercial loans is already beginning in the US. All this will sooner or later spill over into the high-risk debt market of countries such as Russia. Then we will see how the dollar soars against the ruble. I think 60-80 rubles is easy. And the reserves of our Central Bank will not help.

- What is your forecast for the dollar against the ruble?

- Goals cost at first 85–86 rubles per dollar, then - 97, 125 and 250 rubles.

— Is this not a very daring forecast?

- Why? There was the famous "Pavlovian" monetary reform in the late 80s and hyperinflation in the early 90s. One should not renounce their repetition. Then, by the way, all these shocks were caused by the collapse of oil prices..

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Демура, Степан Геннадьевич признанный специалист в области мировой экономики и финансов. Здесь вы можете получить наиболее точные прогнозы на доллары США для рынка Форекс.

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