Energy Company Summit
The subject of the Summit of energy companies held on 16 June at SPIEF 2016 was “World Oil Market at Crossroads: Uncertainty Investments or Risk Management?”
The discussion centres on the following questions: continuation of the crisis on the global oil market; low oil prices; reduced investment in extraction of and prospecting for hydrocarbons. The participants noted that there is still a high degree of indeterminacy on the market owing to lack of consensus between the OPEC and non-OPEC countries.
At the Energy Summit, the keynote speech was given by Igor Sechin, President, Chairman of the Management Board and Deputy Chairman of the Board of Directors of Rosneft.
The participants in the session included heads of leading companies in the sector: BP Group Chief Executive Robert Dudley, CEO of Eni Claudio Descalzi, Total CEO Patrick Poyanné, President and CEO of GE Oil & Gas Lorenzo Simonelli, People’s Minister for Petroleum and Mines of Venezuela and President of PDVSA Eulogio Del Pino, and Chairman of the Board of Directors of ENGIE Gérard Mestrallet.
Other participants in the discussions included ExxonMobil President Rex Tillerson, Chairman and CEO of Pirelli & C SpA Marco Tronchetti Provera.
The moderator of the event was former Executive Director of the International Energy Agency Nobuo Tanaka.
Mr. Sechin began his speech with an assessment of the current situation on the oil market. It is much more complex and mosaic-like than we saw when there was market equilibrium. The market mechanisms by which the industry functions have become deformed. The reason is the infamous sanctions, reliance on short-term finance market instruments and manipulation by market institutions to the detriment of long-term relations between consumers and producers of hydrocarbons and the fundamental factors behind development.
Today there are a whole series of indeterminacy factors on the oil market, above all in relation to the conduct of certain producers that have actually started playing the role of regulators on the oil market and also of the financial sector. The unprecedented volatility has tested the very foundations of the sector. The drop in oil prices and volatility have already brought losses of USD 350 billion in investments in the oil industry.
The events of recent years have shown that, in essence, a change of paradigm has occurred on the oil market: for a long time, it was thought that it was regulated by the OPEC cartel of a number of producing countries, but then, thanks to technological advances, a new “regulator” appeared, which was shale extraction in the USA.
The result of the given crisis is a rethinking of the role played now and in the future by the three biggest oil producing countries, with not only a geological resource potential, but also a broad complex of factors required for influencing the market. Crystallization of the main players is occurring. These countries are Saudi Arabia, the USA and Russia. Each of them is finding answers to these questions, relying on their own resources and technological possibilities, the structure of the market, and the specific of political and economic decision-making.
Compared to the other countries, Russia has major advantages: a developed export infrastructure, including pipelines, a relatively lower sales system developed over decades, long-term contracts, integration into sales markets that are developing in the East and stable in the West. Such a model ensures stability, efficiency and sustainability of Russian oil exports.
Balanced demand and supply, given a high domestic demand and available capacities, allows exports to be differentiated by direction and product. This distinguished Russia from the USA and Saudi Arabia.
Against the background of world oil disruptions, the Russian oil sector has proved, according to many observers and analysts, to be terra incognita, but considering the resource base and results achieved today, the market institutions and availability of quality sales markets, it is becoming terra fertilis.
Russia has a huge resource potential and the oil projects are profitable even given low prices. Major, promising new projects have been developed today in Russia that will allow a due level of extraction and investment to be maintained while the majority of foreign public and national companies are cutting capital expenditures and are compelled to revise their project portfolios in connection with the lack of attractive investments.
The key parameter determining oil extraction in Russia consists in the fiscal conditions, not oil prices. In 2015, at an average oil price of USD 51 per barrel, according to an official independent assessment by Ernst & Young, Rosneft paid USD 25 in taxes for each barrel extracted. This is considerably more (4–5-fold) than foreign companies paid. These tax payments were fixed within the bounds of the so-called ‘big tax manoeuvre’, which was developed and implemented for an oil price of over USD 100 per barrel. The question is now whether it needs adjusting in accordance with the medium-term price realities.
The targeted tax system should act as an incentive to invest in extraction as long as the cost of extracting the next barrel is lower than the price of a barrel on the market.
In processing, cross-subsidisation within vertically integrated systems cannot be perceived as being economically feasible method for doing business. All of the company’s spheres of activity should be economically justifiable. So taxation of processing should be rational and encourage investment.
Describing the main trends and fundamental changes in the global energy sector, Igor Sechin noted that the gas sectors, according to forecasts, would grow faster than oil. We are actively developing this business and are interested in its growth. The gas industry is characterised by increasing competition on the main export markets and implementation of a policy of diversifying gas sources and supply routes. Including penetration of LNG from the USA. We see a need for an effective ‘Russian gas response’, primarily by ensuring equal conditions on foreign markets.
