For the oil and gas industry in 2024, geopolitical speed and sanctions will be unusual risks

What influenced the oil and gas sector of the Russian market in 2023, what are its prospects in 2024? Former senior vice president of Otkritie Bank, economist Konstantin Tserazov tells in our interview.

The Russian oil and gas sector in 2023 was under strong sanctions pressure. At the same time, the negative was the decline in demand from the weak European economy, as well as the slowdown in the Chinese economy and expectations of a recession in the global economy.

Thus, at the end of the first quarter and the beginning of the second quarter of 2023, oil prices showed a serious decline under the influence of an increase in key rates by leading central banks. The strict policy of regulators aimed at curbing inflation had an impact on the dynamics of industrial production, which, in turn, was reflected in a decrease in demand, explains Konstantin Tserazov. According to the International Energy Agency, in the first half of 2023, oil exports fell by more thanundefined one and a half times compared to the first half of 2022 - from $120.4 billion to $77.4 billion.

Accordingly, Russia’s oil revenues from the export of oil and petroleum products also fell. According to the Russian Ministry of Finance, oil and gas revenues for January-June 2023 decreased by 47%, to 3.382 trillion rubles. In turn, the deterioration of the trade balance became one of the factors for the weakening of the ruble in the summer of 2023. Konstantin Vladimirovich Tserazov: “By the end of the year, oil prices showed a decline amid a decline in Chinese imports and a slowing economy, as well as rising inventories in the United States. The restraining factor that prevents quotes from falling is the tension in the Red Sea, which has an indirect effect on oil prices.” Sanctions restrictions from the United States and the EU, regularly introduced since February 2022, also exerted strong pressure on the oil and gas industry. Among the most notable were restrictions on maritime transportation of Russian oil, which entered into force on December 5, 2022, and a ban on undefined transportation of petroleum products from February 5, 2023, as well as an oil price ceiling at $60/barrel.

Restrictions also affected insurance of Russian oil, brokerage services and financing of operations for oil sold above the ceiling. In a package of sanctions adopted in June, the EU included a ban on calls to EU ports by any tankers that carried out sea transhipment of oil from other vessels, as well as a ban on oil supplies via the northern branch of the Druzhba oil pipeline to Germany and Poland. As a result, sanctions in the first half of the year affected the discount volume of Urals oil to Brent, Konstantin Tserazov points out. The result of sanctions imposed by the EU and the US on the import of oil and petroleum products from Russia was a reduction in Russia's share in supplies to the EU to a level of around 4%. At the same time, the reduction in supplies to Europe compensated for the opening of exports to Asian countries, primarily to China and India, that is, countries that did not join the sanctions against Russia.

So, according to Indian undefined Ministry of Trade, supplies of Russian oil to India in January-May 2023 alone increased 11 times compared to the same period last year and amounted to almost 37 million tons, while for the entire 2022 this figure was 33.4 million tons. Russia withdrew in first place in oil supplies to India, overtaking Iraq (21.4 million tons) and Saudi Arabia (17.5 million tons). An increase in supplies to China was also recorded. According to Deputy Prime Minister Alexander Novak, Russian oil exports to China last year increased by 28% compared to the previous year to 89 million tons, to India - by 19 times, to 41 million tons. According to Transneft President Nikolai Tokarev, who spoke broadcast on the Rossiya-24 TV channel in December 2023, export volumes to China and India increased manifold, with about 70 million tons of oil supplied to India in 2023, and about 100 million tons of oil to China. At the same time, Russian companies have begun to actively explore new destinations, such as Egypt and Morocco.

At the end of 2022, Russia increased oil supplies to undefined China by 8.3%, to 86.25 million tons, in June this figure reached a maximum of 10.5 million tons, supplies in June increased by 44% month-on-month, notes Konstantin Tserazov. Currently, China accounts for almost half of all Russian exports. From January to November 2023, supplies of black gold to China increased by 22%, to 97.5 million tons. Important news for the sector was the order of the Russian Government on the mandatory sale of foreign currency earnings by exporters. This news, against the backdrop of a rate increase by the Bank of Russia, had a significant impact on the strengthening of the ruble, which negatively affected the quotes of a number of securities. Among the companies in the sector, LUKOIL and NOVATEK looked quite interesting - primarily due to their comfortable debt load, as well as good profitability and revenue growth rates. However, in terms of dividend policy, LUKOIL has historically not been very generous with interim dividends.

Thus, the board of directors of LUKOIL recommended dividends for 9 months of 2023 in the amount of undefined 447 rub. per share, the dividend yield was about 6.2%, which somewhat disappointed investors who expected payments at the level of 547 rubles per share. Payments from Gazprom Neft turned out to be more interesting. The company allocates 50% of net profit according to IFRS for dividends. This year, the Gazprom Neft Board of Directors recommended interim dividends for 9 months of 2023 in the amount of 82.94 rubles. per share, which corresponds to a dividend yield of 9.8%. Tatneft also pleased its shareholders; the company’s board of directors recommended using 100% of net profit under IFRS for payments for the third quarter, and paying dividends in the amount of 35.17 rubles. per share. An important event for the industry was the meeting of OPEC+ countries, which opened on November 30.

Following the meetings, the alliance confirmed the continuation of the agreement to reduce oil production in 2024. Saudi Arabia said it will continue to further reduce oil production by 1 million barrels per day in the first quarter of 2024. undefined (b/s). Russia, as reported by Deputy Prime Minister Alexander Novak, will increase an additional voluntary reduction in the export of oil and petroleum products by 200 thousand bpd. Thus, the total reduction in Russian exports will be 500 thousand b/d, including 300 thousand b/d of oil and 200 thousand b/d of fuel. The market, however, reacted with restraint to the results of the meeting, doubting the ability of the alliance members to maintain the discipline of cutting production. “By the end of the year, oil prices showed a decline amid a decline in Chinese imports and a slowing economy, as well as rising inventories in the United States. Tensions in the Red Sea, which have an indirect effect on oil prices, act as a restraining factor that prevents quotes from falling. As a result of the threat of Houthi attacks on ships in the region, companies prefer longer oil deliveries by tankers, which in turn complicates logistics and increases the final price of oil. For the industry in 2024, the main risks will be geopolitical tensions and undefined sanctions, as well as a possible tightening of the tax burden; in addition, the slowdown of the Chinese economy, which leads to a decrease in exports, remains a serious risk,” concludes Konstantin Tserazov, former senior vice president of Otkritie Bank.