Managing Director VYGON Consulting Grigory Vygon answered questions for a supplement RUSSIA BEYOND THE HEADLINES to the German business newspaper Handelsblatt

Dec 23, 2016

Grigory Vygon, Managing Director of VYGON Consulting, on the impact of low oil prices on Russian oil and gas producers and their prospects on the European market.

Interviewed by KSENIJA ILJINSKAJA http://de.rbth.com/

How did Russian companies in the energy sector cope with the drop in energy prices?

Russian companies have relatively easily surrendered oil price declines. In the promotion sector, it has remained almost unnoticed. This is mainly due to two factors. First, the taxation of the Russian oil sector is characterized by the fact that most of the taxes are linked to the oil price. Price fluctuations are compensated by changes in the tax burden to about 80 percent.

Secondly, the depreciation of the ruble was accompanied by oil price declines. Russian corporations are expecting the production costs for the most part in rubles. Here, too, a compensation effect has occurred. The return on the subsidy sector, measured in rubles, remained practically unchanged - despite the halving in dollars. This also applies to the Gassector. There, the effect is even greater, because in Europe, where Russian gas is supplied, the price declines - due to the peculiarities in price formation - have been applied with a delay of six to nine months. And in Russia, domestic prices are regulated and indexed on gas, so there is no price drop at all.

In oil processing the situation is, of course, more complicated: Russian refineries receive a customs subsidy - the difference between export duties per crude oil and oil products. This also goes down with sinking oil prices. The subsidy thus halved with the price decline. This led to a marked decline in the processing margin, and the operating result of some refineries was negative.

How competitive are the Russian companies in a global comparison?

Our companies are one of the most competitive in the world. In a vertically integrated group, the average production costs are 2.7 US dollars per barrel - a value comparable to the cost of the Persian Gulf. Regarding the secure reserves and prospects for new resources, they are in a better position than the largest transnational players. This competitive advantage has been reduced, however, by economic, financial and technology sanctions. The US and European governments have created discriminatory hurdles for Russian corporations, making them more difficult to access capital and technology. The problem is not acute, Russian companies are ready: the import substitution is actively projected, the penalties will be lifted sooner or later.

What will Russian companies expect in the future in European markets? Will they be able to hold or even expand the positions?

Russia is currently exporting high-quality oil products - mainly class V diesel - and exporting semi-finished products such as heavy fuel oil and gas oil. Our oil companies will therefore increasingly have to compete for the final consumer. In Europe, this has already depressed diesel prices and thus the processing margin. On the other hand, European refineries are finding themselves in a more difficult situation as crude oil is becoming increasingly scarce.

As far as the gas is concerned, Gazprom supplies will remain stable. We believe in the implementation of Nord Stream 2, on the utilization of opal and on the construction of two strands of Turkish Stream. The gas transit in the Ukraine will be realized and the Russian gas in Europe will continue to be strongly demanded - because of the decline in domestic production. In the long term, we expect a liberalization of pipeline exports in Russia. This will give independent producers access to European markets. Russian gas will remain cheaper for Europe than liquefied gas from the United States. Our shares in the European market will grow for economic reasons, despite the political resistance of some EU members.

Managing Director