Most Russian oil producers restored 2017 profitability close to 2014 levels due to a price rebound, the smoothing impact of the oil production tax regime and the weaker rouble, Fitch Ratings says. Production cuts by Russian producers related to the OPEC+ agreement were marginal, so did not have an impact on profitability and cash flow growth. The outlier was Gazprom as its 2017 EBITDA significantly declined compared to 2014, partly due to a different tax structure applied on gas and lagging gas price increases.
Rising oil prices were largely driven by the OPEC+ agreement to cut production volumes from the beginning of 2017, along with strong demand as economic growth rose globally. Most Russian oil and gas producers benefited from increased prices and generated similar EBITDA in US dollar terms in 2017 compared to 2014, when the Urals oil price averaged almost USD100 per barrel, nearly twice as high as the USD53 per barrel on average in 2017.
Lower taxes paid in 2017 compared to 2014 smoothed EBITDA fluctuations as the Russian oil extraction tax rate and export duty decline progressively during periods of low oil prices. The combined contribution of Rosneft, Lukoil, Gazprom Neft and Tatneft in mineral extraction taxes and export duties to the Russian budget dropped by USD54 billion, or 47%, in 2017 compared to 2014. Exchange rates played a positive role as well – Russian producers benefitted from the weak rouble as costs are largely rouble denominated, while export revenue is US dollar linked.
In contrast, Gazprom’s 2017 gas-related EBITDA (excluding Gazprom Neft and utility businesses) fell by 61% in dollar terms compared to 2014, or by 50% on a fully consolidated basis. The fall was driven by a combination of factors: there is a six-to-nine month lag between a change in oil and export gas prices in some export contracts; the gas export tax structure is set as a proportion of price; and an increase in mineral extraction taxes. Gazprom also faced a forex disadvantage of largely fixed dollar-denominated export costs and stagnant rouble prices for gas supplied domestically.
The overall impact of the production cut commitments on the Russian oil industry as a result of the OPEC+ agreement was marginal. Lukoil had a natural decline in oil volumes due to reduced capital expenditure in 2014. Gazprom Neft and Rosneft made substantial investments in upstream projects before the OPEC+ deal and achieved annual production growth in 2017. However, they complied with the cut requirements relative to October 2016 that was referenced in the OPEC+ agreement as it was a peak month for production that year. Furthermore, producers like Gazprom Neft, which curtailed production at brownfield sites and refocused on the growth of greenfield projects, benefited from tax breaks and typically posted stronger EBITDA growth than companies that emphasised development of brownfield projects, such as Rosneft.
We expect further improvements in financial performance of Russian producers in 2018 because of still relatively high oil prices and the weak rouble. However, positive rating actions are unlikely solely as a result of these improvements.
Western financial and technological sanctions have had limited impact on Russian oil and gas companies so far. Those companies not subject to financial sanctions, such as Gazprom and Lukoil, retained good access to the western capital markets, while Rosneft, Gazprom Neft and Novatek switched to funding provided by the state, the domestic market or loans from China. However, the latest wave of sanctions announced on 6 April 2018 did have an impact on the designated companies and the Russian markets overall. Any further tightening of sanctions is among the main potential threats to the credit quality of Russian oil and gas companies.
Fitch Ratings