Low Oil Prices, Taxes, and the Russian Budget

In ruble terms, the oil collapse has been less severe and has resulted in windfall profits for Russian oil and gas companies, but not a proportionate amount of revenues for the state budget.
In ruble terms, the oil collapse has been less severe and has resulted in windfall profits for Russian oil and gas companies, but not a proportionate amount of revenues for the state budget. Source: EIA

The US Energy Information Administration published the report “Low oil prices have affected Russian petroleum companies and government revenues”.

According to the report, low oil prices are having a significant affect on the Russian state budget due to lower tax revenues from the oil and gas companies. However, the oil companies themselves aren’t feeling the squeeze, since the design of the Russian tax system allows for companies to pay lower taxes amidst lower oil prices. Therefore, the companies, which have their operations denominated in local currency and revenues in dollars, can keep a larger share of revenues, and continue to increase their spending in ruble terms.

In Russia, oil and gas companies pay a mineral extraction and export tax, but there is no profit-based taxation.

“The favorable tax structure and exchange rate for Russian oil companies, the subsequent continued high investment levels at Rosneft, Lukoil, and other Russian oil and natural gas companies,” the report published on October 20, said.

The Russian government is expected to overhaul the tax scheme, but is met with opposition from the energy companies, who argue more taxes will stunt investment.

In June 2014, oil prices hit a record high of $114, and just six months later, a barrel of crude traded for $50 per barrel in January 2015. About a year later, a new nadir was reached: both Brent and WTI benchmarks fell below the $30 per barrel threshold.

Russia’s Central Bank preemptively switched the ruble to a free-float regime in November 2014, which helps offset losses from the collapse in oil prices.

So while Brent (which Russia uses to price its main export blend Urals) declined by 47% in 2015 versus 2014, and then another 31% in the first half of 2015, Russian federal budget revenues from oil and gas only fell by 21% and 29, respectfully.

Rosneft and Lukoil are two of the largest Russian oil companies, and together account for about half of the 11 million barrels of crude oil that Russia produces per day. Following the oil price crash, in 2015 Rosneft increased capital expenditures for exploration and production by 30% compared to the previous year. On the contrary, Lukoil’s expenditures on exploration and production projects fell by 11% in the same time period (see figure below).

Source: EIA

The EIA notes that the favorable tax structure and exchange rates are responsible for bringing production to record highs.

With the exception of independent producers such as Lukoil and Novatek, the majority of Russian oil and gas companies are state-owned, and the Russian government, as the main stakeholder, collects dividends. In April 2016, the Russian government ordered state-controlled companies to pay 50% of 2015 net income out as dividends, nearly double the dividends companies would normally pay, according to the EIA report.

Low oil prices and Western sanctions hit Russia just as the economy was losing steam and heading into a recession. At present, Russia has a budget deficit of 3.3% of total economic input, and many ministers are pushing for higher taxes for the oil and gas industry to fill the gap.

Louise Dickson

Gazprom announces new daily export record


On October 18th, Russia’s largest natural gas producer and exporter Gazprom announced that exports to Europe and Turkey reached an absolute daily high of 578.9 million cubic meters. The increase reflects Gazprom’s intensified struggle to gain market share in non-CIS countries. In order to achieve this, Gazprom is implanting new export plans and increasing investment in long-term projects.

By the end of the year, total investments will have amounted to 853 billion rubles (about $1.37 billion USD), an 11 billion ruble increase (about $176 million) from investments in 2015.

“Winter hasn’t started yet, but the demand for Russian gas in non-CIS countries is if as if it is bitter cold in Europe. This demonstrates that Russian gas is highly competitive and in high demand on the European market,” Gazprom CEO Alexey Miller said in a statement by the company’s press service.

He added that the increased demand also verified the need for new Nord-Stream 2 and Turkish Stream to deliver gas to foreign customers.

Traditional Russian gas exports via pipeline must now compete with shale oil from the US, as well as the rapidly developing LNG market. The emergence of both have made the global gas market more liquid, and prices more competitive.

Before, Gazprom held a monopoly on the European market, and was able to index gas prices to oil. With more players on the market that offer greater delivery flexibility, prices move towards spot indexation. In order to stay competitive with lower oil prices, Gazprom has had to negotiate its contracts with European customers and offer lower prices.

Gazprom says that it is closely following trends in foreign markets. The company believes that the US will remain a major producer of shale gas in the mid to long term future. Gazprom doesn’t believe that development of Russian shale gas is necessary since reserves and the traditional extraction method will last into the foreseeable future.

Now that the US has opened the Sabine Pass LNG port, it could, in theory, send natural gas all over the world. However, in practice, this product is mostly destined for Latin and South America, as it’s priced out on the European market by Gazprom and Australia and Qatar so far have a monopoly on the Asian market.

Saxo Bank: What to Watch for at the International Energy Forum in Algiers

Head of Commodity Strategy Ole Hansen


In their latest research note, Saxo Bank speculates on the outcomes of the International Energy Forum to be held in Algiers on September 26-28. OPEC members will be in attendance, along with non-OPEC member Russia. Head of Commodity Strategy Ole Hansen writes that a deal to cut production could trigger a price surge in oil, but that the gains are unlikely to last as long as the supply glut remains worldwide.

Oil traders turn to Algiers

Just as with gold, the oil market remains locked in a range with the pressure from oversupply being offset by renewed hope that OPEC and Russia may reach an agreement to cut production. OPEC members will meet on the sidelines of the International Energy Forum, which groups producers and consumers in Algeria from September 26-28. Non-OPEC producer Russia will also attend the forum.

After recording four days of gains, both WTI and Brent crude oil succumbed to profit-taking ahead of the weekend. A third weekly reduction in US inventories, a weaker dollar, and renewed verbal intervention from producers ahead of the Algiers gathering helped offset bearish news on the supply front.

According to this Bloomberg article, September has seen a rise in production of more than 800,000 barrels/day from Nigeria, Libya, and not least Russia which said its reached a new record of more than 11 million b/d this month. Rising production into an already oversupplied market is the challenge that troubled oil producers have to address when they sit down face to face.

Back in April a meeting in Doha failed to curb supply, which was due in part to Saudi Arabia’s insisting that a deal could not be done without Iran also participating. Fast forward almost six months and Iran has now reached its pre-sanctions production levels and that has raised speculation that some kind of deal can be hammered out. Representatives from Saudi Arabia and Iran met in Vienna ahead of the meeting and it apparently resulted in Saudi Arabia offering to cut production in exchange for Iran promising to freeze output.

Saudi Arabia produced around 10.2 million b/d during the first five months only to see it surge to a record in July at 10.67 million b/d. Offering a cut from those elevated levels, at a time of year where the seasonal production tend to slow anyway, looks like a smart move, but it still needs the unlikely acceptance by Tehran.

With US production having stabilized during the past two months the pressure on OPEC to support the market has grown, particularly considering that the prolonged oversupply has been driven by rising production among its own members.

We maintain the view that the upside remains limited until we see clear signs of the glut being reduced. A deal to cut production may trigger a speculative rush of buyers but once again, the low 50s in Brent crude oil should once again provide strong resistance.

Failure to act would return the focus to the aforementioned jump in production which carries the risk of seeing Brent crude trade below recent support at $45/b, potentially targeting $40/b.

Brent crude has so far been averaging $47.70/b this quarter, more or less in the middle of our $45 to $50/b target range. A “no deal” in Algiers could see the range being extended to the downside while a deal, depending on the content, may prompt a short-term rally above $50/b.

Yamal is 63% complete – Total

novatek pic

Russia’s ambitious Yamal LNG project in the Arctic is nearly two-thirds finished, Total’s Senior Vice President of Exploration & Production for Continental Europe and Central Asia Michael Borrell said. According to the top manager, 63% of construction will have been completed by the end of August (76% marks the first stage of readiness). The project is on schedule to open in 2017.

Borrell was speaking at the Offshore Northern Seas conference in Stavanger, Norway, which opened on August 29.

Once finished, the $27 billion Yamal LNG project will have a capacity of 16.5 million tons per year, which has been contracted to supply Asia and Europe (already 96% of liquefied natural gas has been contracted under the Yamal LNG framework). According to Borrell, a lot of that gas will supply European markets.

The project involves the construction of three LNG production lines. From the Tambeyskoye field, which has proven and probable reserves that were appraised at 926 billion cubic meters of natural gas in 2014.

To date, shareholders have managed to secure $18.4 billion in investment. According to the French gas major, $12 billion was provided by Chinese banks, $4 billion is sourced from Russian banks, and $2.4 billion is from Russia’s National Welfare Fund. Negotiations on raising more funds from Asian and Russian banks are underway. All tranches must be paid in rubles, euros, or yuan, due to the financial sanctions imposed on Russia by the United States.

Yamal is Russia’s first foray into Arctic LNG. Novatek, Russia’s second-largest natural gas producer, owns a 50.1% share in the project, along with Total (20%), China’s CNPC (20%), and the Silk Road Fund (9.9%).

To date, 57 out of 58 wells have been drilled as part of the first stage of the project. More than 17,000 people are currently working at the construction site, and an additional 24,000 are constructing equipment for a Chinese shipyard project

Total owns nearly 19 percent of Novatek.

The Price Factor: Oil and Terrorism

The entrance to the currently blockaded Zueitina oil terminal in Libya.
The entrance to the currently blockaded Zueitina oil terminal in Libya.

There is a general consensus among oil analysts: the excess supply of oil on the market will subside by the end of 2016. The global demand for oil will increase by 1.2-1.5 million barrels per day, according to BP, the International Energy Agency (IEA), and the Energy Information Administration (EIA). Since the beginning of this year, there has been a significant decrease in shale oil production in the United States. Oil deliveries to the world market are also affected by the militant attacks on production and transport facilities in Nigeria.

Alarming messages are coming from other corners of the world. In late July, ISIS seized two oil infrastructure sites in northern Iraq, killing five workers and destroying the largest oil station that pumped 55,000 barrels of oil to Northern Kurdistan. At the same time, the US resumed their bombing campaign of Libya. According to Pentagon press secretary Peter Cook, the US Air Force bombed Sirte, which has been controlled by ISIS since June. There are about 2,000 militia fighters concentrated in the area around Sirte. It is reported that the strikes are being carried out at the request of the US government.

Before the new bombing campaign, there had been several loud statements on building up Libya’s oil industry, increasing exports from 332,000 barrels per day in July to 900,000 barrels per day by the end of the year. However, Libya’s National Oil Company hasn’t been able to ramp up production since exports through the ports of Ras Lanuf, Zawiya, Zueitina, and Ed Sider have been blocked by militants and local rival groups since 2013.

Analysts estimate that the total export capacity of these ports to be 860,000 barrels per day. According to BMI Research, it is possible for Libyan oil ports to come back online, but they will require significant reconstruction. Maintenance work at Es Sider has already begun. In addition, the country has lost its biggest oil customers. In terms of increased competition between oil producing countries, at present it will not be easy for Libya to come back on the market.

However, before the military operations started again, Bank of America predicted that oil prices would return to between $35-40 per barrel if the conflict in Libya was settled and the country’s full production and export capacity resumed.

Prior to the overthrow and eventual killing of Muammar Gaddafi (coincidentally in the Libyan city of Sirte) and the ensuring civil war, the country was producing up to 1.65 million barrels of oil per day. According to Douglas Westwood, Libya is home to some of the world’s largest proven reserves of liquid hydrocarbons. Oil is the main source of income for countries in Northern Africa, and before the blockade of the ports and exports, contributed 97% of foreign exchange earnings and amounted up to 80% of GDP.

Maria Kutuzova

Did a Crude Oil Combustion Kill the Dinosaurs?

Photo from CSMonitor


There has long been a consensus among palaeontologists that the mass extinction of the dinosaurs was triggered when a 6-mile wide asteroid hit the Earth 66 million years ago.

The narrative has been that the asteroid, slammed into the present day Yucatan Peninsula and set off volcanic eruptions, earthquakes, tidal waves, and eventually a large dust cloud that blocked the sun, ceasing photosynthesis, first killing off the herbivores dinosaurs, then the carnivores.

However, it has remained a scientific mystery why the cataclysmic event wiped out the dinosaurs, but not other animals, such as crocodiles and frogs.

Now, a new theory has emerged to explain the sudden and mass extinction, and it involved crude oil.

The study by Professor Kunio Kaiho and his team of researchers at Tohoku University, suggests that the extra-terrestrial object slammed into an oil reserve in the Yucatan, triggering a burning inferno that shot a massive amount of fine black carbon (also known as soot) into the atmosphere, forming a smoke cloud that plunged the Earth into darkness. The large dust cloud turned vast regions of the globe into deserts.

Both theories share the same “cloud of darkness” basis, but Kaiho’s study focuses less on Co2 spewing volcanoes and more on the sedimentary organic molecules.

The Japanese team examined the powdery black carbon substance, which is about a million times more light-absorbing than carbon dioxide.

Rocks at the impact site of the crater were already known to contain oil elements. In fact, a drilling expedition by the Mexican oil company Pemex in the 1950s helped lead to the discovery of the crater later in the 1980s. In present day Mexico, the region is still oil-rich.

To balance the study, Kaiho and co. took samples soot samples from rocks both nearby the impact site (in Haiti) as well as on the other side of the world (in Spain).

The chemical composition of both samples bore molecular similarities, indicating they originated from the same crude oil incineration.

Kaiho’s research suggests that the asteroid may have incinerated and sent up as much as three billion tons of soot into the sky, causing colder climates at mid-high latitudes, and drought and milder cooling at lower altitudes.

The findings were published in Scientific Reports.

What Brexit Means for Oil and Gas


Nearly a week after the UK voted in favor of leaving the European Union, the post-Brexit hangover has begun to sink in: the sterling is at a 30-year low, the country’s credit rating has been bumped down, and the overall financial and political future of a Britain outside of the EU remains uncertain.

Here at Neftianka, we are more concerned about the ramifications for the oil and gas industries, which incidentally, are closely linked to the economic and financial situation in Great Britain. Here are observations on how Brexit will affect oil and gas

Cheaper oil for the rest of the world, more expensive for Britain

Crude oil prices plunged more than 7% in the past week since the referendum. Brent slipped down to $48.41 per barrel and WTI towards $47.00.

Cheaper crude prices usually translate to less expensive petrol a the pump, but UK residents won’t get to cash in.

Brexit sent the British pound into a tailspin, losing more than 10% of its value on June 25, 2016, when final results from the previous day’s referendum came in. The British pound is seen as an unknown risk, so investors are stashing their money in traditional safe investments such as the U.S. dollar or gold.

Since oil is bought and sold in dollars, a stronger greenback (which increased by more than 1.5% in the last week) means that British oil traders and retailers need more pounds to buy one dollar. Analysts believe that petrol prices in the UK will increase to £ £1.25 per liter, a 2p to 3p price increase.

Bad for consumers, but good for producers

While an average Brit suffers from higher petrol prices, oil and gas companies may feel some relief from the Brexit and weakened sterling.

A weaker pound is good for the energy sector. The weaker UK currency will reduce costs since operation costs, such as labor, are paid out in pounds, but oil is sold in US dollars.

Russian oil companies were able to weather the oil price crisis for the very same reason: the weak ruble significantly lowered costs in dollar terms.

Perhaps the weakened sterling will slow down the layoffs of oil industry jobs, which have been aggressively slashed since oil prices began collapsing in mid-2014. By the end of this year, an estimated total of 120,000 jobs will have been lost due to the pricing rut.

North Sea oil and gas

The majority of the UK’s offshore oil and gas fields are territorially part of Scotland, which after the pro-Brexit vote, pledged to hold a second independence referendum in order to remain part of the EU.

This would give Scotland 96 percent of annual oil production and 47 percent of natural gas production, according to Bloomberg.

The North Sea represents a large source of oil output at roughly 1 million barrels per day, however, fields are drying up which makes extraction more costly (but a weaker pound could help with this). According to the latest (June 2016), BP Statistical Review of World Energy, the UK currently has 0.2 trillion cubic meters (7.3 trillion cubic feet) of recoverable gas and 2.8 billion barrels of recoverable oil reserves.

Newfound independence wouldn’t be an overnight success for the new Scottish oil industry: the political uncertainty would make investors uneasy about projects in the region.

Kashagan Oil Field: What Went Wrong

cover photo 2?

Kazakhstan’s largest oil project Kashagan, scheduled to come online three years ago, still hasn’t produced a single barrel of oil. Now officials say production will begin in October, with the potential to double the country’s oil output. A successful launch could turn around the nation’s economy, another failure would be the latest blow to the slowing oil industry. 

The world’s tenth largest country by land mass, Kazakhstan is a land of contradictions: snow-capped mountains that stretch to China, arid steppe where only horses and their herders roam, oil-rich, yet less than a fourth of the population own a car that runs on the oil extracted from the ground.

After Russia, Kazakhstan is home to the largest volume of liquid hydrocarbons in the former Soviet Union. According to Kazakhstan’s energy ministry, prove oil and gas condensate reserves total nearly 39.8 billion barrels (about 5.3 billion tons).

Oil production has tripled since Kazakhstan achieved independence from the Soviet Union in 1991, and since 2010, Kazakhstan has been producing around 80 million tons of oil per year. This helped the Central Asian country to become the world’s 18th largest oil producer, behind Algeria but ahead of Colombia.

Kazakhstan ships its crude to neighboring Russia and China, as well as to the Netherlands, France, and Italy. However, the country is not yet self-sufficient, and doesn’t produce enough to cover domestic market demand for oil products.

While Kazakhstan has no dearth of extractable hydrocarbons, its aging and depleting fields threaten a dramatic drop in production.

According to OPEC, output declined to an average of 1.34 million barrels a day in March, compared to 1.61 million bpd in January and February, or 1.72 million bpd in 2014. The oil cartel (to which Kazakhstan does not belong) estimates overall production in 2016 will average 1.56 million barrels per day.

Standing alone, 1.56 million barrels per day is an impressive figure, but with proven oil reserves nearly as large as the U.S. – it is less so. In comparison, the US produces 8.68 million bpd, and Russia 10.6 million bpd.

Waiting for a Kashagan Miracle

Astana is placing its hopes to increase production Kashagan, the second largest field in the world with recoverable reserves estimated at 10-13 billion barrels, and over one trillion cubic meters of natural gas reserves.

Located 80 kilometers off the coast of Kazakhstan in the Caspian Sea, ground was broken on the Kashagan project more than 15 years ago with the expectation it would produce at least 90,000 barrels per day. So far it produces zero.

Kashagan oil field, the biggest energy discovery in the past 30 years
Kashagan oil field, the biggest energy discovery in the past 30 years

At more than 2.5 miles below the seabed under very high pressure (770 pounds per square inch), the oil isn’t easily accessible, and presents a magnitude of complicated engineering challenges.

The field has the potential to produce more than 58 million barrels of oil per year, which would more than double the country’s crude production, making it a top 10 global oil exporting nation.

The sheer potential attracted an array of foreign oil giants: Italy’s Eni, Royal Dutch Shell, Total, ExxonMobil (16.8% share each) Japan’s Inpex (7.6%), and China’s CNPC (8.4%). ConocoPhillips sold its 8.33% stake to KMG for $5.4bn in 2013, which in turn sold it to China’s CNPC. Kazakhstan holds a 16.81% stake in the project through KazMunayGas and the national sovereign wealth fund Samruk-Kazyna. In total, more than $50 billion has been invested into the project, compared to the original estimated cost of $10 billion.

The cold climate freezes the shallow water in the winter season, which makes conventional drilling practices impossible. To add to that, the reservoir contains a highly toxic, corrosive hydrogen sulfide.

After more than eight years in delays, drilling finally began on September 11, 2013. Production was halted 13 days later, after cracked pipelines that running to the onshore caused a gas leak. After a leak on the gas pipeline running to the Bolashak onshore processing facility. The Kazakh government has said that produced will start again this October.

For the last three years, Kazakhstan has been missing out on billions in oil revenue.

Soviet and Post-Soviet Fields

Other oil fields in Kazakhstan are unable to make up for the lost oil production at Kashagan.

Out of the 15 sedimentary basins on the Kazakh territory, only 5 are used for commercial purposes. The two biggest oil and gas fields, Tengiz and Karachaganak (with an estimated 1.35 trillion cubic meters of gas and 1.2 billion tons of oil and liquid condensates) account for about half of the country’s oil production. Discovered in 1979, these two fields have been developed by western investors over the last 20 years. But as the fields’ resources dry up, it becomes more expensive to extract the remaining crude from the ground.

Kazakhstan’s oil industry runs on increasingly costly and aging infrastructure built during the Soviet Union.

1987: Workers celebrate the first million tons of oil produced from the Kumkol field.
1987: Workers celebrate the first million tons of oil produced from the Kumkol field.

Post-Soviet discoveries such as Kumkol North and South are estimated to collectively hold 300 million barrels of proven oil reserves, however, Wood Mackenzie believes that production at these fields reach will their peak of 72,500 bpd in 2017.

The Zhambyl field, which is located in the northern section of the Caspian Sea, is estimated to contain more than 880 million barrels of oil.

The View Forward

Kazakhstan first discovered oil in 1988, first producing the product as an independent nation, then under the Soviet Union, and now again in its own right. With over 30 billion barrels of recoverable crude, it’s unlikely the current Kashagan problem and production rut will spoil long-term prospects.

Wealth from energy has significantly boosted the country’s economy under the leadership of President Nursultan Nazarbayev, who has ruled the country with an authoritative, yet benevolent, manner since independence (last 25 years).

Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now Atyrau) in 1984.
Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now
Atyrau) in 1984.

Energy drives the economy of the landlocked Central Asian country: oil alone accounts for 25% of GDP.

Situated between Russia and China, Kazakhstan is geographically surrounded by economic crisis. The recession in Russia, which really only began to fully manifest itself when oil prices began to slide in the second half of 2014, quickly spilled over to Kazakhstan as the two economies are closely linked. To the south of Kazakhstan is Uzbekistan, Kyrgyzstan, and Turkmenistan, all reeling from Russia’s rupture.

GDP, which only expanded 1.2 percent after 6 percent growth in 2013 and 4.1 percent in 2014. The spillover recession from Russia has also battered foreign investment to Astana by nearly half.

Photos from http://vasi.net/

Louise Dickson

Finding a Global Energy Balance – BP Economist


BP Chief Economist Spencer Dale presented his company’s 65th edition of the Statistical Review of World Energy June 2016 in Moscow on June 10 at the Institute of World Economy and International Relations. BP has been producing the report since 1952, and the study has established itself as an authoritative source in the energy industry.

The report, which in its inaugural year, only reported on oil – now focused on the three primary global energy sources – oil, coal, and natural gas.

Oil remains the most widespread used energy in the world – in 2015 it accounted for 32.9% of total energy consumption. In 2015, it even saw its market share rise, for the first time since 1999. After oil, coal is the second biggest fuel, with 29.2% share in the energy balance, but it saw its market share decline in 2015. Natural gas made up 23.8%.

Dale’s main message for the upcoming year is to expect another year of strong growth in demand, and a continued shift towards low-carbon fuels, as well as renewables.

According to the report, global demand for primary energy only amounted to 1%, which is significantly lower than the average in the past decade (on average 1.9%).

Dale said this reflects an overall slowdown in the global economy and consequential slower growth in energy consumption, most notably in China.


“On the demand side, we are in a world where demand is in a period of transition. Over the last 10-15 years, we have seen very strong growth in global energy demand, much of that driven by China,” he said.

China’s economic boom days are over, and as Dale put it, “the days of double-digit growth and industrialization are behind us”.

Even if there is a massive increase in demand – from China or elsewhere – the massive amount of oil inventories will offset any oil price surges.

Screen Shot 2016-06-17 at 2.10.51 PM

For example, even if demand grows to a point where there is a shortage of oil, prices won’t suddenly snap back.

Dale explained: “If you have a shortage of a 1 million barrels per day, but we have a surplus of 500-600 million barrels, simple arithmetic tells you that it could easily take 12-18 months before stock levels are back to normal levels, and it’s only when you work off that significant stock overhang, will the oil market come back to balance.”

Technology is also changing the energy balance, the report says, referencing developments in both shale oil in the US, as well as renewable energy sources worldwide.

“On the supply side, we are surfing a technological wave. Over the last few years, we have seen rapid gains in technology advancements and productivity gains, which are increasing the types and abundance of energy supplies,” said Dale.

oil market

As our readers know very well, oil prices in 2015 dropped drastically. In dollar terms, the largest drop on record, and the sharpest fall in terms of percent since 1986. Prices rose slightly in early 2015 as US shale producers nixed production, but increased production by OPEC countries, especially Iraq and Saudi Arabia (account for ~90 percent of increase production) caused a sharp drop in prices overall.

We are “truly in an age of plenty in terms of supply,” Dale noted.

The growth rate of world oil production for the second year in a row outpaced global consumption growth. Production grew by 2.8 million barrels per day, or 3.2%, the highest rate since 2004. Production in Iraq (750,000 barrels per day) and Saudi Arabia (510,000 barrels per day) rose to record levels, which pushed OPEC production up 1.6 million barrels per day to 38.2 million barrels per day, even outpacing the previous record set in 2012.

“You do not need a PhD in economics to know if supply grows by 2 million barrels a day, and demand grows by 1 million barrels a day – what will happen with oil prices – and sure enough, prices fell,” said Dale.

Natural Gas

“The big picture story on natural gas is one where global production continued to grow strongly, but demand outside of the power sector was relatively muted, and these two things together causes gas prices to drop sharply around the world,” said Dale.

There is still a large variation across countries and markets.

“On the supply side, the US remained the global powerhouse for natural gas, accounting for around half of the entire increase in global production last year,” according to the economist.

Overall, BP sees three general themes from the gas market:
1) A gas increase share within power sector, especially in the US, even pricing out coal;
2) LNG overall increased, though demand from Asia decreased, and increased in Europe, North Africa, and the Middle East;
3) In order to retain market share, Gazprom responded to increased competition by lowering European prices

The rise of LNG is increasingly influencing prices. For example, a drop in demand for LNG in Asia affected prices in natural gas in Europe.

Screen Shot 2016-06-17 at 2.11.17 PM

Other interesting points of the presentation:
– Gas overtook coal in US power sector – first time ever
– Renewable energy – solar energy has increased 60-fold in the last 10 years

Race to the Bottom: Forbes Top 25 Oil and Gas Companies

oil companies

Every year, Forbes magazine publishes an annual ranking of the 2000 biggest companies in the world based on four metrics: revenue, profits, assets, and market value.

This year’s list included energy majors such as ExxonMobil, PetroChina, Chevron, Total, as well as Russian state-owned giants Gazprom and Rosneft.

The majority of companies (500+) were from the USA, while Chinese companies occupied the top three places.

Oil and gas companies maintained their top places in the rating, despite a tumultuous year of oil prices and mass layoffs and bankruptcies in the energy industry in 2015.

ExxonMobil kept its title of largest oil and gas company worldwide. However, in April 2016, the energy giant lost its coveted AAA credit rating for the first time since the Great Depression due to the effects of low oil prices. This year, it slipped to 9th place in the Forbes 2000 ranking.

ExxonMobil held one of the top three spots since the poll was introduced in 1955 until at first sparring with General Motors and then later Wal-Mart for the top place. The last year that the Irving, Texas-based company was the biggest company was in 2012.

Despite the slowdown in the Chinese economy, the largest global corporations were Chinese banks: Industrial and Commercial Bank of China (ICBC), China Construction Bank, and Agricultural Bank of China, which have held the top three positions since 2014. Bank of China slipped to 6th on the list to 4th place, which it ceded to Warren Buffet’s Berkshire Hathaway, followed by American banks JPMorgan Chase in 5th and Wells Fargo in 7th. Apple secured 8th place, while Japan’s Toyota Motors held onto its 10th place position to break up the America-Chinese domination.

While Chinese and American banks topped this years’ list, oil and gas companies retreated in their ratings.

After ExxonMobil in 9th place, the next energy company was PetroChina (the second largest oil and gas company in the world) in 17th place, and US company Chevron in 28th place, dropping 12 spots since last year.

The list shows that both private and state-owned energy companies are feeling the burn from the oversupply in the world market in the last year. Private companies have been forced to delay projects as well as lay off thousands of staff, while state-owned companies in the so-called petrostates – those whose economy depends on the sale of hydrocarbons- also lost their leadings positions in the global economy.

As for Russian companies, Gazprom can be found in the 53rd spot, having dropped 26 positions, and Rosneft is in 75th place, having fallen 16 spots.

One oil and gas company that is notably absent from the top of the list is BP, which currently occupies the 370th place on the list. The spectacular drop is due to the massive fines the company paid following the Deepwater Horizon oil spill in 2010. In order to pay out more than $20 billion in a settlement, the company began to actively sell assets and cut spending.

Despite the downward trend in global oil prices, the oil and gas sector is still recording huge projects. Combined, the world’s top 25 oil and gas companies sold more than $2.6 trillion in products, and income revenues were $81 billion.

World’s Top 25 Oil and Gas Companies

Ranking Among Oil and Gas Companies Company Forbes Global 2000 Ranking
1 ExxonMobil 9
2 PetroChina 17
3 Chevron 28
4 Total 30
5 Sinopec 31
6 Shell 50
7 Gazprom 53
8 Rosneft 75
9 Reliance Industries 121
10 Lukoil 122
11 CNOOC 134
12 Phillips 66 141
13 Schlumberger 176
14 Valero Energy 182
15 ONGC 220
16 Marathon Petroleum 234
17 Surgutneftegaz 242
18 SK Holding 247
19 Gas Natural Fenosa 287
20 PTT PCL 337
21 Transneft 361
22 BP 370
23 Indian Oil 371
24 Eni 409
25 Petrobras 411


Data from Forbes Global 2000