Spencer Dale, Chief Economist at BP was in Moscow in mid-February to deliver BP’s most recent Energy Outlook. The report forecasts the upcoming trends in the oil and gas industry in the coming decades. Dale’s presentation focused on global growth, the trend towards decarbonization, and the increasing demand for electricity.

Dale spoke at the Institute of World Economy and International Relations in Moscow, part of his global tour to present this year’s report.

“Do we have a crystal ball that somehow means that can we forecast perfectly for 20 years ahead? Of course not. We now know that any forecast will inevitably be wrong. But I don’t think we should think about forecasting as being right or wrong. The value of forecasting is to better understand the nature of the uncertainty we face.”

The energy demand forecasts are based on the assumption that GDP will grow by 3.4% on average over this period. While some of the growth is driven by an increase in population, a majority will come from productivity growth, led by China and India. More than 2 billion people will shift from “lower income” to middle class, creating more demand for energy.

“The world continues to electrify, with the share of energy used for power continuing to increase,” the economist said.

By 2035, the global demand for energy will increase by 30%, with virtually all growth coming from developing economies.

While oil demand will continue to rise, the real winner will be natural gas with the expansion of LNG, the report says. Coal is expected to see its peak in the mid-2020s. Overall, the three fossil fuels will only make up 77% of the energy mix in 2035, compared to the current 86%.

According to the forecast, in the decades to come, Russia will continue to be the world’s biggest exporter, and in particular, has the potential to increase gas production by 28%.

BP, which recently launched a market campaign to rebrand itself as Beyond Petroleum, is very much oriented towards the role non-carbon sources of energy will play in the future.

“Non-fossil fuels provide almost half of the increase in primary energy in the next 20 years,” Dale said.

Russia’s largest oil company Rosneft and oil pipeline monopoly Transneft have reached a compromise on the transport of oil and oil products for 2017. Rosneft had held out on signing a contract for 2017, which would have left Rosneft without a means to ship their product and Transneft with billion of lost revenue from transport fees.

The dispute between the two power players is longstanding, and stems from the disagreement over compensation payments.

Novatek CEO Nikolai Tokarev and Rosneft head Igor Sechin are both long-time Putin allies, having worked under the President in the 1990s for the city of Saint Petersburg. The two bosses recently met with Russian Energy Minister Alexander Novak and presented the final resolution.

Under the agreement, Rosneft will transport 180,346 million tons of oil via Transneft pipelines, and will ship oil and petroleum products from its recently acquired company Bashneft. The amount of Rosneft will pay to use Transneft’s infrastructure was defined vaguely as “depending on the tariff, amount of oil, and transportation routes.”

Transneft enjoys a monopoly on the transport of Russian oil, shipping more than 90 percent. Rosneft is Russia’s largest producer of oil, accounting for about 40% of the country’s total output.

In December, the pipeline operator, threatened halt pipeline shipments of Rosneft’s oil if a contract wasn’t signed before the end of the year, but this move was blocked by the courts.

With more than 70,000 of kilometers of pipelines, Transneft is the world’s largest oil pipeline company. The company’s monopolistic position makes it a target of not only Rosneft, but also small independent oil producers vying for access to pipelines.

Louise Dickson

Russia’s largest oil company Rosneft is making more definitive moves in developing the Pechora LNG project in northern Russia off the Barents Sea coast. When complete, it will produce have the capacity to produce 10 million tons of natural gas per year. The project will help the state-owned oil behemoth get a foot in the natural gas industry, as well as in liquified natural gas (LNG).

Pechora will develop the Kumzhinskoe and Korovinskoye fields in Russia’s Nenets Autonomous region, and will include the construction of an LNG as well gas transport infrastructure, gas treatment plant, and a sea shipping port. At full capacity the Pechora project could reach production of 10 million tons of natural gas per year. Total reserves are more than 174 billion cubic meters of gas and 6 millions tons of condensate.

On November 11, 2016, Rosneft ordered pre-design work on the feasibility study phase of the project Pechora LNG; oilcapital.ru reported, citing a company statement.

Initially, the project was going to be run by Alltech, but the ownership had to change since Rosneft is one of three Russian companies permitted by law to export LNG (the other two are Gazprom and Novatek). Up until 2013, only Gazprom had the right to export.

Pechora LNG was established in 2015 as a joint venture of Rosneft and Alltech Group, the owner of the licenses. Rosneft tried and failed to buy the surrounding Layavozhsky and Vaneyvissky fields in order to expand the project. It lost the auction to rival Gazprom.

Now Rosneft is looking at the option of slashing LNG capacity in favor of refining the product at a gas chemical facility and producing methanol and urea. Rosneft also isn’t ruling out transporting the natural gas it extracts via Gazprom pipelines. Instead of producing up to 10 million tons of natural gas per day, will reduce LNG to 4.3 million tons and a mix of the above stated gas chemicals. So instead of sending LNG to Western markets, it would send oil and chemical products to Russian consumers.

Analysts aren’t sold on the viability of the project, due to some very complex logistics. Putting too much LNG on the market, especially amid a global slump in pricing, would be risky. At the same time, putting less on the market may mean that Pechora is unprofitable.

Despite the slump in crude oil prices, Rosneft has been increasing assets and ramping up its international activities in Iran, China, and Central America.

In Russia, Rosneft has been focusing on diversifying into other non-crude oil markets, putting pressure on Gazprom, which has long had both a domestic and foreign monopoly on natural gas and natural gas exports.

If successful, Pechora will be Rosneft’s second LNG project after Sakhalin-1, a joint venture between Rosneft, Japan’s Sodeco, and Indian state-owned oil company ONGC Videsh Ltd.

Louise Dickson

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).

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

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.

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.