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Despite challenges, Russian oil & gas remain profitable

Editor: Li Kun 丨CCTV.com

12-14-2015 15:57 BJT

By Tom McGregor, CNTV Commentator

CCTV.com attended the 2015 Moscow Forum, hosted by Moscow City Government. Local officials discussed Moscow's business climate. We will post a 5-part series of Special Reports, ‘China's New Silk Road connects with Russia.’ This is Part I.

Doomsayers have raised alarm bells over Russia's economic decline, and they anticipate even worse to come. They point to dramatic oil & gas price drops as the crucial indicator, since the nation's capital city is a global energy hub.

Industry experts have told CCTV.com they forecast oil prices to stay in the doldrums for another five years.

Russian oil & gas companies must confront de-stabilizing geo-political factors, such as Western governments imposing sanctions on them, steep valuation drops of Russia's currency, ruble, and a recession.

Nonetheless, Moscow is undergoing a construction boom and Sergey Cheryomin, Minister for External Economic and International Relations of Moscow, claims the city's unemployment rate for the working-age population stands at 1-2 percent.

Russian oil and gas companies also appear poised to overcome challenges and perhaps they have a few good reasons for optimism.

Low production costs to the rescue

Last week, crude oil prices have plunged to under $US40 a barrel, the lowest level since 2009. But, Russian oil & gas conglomerates believe they can weather the storm.

"Russian companies can pump oil, because their drilling costs are low, $US3-$10 per barrel and they enjoy preferential tax treatment," said Alexis Rodzianko, CEO of AMCHAM (American Chamber of Commerce, Moscow Chapter).

He added, "They still report good production and maintain high profit margins. For the time being, they will abandon offshore drilling, because it’s more costly."

Ironically, Western-imposed sanctions have sparked a localization trend that benefits Russia-based oil & gas equipment manufacturers, while domestic companies are offering more technical training programs for its employees.

Moscow's city government has opened up hi-tech industrial zones - Technopolis Moscow and Skolkovo Innovation Center – to encourage startups to invent more efficient and cheaper equipment and technologies for Russian oil & gas operations.

Localization creates opportunities for China 

Chinese oil & gas companies are signing more lucrative deals with their Russian counterparts. Moscow-based oil & gas giant Gazprom has agreed to supply China with 38 billion cubic meters of natural gas for 30 years, starting in 2018, at a total estimated value of $US456bn.

European and North American companies would not benefit, since sanctions forbid them from participating. China is the world's largest consumer of fossil fuels, and Russia holds an abundant supply of reliable energy sources.

Both nations rely on each other. As the saying goes, "a friend in need is a friend indeed." One side should not claim superiority over the other. Russia is an energy supplier and China can pay cash for it amidst sanctions.

Ruble devaluation has its benefits

In spite of the gloomy economy, Russian exporters could emerge stronger than ever before, due to the ruble's sharp decline. When a nation's currency drops, that's beneficial to exporters and hurts importers.

Russian oil & gas companies can export abroad at lower prices. Russia-based equipment manufacturers can sell their goods and services to foreign investors at lower fares. Here's where Chinese investors can cash in.

North American and European firms cannot take advantage the rubles' devaluation, since they have been shut out of Russia's oil & gas markets. Hence, Beijing is a major beneficiary.

China-Russia partnership on the rise

Washington, London and Berlin would stand firm on imposing sanctions against Russia for another six months at least, according to AMCHAM's Rodzianko. Moscow does not indent to act subservient to other nations to escape punitive measures.

Nonetheless, Beijing does not engage in "exceptionalism" foreign policy and would not punish Moscow economically for its perceived actions over the Ukraine. China has taken a more pragmatic approach with its neighbor to the north.

Consequently, Russia's oil & gas companies can grab greater prosperity by working more closely with China.



( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )



Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.


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