Time to read: 13 minutes(s)

Author: Tatyana Rybakova

The Year of the Fire Horse has begun... with a bang. You could say it's a blaze of fireworks: the kidnapping of the Venezuelan dictator, American special forces chasing tankers that were flying Russian flags as they ran, protests in Iran threatening to topple the ayatollah regime, the loss of foreign assets by Rosneft and Lukoil, Trump's approval of "hellish sanctions" for the purchase of Russian oil... This is all just over the New Year holidays, and already it's scary: oil prices are creeping up. We decided to ask oil and gas analyst Mikhail Krutikhin whether these fears are justified, and what the potential consequences of these events might be.

I'd like to start with what's happening in the global oil market, and I'd like to begin with the most discussed issue right now: Venezuela. Do you agree with the opinion that the transfer of Venezuelan oil to US control will not lead to the appearance of new large volumes of oil on the market in the short term? Because, firstly, this is heavy oil and abandoned fields, where, they say, it will take five to ten years to restore everything. Secondly, there has already been a reaction from US oil companies, who, for some reason, have responded less than enthusiastically to Trump's call to come and own these fields.

Let's start with the fact that Venezuelan oil currently accounts for only 1% of global production. This means that even its complete disappearance would not lead to any shortage, much less a critical situation. Secondly, expectations that the rapid development of the Venezuelan oil industry will bring large flows of oil to the market will not come true. I will quote the Norwegian company Rystad Energy. They calculated that tripling Venezuelan oil production, from 1 million barrels per day to 3 million barrels per day, would require until 2040 and $183 billion in investment. That's why American companies were less than enthusiastic about Trump's announcement that they would invest billions in Venezuela now. And if production were to increase by just 0,5 million barrels per day, or 50%—as calculated by the American company Wood MacKenzie—it would take two years and $10 to $20 billion. The Norwegians also calculated the price per barrel at which production at new projects in Venezuela would be more or less profitable. That price is $80. So, with Brent crude averaging around $61 per barrel, there's no point in hoping for that. Especially since forecasts for this year and next indicate a downward trend in oil prices.

Let's approach this from a different angle. Venezuela is one of the founding countries of OPEC. Will the de facto transition to American control somehow change the balance of power within this cartel?

— No, it won't change anything. Judging by the statements, the Americans are taking control of Venezuelan oil exports. How they'll manage this, no one knows: exports are conducted under proper documents, contracts. That means contracts, licenses, concessions, and so on, need to be terminated. Yes, various Rosneft subsidiaries receive oil for subsequent resale from Venezuela as payment for funds previously provided by Russia. But oil from the American company Chevron, the Spanish Repsol, the Chinese CCRC, and the Venezuelan state-owned company PDVSA is also exported there. How these contracts will suddenly come under American control is still a big question mark, because it would violate all principles and the sanctity of business agreements.

So, it seems that Venezuela will not cause any upheaval in the global oil market?

— Absolutely right. No, it can't increase production, and if its current production were to suddenly disappear, there wouldn't be any disruption, because its share of the global market is very small. There's also talk that the US will cut China off from cheap Venezuelan oil, but if we look at China's oil imports, we see that Venezuelan oil accounts for about 2%. So, it wouldn't be a shock for China either.

Let's move on to Iran then. Things are a little more precarious here, because it's not entirely clear whether the regime will survive, and if it doesn't, what will happen and how. Nevertheless, could a regime change in Iran impact the global oil market?

— In the short term, it won't have any impact. If the regime changes to one more favorable toward the West, then sanctions might be lifted. But that's a long-term prospect; it's impossible to say for sure yet. If sanctions are lifted, it will pave the way for an influx of foreign technology, foreign companies, and work to increase oil and gas production in Iran. Naturally, this won't happen overnight; it will take several years for the market to feel the impact.

This means that we can conclude that, for now, all these turbulent geopolitical events are unlikely to have had an impact on the global oil market, the distribution of flows, reserves, and prices in the short term.

- Yes, they don’t affect anything.

Let's now move on to Russia's export potential. Everyone is currently watching the American pursuit of the "shadow fleet" tankers. Before our conversation, it was reported that not only were two of them seized, but 15 more tankers attempting to break the blockade around Venezuela are also being pursued. Will the transition to such forceful measures impact Russia's export potential and its oil export revenues?

— By the way, it seems like five or six of these tankers have already raised Russian flags, having urgently re-registered. But let's take a look: this hunt for the "shadow" fleet is currently limited to Venezuela. Despite the fact that the United States, the European Union, and the United Kingdom have blacklisted over 650 vessels as "shadow" tankers, the practical implementation of these sanctions—when vessels have been stopped, inspected, checked, and, in the event of violations, punished—can be counted on the fingers of one hand. They sail the seas with complete impunity and do whatever they please. Here's a map in front of me: a tanker from the Baltic is coming with a cargo of Russian oil. It's sailing through the English Channel, passing quite close to the UK and the continent, and it's on the sanctions lists of the UK, the EU, and the United States. It doesn't care; it keeps going. And so, out of 5 such tankers leaving Russian ports carrying petroleum products, we see that out of these 6, perhaps four were detained—with dubious results. There's no influence on this movement, no sanctions, and no hunt for tankers.

But perhaps Europeans will now follow Trump's example? Or will Trump himself expand his pursuit to the entire Atlantic and even the Pacific?

"Look, to seize one recalcitrant vessel that turned away without following orders and continued on, they had to deploy a massive military force. Not just coast guards or customs officials, but also armed forces—they even brought in the British—to detain one large, rusty vessel, 30 meters long, somewhere between the Faroe Islands and Iceland, far from the American coast. And if other vessels are disobedient, would they need to deploy an aircraft carrier group or something else to detain them? Right now, everyone is watching and seeing that there aren't enough forces to handle the flow of sanctioned oil from Iran and Russia. I don't know what they'll do about Venezuela, but Iran and Russia feel they can operate with complete impunity."

What could influence the decline in Russian oil export revenues?

— In terms of volumes and capabilities, it depends practically only on Russia's production potential and the balance between the domestic and foreign markets—that's its own balance. Oil production in Russia is declining, but it's still very slow, especially judging by official statements. Of course, you can't trust them, because I see obvious contradictions in official production estimates in Russia. But the decline in revenue depends on at least three factors. Factor number one is the overall market situation, where prices are falling. We see a general consensus among analysts forecasting oil prices for this year, and the consensus is around $55 per barrel on average for Brent crude this year. And next year, we see those same analysts speculating that Brent could reach $33 per barrel. That's the first factor. And factor number two is the toxicity of Russian oil. Its buyers in various countries are demanding huge discounts because they say, "Sorry, we could end up under secondary American sanctions, which will ruin our relations with the Americans, their banks, their companies, and so on. So give us a big discount." This is the second factor that is reducing the Russian Federation's revenue from oil exports. Factor number three is the very high value of the ruble. Russian companies that receive some foreign currency for their exports are receiving far fewer rubles per dollar than they once expected—and they pay taxes to the state treasury on this reduced ruble volume. And all domestic expenses are covered by the now-high value of the ruble. These three factors are reducing the revenues of Russian companies and the Russian budget.

What do you think about Trump's approval of the Lindsey-Graham bill, which allows Trump to impose 500% tariffs on those who buy Russian sanctioned oil?

— Well, it's psychological pressure. Trump has already approved this bill twice, but we haven't seen any real progress on it in Congress yet. Where is it? So far, there's been no movement beyond the committee. Another consideration: this bill doesn't impose any tariffs, sanctions, or anything like that. It delegates that to the president. That means he's allowed to impose exorbitant tariffs on countries buying Russian sanctioned oil, up to 500%, which is absurd, because 100% is effectively a ban on purchasing goods from these countries. This is purely a propaganda figure; it has nothing to do with reality, and so there are still doubts whether this bill will pass in Congress. So for now, it's psychological pressure.

Let's move on to the Russian domestic market. The peak fuel season has passed, and there's been no talk of fuel shortages or any significant price increases. Yet, Ukrainian attacks on oil refineries, storage facilities, and pipelines continue. In your opinion, is it possible that, as the saying goes, force will ultimately prevail, and Russian oil refining will actually experience serious problems? Or are drones incapable of causing critical damage?

"Well, so far we haven't seen them cause that kind of damage, and we see that Russian oil refining has ample capacity in reserve. Plus, we've managed to establish logistics chains for transporting fuel from region to region when capacity is damaged or reduced elsewhere. And I think that to cause a fuel crisis, Ukrainian airstrikes and the damage they cause would have to increase dramatically. And right now, that's not enough."

Perhaps the final topic is Russian oil companies themselves. Iraq nationalized Lukoil's assets in the West Qurna-2 field. Does this mean that sanctioned Russian assets abroad will now be nationalized without waiting for a sale? And what will happen to the companies' profitability then?

"We can't say that because Lukoil was given the opportunity to find a buyer for this asset. They didn't find a buyer in time for this, or many other assets, so nationalization was the only option. And then the Iraqis will look for a buyer for this asset. But that's normal: since there are sanctions, since they can't operate this asset abroad, that means the authorities of that country are forced to intervene. For Rosneft, it's the German authorities; for Lukoil, it's the authorities in Romania and Bulgaria. They have to do something with these assets. So, the natural course of action is nationalization followed by sale."

Nevertheless, the companies are suffering significant losses. Rosneft has a small asset in Germany, as I understand, but they're said to have suffered significant losses in Venezuela. For Lukoil, as far as I know, the West Qurna-2 field was also a fairly valuable asset. Or am I mistaken?

"No, you're not mistaken. I saw a valuation of Lukoil's foreign assets at around $22 billion. And yes, they won't be able to get much for them. They might sell some of their shares, maybe even make some money, but basically, it's all lost for a company that once set a course for becoming a global player, with the expectation that half of its business would be outside of Russia. Now they're having to abandon that global status and return to Russia. Rosneft's involvement in Venezuela is murky, because at one point they got involved directly, then the Americans effectively kicked them out with sanctions and other measures, and they operated through shell companies, which, as always, are registered in obscure places: Roszarubezhneft and others. Rosneft later divested their capital, but there are still intermediaries operating in Venezuela who share the profits with them." The extent of Rosneft's losses in Venezuela as a result is very difficult to estimate. Moreover, Venezuela paid for Russia's investments with oil, so some of them were recouped. Still, the losses are in the billions, although we don't know the exact figures.

The thing is, I'm trying to understand what kind of compensation the oil companies will ask the government for. They've already secured dampers for domestic supply—won't they now demand some kind of incentive to compensate for their losses? And there's no money in the budget...

— Well, the oil producers have been constantly pressuring the government for many years now, and the government once promised, before the war in Ukraine, that in 2027 it would introduce a universal additional profit tax (NPT), replacing the current export duty and mineral extraction tax (MET). Some projects that were implemented before the war are operating under this system, but it's likely that the announced 2027 deadlines won't be met—the government says there's no money in the budget. However, the oil producers have managed to secure some concessions: there was a report that the government decided to help Rosneft and Lukoil with tax breaks. Yes, this will come from the federal budget. There will likely be some concessions and relief, but it's unlikely that the oil producers will be fully transitioned to a more reasonable NPT system—the government needs money for the war. So, the oil producers will continue to be taxed.

So, as I understand it, there will be no major cataclysms in the global oil market, nor in the domestic oil market, nor in the budget's oil revenues, despite such turbulent events of recent times?

"No, don't expect it anytime soon. Because for a serious market shakeup, some extraordinary event would be needed, disrupting either production or transportation. We don't see that happening yet."

All illustrations are generated using a neural network.