Russia’s oil companies face short-term crunch

EVENT: Rosneft, Russia’s top oil producer, confirmed yesterday that it would seek a $4-billion loan from the state development bank in 2009.

SIGNIFICANCE: Rosneft’s announcement is symptomatic of the difficulties facing Russia’s oil majors, including private companies such as Lukoil and TNK-BP. The companies have exhibited strong growth in recent years as increased production and prices combined to generate solid financial performance. However, they now face a number of challenges as investment requirements continue to grow amid much less favourable projections for oil prices.


ANALYSIS: In the short term, Russia’s leading oil companies are facing a cash squeeze caused by falling crude and petrol prices. This decline has been exacerbated by the impact of export duties, which had been set for two-month periods (although the Kremlin has now reduced this time frame to one month). This meant that when oil prices fell, the duty paid on exports became a much higher proportion of the prices actually realized, and margins were severely reduced. Producers with no spare refining capacity either took a potential loss, or tried to sell crude in the oversupplied domestic market, where prices have consequently been even more depressed.

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