Interview with Gennady Krasovsky

Gennady  Krasovsky, the Head of Investor Relations for Lukoil, discussed with Russia Today the effect the oil prices volatility could have on Russian oil companies.

Russia Today: The Russian market is seeing great volatility; global oil prices are very volatile at the moment. Yesterday we have seen a spike of $US 78.77, now they are down at $US 75.50. How are Russian oil companies feeling in this situation?

Gennady  Krasovsky: In general all oil companies, including Russian, benefit from high oil prices. But probably Russian oil companies can benefit a lesser scale because of the tax mechanism we have in Russia. This high volatility on the market is due to a composition of speculative and fundamental reasons. As far as for the speculative reasons, it is political instability in the Middle East and Africa, as for the fundamental reasons, I can say, it indicates under-investments in new crude oil reserves to meet rising global demand for energy. This lead us to the highest level over the past 10 years. Average full-cycle oil price doubled or probably tripled from $US 16-20 per barrel and now we can see it is like $US 50 – 60 per barrel as a long run. We also see this era of high oil prices to continue in the next ten years. The reason for this is the growth of energy demand, deterioration of the global resources base of the big oil companies. And somehow signals coming from oil companies indicate it should continue. On cost side, like lifting cost or refining cost – now they have tripled per a barrel of production over the last five years.

RT:  This is due to the current taxation system, the so-called mineral extraction tax. It is tied to global crude prices. How is this affecting companies financials?

G.K.: It makes us stable financially. In times of softening of oil prices it makes us less sensitive to oil price fluctuations in the high area. Definitely, when oil prices rise, the main beneficiary is the state but oil company continues improving its profitability. From each additional dollar above $US27 per barrel, $US 0.1 goes to all oil companies as a profit.

RT: Is it actually stimulates oil companies to increase production?

G.K.: On brown fields the answer is yes, we can continue improving efficiency on brown fields stimulating their higher productivity. At the same time the problem of making investments in completely new untapped provinces with a lack of infrastructure, probably it puts, you know, a kind of the barrier to make these investments. And actually that is not just a Russian topic. We can describe this problem in other parts of the world, like Mexico. This year Mexico, one of the largest, probably not that large but significant and visible oil supplier to the world economy, this year saw like 16 – 18% decline in production. And the problem is ageing resources base and under-investments. On annual base they invest some $US 12 BLN, but they need $US 30 BLN, to triple just to keep their production flight. Developing brown fields in Russia probably, in some reasonable future, we can see the same problem. The problem to escalate investments in brown fields but, you know, brown fields can give you extra barrels. Extra barrels can give virgin untapped provinces. According to the rough estimations in the next 30 years we need to invest around $US 1 TRLN and it will help us not just to replace depleted barrels from the current producing efforts but probably to increase Russia’s oil production to 10.5 MLN barrels a day. But tax mechanism is in the hands of the state and actually it is the state to make decision in what area we should go. Shall we go to the greenfield provinces or we should concentrate on the development of brown fields.

RT:  Also last year we have seen a similar spike in oil prices which is led to the wholesale petrol prices growing more than 11%. Now are we to expect that kind of growth this year too?

G.K.: Well. As for the international, I mean world retail prices, the answer is yes because there is a direct link between crude oil prices and retail prices. That is why the average price per litre in Europe is like €1.2- 1.6 per litre. As for Russia we still have like € 0.4 per litre which is just probably 40 – 50 % of the European prices. And actually this gap or this low price is a beneficiary of our economy because of the resources, richer resources that we have in hands. The function of domestic retail prices in the next mid-period will out do inflation. Because definitely all companies, you know, they cannot ignore macroeconomic factors. They have to buy, you know, additives just to produce high octate gasoline. We still feel pressure from the suppliers. That is why they should rise, but it should be very modest and very stable rise in line, probably lower than the Russian inflation. The passed two historical periods presented the same try.

RT:  Since you have mentioned inflation, let’s talk about macro economy now. Oil prices are racking in win for profits of oil companies. On the other hand this extra surplus money, is this sparing inflation or not?

G.K.: In the global context probably it could happen but actually it is out of my responsibilities. As for the Russian context the governmental expenditures, the budget expenditures I guess is the main driver for inflation and actually all macroeconomists here in Russia, they say it. Definitely the fact that around 50% of Russia’s total export operations are provide from energy resources, from crude oil and natural gas. And oil products, you know, provide a significant in-flow of the cash inside the country. Definitely it can give some hit to the economy. But actually it is the task for the government, to channel these money to the real projects, to develop economy and, you know, just in that way to escape this Holland disease.