Oil producers suffer from inflation hikes

Shares in Russian oil firms are in high demand, as crude oil has hit $US122 a barrel this week. But it’s not all good news for the industry. Inflation is starting to bite oil companies.

Oil company shares are certainly outperforming.

“If we assume that if the oil price on the average for 2008 is at today's level, which is highly likely, then we would foresee the upside for Lukoil and Rosneft to reach 40-45%,” expects oil & gas analyst at Unicredit Aton Tatyana Kapustina.

Expectations jump another 10% if the government goes ahead with plans to cut export duties.

But high oil prices also bring problems.

Inflation is forcing oil companies to spend more on upstream services and technologies. Meanwhile high export duties mean they don't benefit much from high prices.

Inflation is pushing up the cost of services, technologies and salaries. Last year's double digit inflation is not seen slowing much in 2008.

Then there's the currency. Russian oil producers get paid in dollars, but their costs are in roubles. That's pushed up their costs, and means they have to borrow money from the banks just to keep their investment at the same level as last year.