His country has long since ticked off the sanctions against Russia’s oil and gas sector, which have been tightened again and again since 2014, and are now doing energy projects alone, without the participation of western corporations. Nord Stream 2 will also be completed.
For the oil sector, which has been hard hit by the corona pandemic, he expects a recovery in “two to three years”. People would travel far less and the proportion of renewable energies would increase more than previously predicted. On average for the year, the 48-year-old expects the price of the Russian Urals oil to be $ 35 a barrel (159 liters). The price of the North Sea variety Brent should develop similarly.
Nowak did not rule out further cuts in oil production by the Opec plus group, but these are not currently necessary. The group of the oil cartel Opec and other oil countries like Russia meanwhile meet monthly instead of once a quarter to analyze the market development in detail. Nowak also admitted that some Russian oil wells, especially obsolete ones in Siberia, will never produce again after the shutdown as part of the agreed cut in production.
Read the entire interview here:
Mr. Nowak, Russia as an energy exporter is suffering from the massive drop in the oil price. The corona crisis is also severely affecting the economy. Now the United States is threatening further sanctions against the Nord Stream 2 pipeline. Are you worried?
We have long forgotten that there are sanctions at all. They were introduced in 2014. Just because you are asking now, I remember that they still exist. Our companies have long since got used to carrying out their projects independently. We have very strongly developed our own conveyor technology and implemented a program for import substitution. The sanctions no longer burden us. We used to do energy projects with Western companies, now we do them alone. And the sanctions no longer affect Russia alone. They are increasingly becoming a truncheon to beat their own protectionist goals.
How will you react to possible sanctions against the Nord Stream 2 Baltic gas pipeline?
This pipeline is a commercial project that primarily serves Europe and its energy security. It benefits competition and competition. Because the more supply routes there are, the better and cheaper the selection among suppliers and delivery routes will be. The sanctions and their tightening against Nord Stream 2 are absolutely illegal and completely inadequate. This is pure protectionism. The USA want to force Europe on its liquid gas or other projects. This is an interference in the sovereignty of European countries.
And despite everything, Russia’s Gazprom will complete this pipeline?
The pipeline is being built by a consortium of foreign companies, not Russia. The Nord Stream 2 project has already been completed from an investment and economic viability perspective. All possible technical means are used for the purely physical completion of the construction work.
Speaking of natural gas: To what extent are you afraid that after the oil price, the gas price may fall into the negative range?
The situation in the gas market is also very difficult due to the drop in demand due to the corona pandemic. Our experts anticipate a four percent drop in gas consumption. The last warm winters had already made growth forecasts for gas consumption obsolete. And there are more and more capacities for liquefying natural gas (LNG) under construction, the LNG share in the gas market is growing. But because of the drop in demand due to the pandemic, there is a large oversupply of LNG, and this puts considerable pressure on gas prices on the spot markets, and prices have fallen in double digits.
How can this be stopped?
Like the oil sector, the gas market has become very volatile. If prices fall sharply, investments are cut, supply is reduced and prices stabilize. I hope that the worst is already behind us on the gas market. Although it is much more difficult here because there is no regulatory body like Opec in the gas sector and coordination is much more difficult. Therefore, the gas market is more chaotic and bankruptcy will occur.
There will be investment stops and conveyor systems will stop – in the countries that have such projects and cannot implement them at the current prices.
Do you mean US fracking gas companies?
Of course, I am closely monitoring the situation in the USA, and of course there are some companies there that are no longer able to cope with the current price level.
Do you rule out that the gas price will also fall in minus?
This is hardly possible, at most in small local markets. As in the USA for oil, where at times it could hardly be transported or stored. On the gas market, there was a very short time at a European gas hub, but these are very short-term slumps. I rule out a longer, system-relevant negative gas price.
Then we come to the oil sector. As a result of the corona pandemic, global oil demand has fallen massively and the oil price has even dropped in some cases. Will demand and price ever stabilize again at the pre-crisis level?
It will be a very long process that the demand for oil and gas will increase again to the pre-crisis needs. Because people saw in the crisis that they don’t always have to drive or fly a lot, that they can exchange information using modern means of communication. For example, I haven’t made a single business trip since March 6th. Since then, all meetings have taken place online.
So you were last at that famous meeting with the Opec countries and other oil countries in Vienna, at which Russia and Saudi Arabia could not agree on further cuts in oil production. Whereupon Riyadh declared a price war, ramped up its production and caused the oil price to collapse. Do you regret not having given in at the time?
We’re realists, you don’t have to regret anything. And I’m not talking about an oil price war. In March no one could really imagine how big the cuts in funding would have to be to really stabilize the price. We were right in our request to wait two weeks and to keep the production limit in force until then, to follow the course of the pandemic and then to decide. We did that in April.
However, in March you did not agree to a deepening of the current quantitative limit. In retrospect, was that a mistake?
The non-renewal was not the decisive point, which is why the price of oil fell. We weren’t listened to at the time, and we had just proposed to extend the restrictions to the same level. An alternative was to cut production by 600,000 to one million barrels a day. But experts said back then that demand would drop even more drastically. This coincidentally coincided: the non-extension of the quantity limit and the violent slump.
Would an agreement between Russia and other producing countries with the Opec cartel have been better than none?
The extension of the existing agreement would have had no effect. The price would still have collapsed because the oil supply was much larger than the demand. Nobody knew that, and no one could have imagined such a drastic drop in demand. And that’s how we experienced the worst April in the history of the oil markets. In the worst nightmare, you could not have imagined a 25 to 28 percent drop in oil consumption. Fortunately, the trend is now pointing upwards.
But will pre-crisis oil consumption ever be reached again?
Certainly not again this year. We hope that it will happen again in 2021. But maybe it will take two or three years. Because people will fly less, drive less, travel less and do more online. The economy will grow again, but the demand for oil from transport will remain lower.
And in this case is the significant reduction in funding agreed within the Opec plus group sufficient? Or do you have to cut further quantities?
What we have agreed has been calculated well. A balance between oil supply and consumption could be achieved by the end of June, and a slight supply deficit could already arise from July. In July the agreement will result in two million barrels of oil less on the market than originally planned. Then we’ll see. There is a lot that is unclear: consumer demand, and there will be a second wave of corona that many expect. That would again mess up the markets considerably.
Are you therefore not considering any further funding cuts?
This is currently not necessary. But we have agreed to discuss the situation every month.
So, in principle, another round of cuts is possible, only now too early?
Exactly. We are watching the oil market closely, and depending on the situation, we will respond. So far we have advised once a quarter, now we will do it monthly as part of Opec plus. Because the situation is very volatile.
What do you want to do about the producing countries that do not adhere to the agreed production cuts?
At the moment everyone is sticking to the agreement. 85 to 90 percent in May. We have decided on the toughest cuts ever, almost ten times as violently as the first Opec plus agreement in 2016. Back then we all cut by 1.2 million barrels a day, now by almost ten million. But of course it is important that everyone adheres to the agreement honestly and in partnership. It’s a voluntary agreement, but everyone wins if the market balances. There must be no free riders who take advantage of the determination of others.
And Russia is keeping the deal? In the past, your country was accused of including cuts but not implementing them.
We stick to what has been negotiated very responsibly. The government looks very closely at the oil market. Russia has recently met 96 percent of the funding cut. That is a huge amount for us, we are now producing two million barrels less every day. It is a real test for us.
How hard will the Russian budget and the revenues of the Russian oil companies be hit by the crisis and cuts in production?
The cuts are supposed to do the opposite and stabilize prices. Without the agreement, the demand would still have decreased and the price would have continued. There was hardly any free storage capacity for oil. Then production would have had to be cut, just completely chaotic, and the market would no longer have been controllable. Then the oil price would have temporarily fallen into negative territory not only in the USA. But we avoided chaos in the Brent oil market by means of controlled volume cuts. A cut in production by 20 percent has doubled the oil price.
But up to what level can Russian oil companies cope with a slump in the oil price? Experts say Russian miners cost $ 30 a barrel, Saudi Aramco $ 3 a barrel.
For this we have a very flexible taxation of the oil producers, depending on the amount of the oil price. Our oil companies can continue to produce even when the oil price is low, thanks to reserves and then low taxes. And with a low oil price, the price of our national currency also falls, and the companies still have high ruble proceeds.
Could it be that Russian oil producers need state aid to survive?
No. Only oil service companies will need help, since the oil companies have stopped drilling because of the current situation, they will lack the orders for about two years. So far, it has been agreed that the production volume will be limited. We place orders for the completion of oil wells that are needed when we start production again.
But can Russian oil and gas companies like Lukoil, Gazprom, Novatek or Rosneft still invest in view of the current earnings situation?
They don’t need government aid or tax deferrals, they come through the crisis. And they are continuing their investment programs, with a few small cuts of maybe ten, 20 percent. There will be no fundamental changes.
What oil price do you expect by the end of the year?
On average, my ministry expects $ 35 a barrel for the Russian Urals oil grade.
So that would mean $ 38 for the Brent variety? Urals were always traded at a discount.
Not necessarily. A premium is currently being paid for the Urals. Before that, there were discounts towards Brent. That has become very volatile. So you can expect $ 35 a barrel for Brent.
Experts warn that once closed, old Siberian oil wells can never produce again, even if you want to. You are too out of date. Is that correct?
This is the case in individual cases. We have very different oil fields and wells, some very old, but also a few new and controllable wells. This also varies greatly from group to group and is also taken into account in the implementation within Russia of the reduction in the funding volume decided within the scope of Opec plus. The management of all companies strives to maintain all sources of funding in the future. But a few will not survive the current throttling.
Does the low price for oil and gas stop the plans of many countries to rely on renewable energies for climate protection reasons? Because oil and gas have become so temptingly cheap again.
I believe in the trend towards more renewables. Energy consumption fell significantly during the crisis. But the demand for electricity will undoubtedly pick up again – if only because of more and more electric cars. But we are seeing a change in the energy mix. Before the crisis, the share of hydrocarbons in electricity production was expected to decrease from 85 to 75 percent by 2040. I now believe that the share of renewable energy will increase more significantly. I don’t want to predict how strong. However, it is clear that the trend towards renewables is not so much affecting the oil sector, but rather the gas and coal industry.
Mr. Nowak, thank you for the interview.
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