Producers in turmoil as Russian oil hits $10 a barrel

Leading Russian oil producers, including TNK-BP, BP’s Russian affiliate, are grappling with a collapse in profits from the export of Siberian oil.

Heavy export tariffs have almost wiped out the profit margin from selling crude oil outside Russia, forcing Siberian producers to sell at prices as low as $10 a barrel on Russia’s domestic market. Fears are mounting that the profits squeeze may speed the decline in Russian oil output, already down 6 per cent this year.

The profits crunch, caused by the collapse in the worldwide price of crude, is provoking concern within Russia’s oil community that capital expenditure budgets will have to be cut if profits from oil sales do not recover. “The tax burden is very tough,” Valeri Nesterov, an oil analyst at Troika Dialog, the Moscow brokerage, said. “The problem is that the future of the oil sector might be jeopardised if the Government doesn’t reduce the tax burden.”

Transneft, the Russian state oil pipeline monopoly, reported over the weekend that shipments of crude were running at only three quarters of planned exports for November. Oil traders suggested that leading producers, including Tatneft and Rosneft, the biggest Russian oil producer, were likely to cancel tanker exports from Black Sea ports due to the heavy tax burden.

A BP spokesman confirmed that Russian exporters were experiencing problems due to high export taxes. “In October, you would have made a loss,” he said.

The problem has emerged because of the precipitous decline in the price of crude from its peak in July of $147 a barrel to present levels of around $56 a barrel.

Russia imposes an export duty on crude oil, a significant source of government funding, but the level of the tax is set in arrears, calculated according to the export price of Urals blend crude over the previous two months. Oil producers complain that the levy is always excessive, but when oil prices fall quickly, the change in the tax rate takes months to catch up. The Government cut the export tariff at the start of this month from $51 a barrel to $40 a barrel. However, Urals blend crude fell to $53 a barrel yesterday, suggesting that exporters would continue to suffer losses after meeting production costs and pipeline tariffs.

“Profits will decline, but the main problem is that in order to sustain oil output they need to maintain capital expenditure. It is nearly impossible to borrow money and, if your profit falls, you have less money to invest,” Mr Nesterov said.

Reports from Moscow yesterday said that TNK-BP was in talks to secure a $600 million (£399 million) loan from its bankers. The fundraising was put on ice last summer when a row erupted between BP and its oligarch partners over control of the joint venture. Since then, the syndicated lending market in Moscow has virtually disappeared because of the sudden outflow of funds from Russia in the continuing global credit crisis.

Alexei Kudrin, the Russian Finance Minister, said yesterday that the Government was forecasting an average oil price in 2009 of $50 a barrel. He said that Moscow would consider using its foreign currency reserves to prop up state finances next year. They had been budgeted on an oil price of $95 a barrel.

Russia continued to intervene in the markets yesterday, selling dollars in its effort to prop up the sagging rouble.

“You will see more support measures for the economy this week. I think we will need to work hard for at least another year,” Mr Kudrin said. “The Finance Ministry has been put into army barracks regime, and the central bank is working until 2am, reacting to everything.”