Global Oil and Gas Market

Global Oil Market

According to preliminary data from IEA, global demand for liquid hydrocarbons (LH)In this document, LH demand indicates the consumption of petroleum products from oil and gas condensate; consumption of oil as fuel; and consumption of hydrocarbon components from unconventional sources (biofuel, GTL, CTL, etc.). GTL (Gas to Liquids) and CTL (Coal to Liquids) are technologies for producing synthetic liquid fuel from gas and coal, respectively. slightly accelerated in 2017 to 1.6% (1.3% in 2016) at 97.8 mmb per day, up 1.6 mmb per day year-on-year. About 35% of the demand originated from Asia, accounting for 66% of growth in global LH demand in 2017.

LH Demand by Region, mmb per day Source: IEA.
LH Output by Region, mmb per day Source: IEA.

According to preliminary data from IEA, global LHIn this document, LH output indicates the production of crude oil, gas condensate, gas condensate liquids, and production of hydrocarbon components from unconventional sources (biofuel, GTL, CTL, etc.). output in 2017 grew by 0.4 mmb per day to 97.4 mmb per day. Production growth slowed down from 0.5% year-on-year in 2016 to 0.4% year-on-year in 2017. The slowed production results from measures taken under the joint agreement between OPEC members and 11Equatorial Guinea joined OPEC in May 2017. non-OPEC countries to reduce oil production. The total oil output in 2017 by the 14 OPEC member countries reduced 1.4% year-on-year to 32.3 mmb per day, although the production of gas condensate liquids was up 1.3% year-on-year to 6.9 mmb per day. Production trends varied across OPEC’s 14 countries. In 2017, crude output mainly dropped in Saudi Arabia (down 4.4% year-on-year to 10.0 mmb per day) and in Venezuela (down 12.2% year-on-year to 2.0 mmb per day), while an increase in crude output was primarily posted by Libya (up 2.1 times year-on-year to 0.8 mmb per day) and in Iran (up 7.0% year-on-year to 3.8 mmb per day).

The drop in LH output (down 2.5% year-on-year) observed in OECD’s North American member countries in 2017 reversed to a 3.9% year-on-year growth to 20.2 mmb per day. The regional production growth was mainly driven by the US, where 2017 LH output was up 5.3% year-on-year to 13.2 mmb per day, including crude production up 5.4% year-on-year to 9.3 mmb per day. LH output also grew significantly in Canada, by 7.4% year-on-year to 4.8 mmb per day, while Mexico, also having signed the OPEC production cut agreement, reduced its LH output in 2017 by 9.5% year-on-year to 2.2 mmb per day.

In 2017, LH output in Asian countries dropped to 7.7 mmb per day. Regional output growth slowed down from 3.9% year-on-year in 2016 to 3.3% year-on-year in 2017. The trend was attributable to the deceleration of LH production rates in China from 6.8% year-on-year in 2016 to 2.8% year-on-year in 2017. In 2017, Chinese LH production stood at 3.9 mmb per day, accounting for half of the Asian LH output.

Commercial Crude Inventories in OECD Countries, bln barrels Source: IEA.

As a result of slowed production rates, IEA estimates that in 2017 the oil market showed a slight production deficit of 0.4 mmb per day. In November 2017, commercial crude inventories in OECDOfficial national estimates of crude inventories, IEA data. The discrepancies in crude stock estimates for 2010–2016 as compared to the previous annual report of the Company are due to IEA’s updates and revisions made during the year. countries dropped 6.0% year-on-year to approximately 1.11 bln barrels.

IEA forecastsForecast of January 2018. that global LH demand in 2018 will grow 1.4% year-on-year to 99.2 mmb per day. The US Energy Information Administration (EIA)Forecast of February 2018. forecasts that accelerated LH production growth will drive a surplus of 0.2 mmb per day in 2018 and 0.3 mmb per day in 2019. According to EIA projections, global LHForecasts of global LH demand and supply for 2017–2018 were based on EIA data, since IEA’s Oil Market Report only contains global demand outlooks for 2018. The discrepancy between EIA’s LH demand and supply data for 2017–2018 and IEA’s data are due to different calculation methodologies. demand in 2018 will grow 1.7% year-on-year to 100.2 mmb per day, with global LH output up 2.5% year-on-year to 100.4 mmb per day.

EIA’s ForecastU.S. Energy Information Administration.  of Global LH Demand and Output,mmb per day Source: Forecast by US Energy Information Administration as at February 2018.
Overview of the Global Gas Industry

The global demand for gas grew 2.4% to 3.6 tcmIHS Markit preliminary estimates. in 2017. A considerable part of the demand growth (up 34 bcm – 42% of total growth for 2017) is attributable to Asia-Pacific, primarily China. The market is supported by the increasing accessibility of supplies and relatively competitive prices, particularly prices for oil and petroleum products.

The demand growth was accompanied by an increase in global gas outputIHS Markit preliminary estimates. to 3.6 tcm, with 26% of global gas output attributable to North America, approximately 19% to Russia, and 17% to Asia-Pacific.

In 2017, gas producing countries exported about 1.1 tcm of gas.Rosneft’s estimates based on IHS and IEA data. Approximately 68% of global gas exports are transported by pipelines, and 32% as LNGBased on BP data for 2016. 2017 data will be published in June 2018..

Gas Production by Region, bcm Source: IHS.
Gas Consumption by Region, bcm Source: IHS.
LNG Market

In 2017, the LNG market grew by 29.9 mmt or 11% year-on-year (the highest growth rate since 2011) to reach a record high of 296.7 mmt, and largely driven by the improved demand in Asia-Pacific (up 12% year-on-year to 216 mmt) and Europe (up 22% year-on-year to 46.9 mmt). LNG demand in Japan, a major global LNG importer, was up 0.9% year-on-year to 84.5 mmt.

The growth was largely attributable to new LNG trains commissioned in 2017 at existing plants and new LNG projects coming on line in:

  • Australia, increasing exports by 11.6 mmt to 55.8 mmt to provide 39% of the global export growth
  • the US, increasing exports by 4.7 times to 12.5 mmt.

In addition, in December 2017, the first liquefaction train with a nameplate capacity of 5.5 mtpa was launched at the Yamal LNG project in Russia, with LNG supplies from the train totaling 73 thousand tonnes in 2017. In 2017, Qatar, the world’s largest LNG exporter, cut its supplies by 1.1% year-on-year to 81.0 mmt. In July 2017, state-owned Qatar Petroleum announced its ambitious plans to expand LNG production capacity to 100 mtpa. Construction of new LNG trains will allow Qatar to retain its position as the leading LNG producer.

Absolute and Relative Increase in LNG Exports and Imports by Country, 2017 y-o-y, mmt Source: IHS.

After many years of multiple new LNG projects announced across the industry, the market came to a lull. In 2017, the final investment decisionFinal investment decision (FID) is the decision to proceed with a project. As a rule, FID is taken after the design stage is completed, necessary permits obtained, an EPC (Engineering, Procurement, and Construction) contract signed, and financing sources and target markets for the project products identified. was only made for one LNG project, Coral South FLNG (Mozambique, 3.4 mtpa).

Long-Term Forecast for Hydrocarbon Demand

Top global energy agencies expect that the weight of hydrocarbons in the global energy mix will remain largely unchanged until 2040. While oil will continue dominating other resources in global energy consumption, its share, as with coal’s, will decline in favor of gas, nuclear energy, and renewables. Under IEA’s baseline forecast, global oil demandOil demand indicates the consumption of petroleum products from oil and gas condensate; consumption of oil as fuel; and consumption of hydrocarbon components from unconventional sources (GTL, CTL, etc.), excluding biofuel. will reach 104.9 mmb per day by 2040. The bulk of this growth will be attributable to Asia-PacificRegional demand does not include demand from international aviation and bunkering., which will account for approximately 37% of global oil demand (39.2 mmb per day). In North America, oil demand will decline to 18.0 mmb per day in 2040, and in Europe, to 8.7 mmb per day, and these regions will provide 17% and 8% of global oil demand in 2040, respectively.

Global Energy Consumption by Fuel Type in 2040, IEA’s baseline scenario, % Source: IEA’s forecast of November 2017.
Global Energy Consumption by Fuel Type in 2016, %

Source: IEA’s forecast of November 2016.

By 2040, global gas demandRegional demand does not include international bunkering. will reach 5.30 tcm, with gas consumption expected to grow across the board. The share of gas in global energy consumption will grow from 21.9% in 2016 to 24.8% in 2040, whereas coal will decline from 27.3% in 2016 to 22.3% in 2040.

Oil Demand by RegionRegional demand does not include international aviation (excluded from oil demand estimates only) and bunkering., IEA’s Baseline Scenario,mmb per day Source: IEA’s forecast of November 2017.
Gas Demand by RegionRegional demand does not include international aviation (excluded from oil demand estimates only) and bunkering., bcm
Russian Oil Industry

Oil and gas condensate production in Russia amounted to 546.8 mmt in 2017, down by 0.1% year-on-year. The decline results from Russia’s participation in an agreement with OPEC countries and other oil producers to cut production in 2017 and 2018.

The Northwestern Federal District was the main contributor to the reduction (down 5.1% year-on-year to 32.0 mmt – 5.9% of Russia’s total production), including the 7.2% year-on-year production decrease to 14.0 mmt in the Komi Republic (2.6% of Russia’s total production), and by 3.2% year-on-year to 17.3 mmt in the Nenets Autonomous Area (3.2%). Production in the Ural Federal District declined by 0.4% year-on-year to 302.8 mmt (55.4% of Russia’s total production in 2017), including a 1.6% year-on-year decline to 235.2 mmt in the Khanty-Mansi Autonomous Area (43%) and a reduction in the Tyumen Region by 11.4% year-on-year to 11.0 mmt (2%), while production in the Yamalo-Nenets Autonomous Area rose by 7.9% to 56.6 mmt (10.4%). Production in the Volga Federal District decreased by 0.9% year-on-year to 117.4 mmt (21.5%).

In 2017, there was a 1.1% year-on-year production growth in the Siberian Federal District, totaling 52.5 mmt, constituting 9.6% of Russia’s total production and resulting from increased production in the Krasnoyarsk Region (up 3.8% year-on-year to 23.3 mmt; 4.3%) and the Irkutsk Region (up 2.5% year-on-year to 18.5%; 3.4%). The Southern Federal District also exhibited growth (up 29.7% year-on-year to 12.7%; 2.3%) due to increased production in the Astrakhan Region (up 57.9% year-on-year to 9.2%; 1.7%).

Oil and Gas Condensate Production by Federal District, mmt

Source: CDU TEK of RussiaCentral Dispatching Department of the Fuel Energy Complex of the Russian Federation..
Oil and Gas Condensate Production in Russia, mmt Source: CDU TEK of Russia.

In 2017, Russian oil and gas condensate refining volumes decreased by 0.2% year-on-year to 280 mmt, while oil exports increased by 1.1% year-on-year to 257 mmt, causing the export share in total oil and gas condensate production to rise to 47.0%, reaching its highest level since  2011.

Oil and gas condensate exports to countries outside the CIS increased by 1.2% year-on-year to 238.9 mmt, causing an overall rise in exports. Almost 66% (approximately 157.2 mmt) of export volumes outside the CIS were transported by sea, including 18.4% via Primorsk and 13.3% via the Kozmino oil port. Meanwhile, oil and gas condensate exports to CIS countries decreased by 0.4% year-on-year to 18.1 mmt in 2017.

The “big tax maneuver” in the Russian oil industry resulted in a 3.8% increase in oil production in 2017 compared with 2014. Exports grew by 16.0%, while oil refining volumes decreased by 3.1%.

Russian Oil and Gas Condensate Exports and Refining, mmt Source: CDU TEK of Russia.
Russian Gas Industry

In 2017, natural and associated gas production in Russia increased by 7.9% year-on-year, reaching 691.1 bcm.CDU TEK of Russia. Rosneft produced 67.6 bcm of gas, constituting approximately 10% of the country’s total production.

Gas produced in Russia is both sold on the domestic market and exported.

Russia’s natural gas exports amounted to 225.8 bcm in 2017, up by 5.8% year-on-year. Total supplies via Gazprom’s pipeline systemPursuant to Federal Law of the Russian Federation No. 117-FZ On Gas Export dated 18 July 2006, the exclusive right to gas export shall be granted to the owner of the Unified Gas Supply System or to its wholly-owned subsidiary. were 210.2 bcm, 175.9 bcm of which was exported to countries outside the CIS, resulting in a 6.8% increase year-on-year, while exports to CIS countries totaled 34.3 bcm, up 0.8% year-on-year. A total 15.6 bcm (up 6.1% year-on-year) was exported as LNG, mostly by members of Sakhalin-2 PSAProduction Sharing Agreement. consortium.

Gas Exports from Russia, bcm Source: Federal Customs Service of Russia, CDU TEK.
Gas Production in Russia, bcm

Major gas consumers in Russia include power generation companies, households, utilities, and companies in the oil, metals, and agrochemical industries, altogether accounting for almost 80% of the country’s total gas consumption.

Rosneft supplies gas to industrial consumers, as well as to households and municipal utilities.

Rosneft’s selling prices of gas are based on agreements with customers, and are not regulated by the Government. The wholesale prices of gas produced by Gazprom and its affiliates and sold to domestic consumers are used as a benchmark. The prices are fixed by orders of the Federal Anti-Monopoly Service of the Russian Federation (“regulated gas prices”).

Regulated gas prices differ by region, generally depending on the distance from the gas production hub in the Yamalo-Nenets Autonomous District.

The indexation benchmark for regulated gas prices is the Forecast of Social and Economic Development of the Russian Federation, published by the Ministry of Economic Development of the Russian Federation.

Actual Growth in Regulated Gas Prices in Russia, % Source: Forecast of Social and Economic Development of the Russian Federation for 2018 and for the 2019–2020 Planning Period, approved at a meeting of the Government of the Russian Federation on 29 June 2017.
Indexation of Regulated Prices (Tariffs) for Infrastructure Sector Products (Services) in 2018–2020, %

Current wholesale prices of gas produced by Gazprom and its affiliates for all categories of Russian consumers (excluding households) were set by Order No. 776/17 of the Federal Anti-Monopoly Service dated 13 June 2017, and the wholesale gas prices for households were set by Order No. 1870/16 of the Federal Anti-Monopoly Service dated 26 December 2016. Pursuant to the above Orders, regulated gas prices for household consumers were indexed by 3.9% as of 1 July 2017.

Independent gas producers use the Gazprom-owned Unified Gas Supply System for gas supplies to consumers, and transportation charges are set by the FAS Russia (previously by the FTSFTS – Federal Tariff Service of Russia was relinquished by Presidential Decree No. 373 dated 21 July 2015, with the FAS Russia appointed as its successor.). Gas transportation service prices are based on a tariff consisting of two fees, one for the use of gas pipelines and the other for gas pumping. The pipeline usage fee depends on the distance between the “inlet” and the “outlet” points, while the pumping fee depends on Gazprom’s handling and transportation costs.

Current tariffs were approved by Order No. 216e/1 of the FTS dated 8 June 2015, and were not revised in 2016 or 2017.

Gazprom also offers underground gas storage (UGS) services to independent gas producers, and 25 underground gas storage facilities are currently located in the main gas consumption regions. Fees for UGS usage are not regulated and are set by Gazprom on a case-by-case basis for each UGS facility. Rosneft makes use of UGS facilities to offset seasonal and other fluctuations in gas consumption by end users.

In recent years, the domestic gas market has been characterized by increased competition for consumers and a gradually expanding share of independent producers in the total volume of domestic gas sales.

The St. Petersburg International Mercantile Exchange was launched on 24 October 2014 pursuant to the order of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Safety. In 2017, it continued to develop organized trade in natural gas, amounting to 20 bcm in trade volume. Since its launch, the Exchange has organized the sale of close to 45 bcm of gas.

Overview of Key Taxation Changes

Overview of Key Taxation Changes in the Russian Federation With the Largest Impact on the Company’s Financial and Business Operations

“Big Tax Maneuver”

Another phase of the “big tax maneuver” initiative was completed in 2017. From 1 January 2017 the base rate of the mineral extraction tax (MET) on oil was raised from RUB 857 per tonne to RUB 919 per tonne. The K coefficient in the formula for calculating the total export duty rate for 2017 was set at 30% (42% in 2016) if the average Urals crude oil price (Coil) on global markets exceeds USD 182.5 per tonne {Rate (total) = K * (Coil – 182.5) + 29.2}.

At the same time, pursuant to Federal Law No. 401-FZ dated 30 November 2016 (as amended by Federal Law No. 254-FZ dated 29 July 2017), an additional component (Kk) will be included in the MET rate for oil for the period from 2017 through to 2020. The additional component amounted to RUB 306 per tonne in 2017.

Increase in the Rates of Excise on Petroleum Products

The Rates of Excise on Individual Petroleum Products were Raised in 2017, RUB per tonne
Types of Excisable Goods Previous Target Excise
Rates for 2017
(Federal Law No. 34-FZ dated 29 February 2016)
Actual Excise Rates in 2017
(Federal Law No. 401-FZ dated 30 November 2016)
Motor gasoline
  • Non-compliant with Euro 5
12,300 13,100
  • Euro 5 compliant
7,430 10,130
Diesel fuel 5,093 6,800
Motor oil 5,400 5,400
Straight-run gasoline 12,300 13,100
Benzene, paraxylene, orthoxylene 2,800 2,800
Jet fuel 2,800 2,800
Middle distillates 5,093 7,800

Changes to the Income Tax Calculation and Payment Procedure

Pursuant to Federal Law No. 401-FZ dated 30 November 2016, special rules were introduced in 2017 concerning loss recognition for the purpose of the corporate income tax: From 2017 to 2020, taxpayers may reduce the tax base in the current reporting (tax) period by excluding prior period losses in the amount of up to 50% of the tax base in the current tax period, with no limit on the amount of losses excluded after 2020.

As of 2017, the procedure for calculating the tax base of consolidated taxpayer groups was changed and a limit was introduced on reducing the profit generated by some members of consolidated taxpayer groups during the given reporting (tax) period by the amount of losses incurred by other members of the consolidated taxpayer group (up to 50% of the profit generated by profitable members of the consolidated group of taxpayers).

The previous limit of 10 years on carrying loss forward was additionally lifted from all taxpayer categories, including the consolidated group of taxpayers.

Pursuant to Federal Law No. 401-FZ dated 30 November 2016 during the period from 2017 through to 2020, part of the income tax payments toward the regional budget amounting to 1 percentage point of the tax rate will be redistributed to the federal budget (now 3% in place of the previous 2%), thereby reducing payments to the regional budget.

Further Changes in Tax Legislation

As of 1 January 2018, the companies producing oil from license areas located completely within the boundaries of the Nizhnevartovsk District of the Khanty-Mansi Autonomous Area – Yugra with initial recoverable reserves of 450 mmt or more each as at 1 January 2016, will be eligible for a MET deduction in the amount of RUB 2.917 bln for the tax period (calendar month) until 31 December 2027 inclusive. License areas in the Samotlor field with subsoil use rights owned by the Company meet these criteria.

As of 2018, a new taxation procedure will apply to the property tax on movable property and energy-efficient property, whereby regional authorities of the Russian Federation will be authorized to exempt these categories of property from taxation. A transition period is provided for movable property, and in 2018 the tax rate for the movable property taxation will not exceed 1.1%.