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Business/Finance See other Business/Finance Articles Title: Russian production costs are some of the lowest in the world True Economics There has been much confusion in recent months as to the 'break-even' price of oil for Russian and other producers. In particular, some analysts have, in the past, claimed that Russian production is bust at oil prices below USD40pb, USD30pb and so on. This ignores the effects of Ruble valuations on oil production costs. Devalued Ruble results in lower U.S. Dollar break-even pricing of oil production for Russian producers. It also ignores the capital cost of production (which is not only denominated in Rubles, with exception of smaller share of Dollar and Euro-denominated debt, but is also partially offset by the cross-holdings of Russian corporate debt by affiliated banks and investment funds). It generally ignores capital structuring of various producers, including the values of tax shields and leverage ratios involved. Third factor driving oil break-even price for Russian (and other) producers is ability to switch some of production across the fields, pursuing lower cost, less mature fields where extraction costs might be lower. This is independent of type of field referenced (conventional vs unconventional oils). Russian Energy Ministry recently stated that Russian oil production break-even price of Brent for Russian producers is around USD 2 pb, which reflects (more likely than not) top quality fields for conventional oil. Russian shale reserves break-even at USD20 pb. In contrast, Rosneft estimates break-even at USD2.7 pb (February 2016 estimate) down from USD4.0 pb (September 2015 estimate). Here is a chart mapping international comparatives in terms of break-even prices that more closely resembles the above statements: Here is another chart (from November 2015) showing more crude averaging, with breakdown between notional capital costs (not separating capital costs that are soft leverage - cross-owned - from hard leverage - carrying hard claims on EBIT): Another point of contention with the above figures is that they use Brent grade pricing as a benchmark, whereby Russian oil is priced at Urals grade, while U.S. prices oil at WTI (see here). All three benchmarks are moving targets relative to each other, but adjusting for two factors: Historical Brent-Urals spread at around 3.5-4 USD pb and Ongoing increase in Urals-like supply of Iranian oil we can relatively safely say that Russian break-even production point is probably closer to USD7.5-10 pb Brent benchmark than to USD20pb or USD30pb. Another interesting aspect of the charts above is related to the first chart, which shows clearly that Russian state extracts more in revenues, relative to production costs, from each barrel of oil than the U.S. unconventional oil rate of revenue extraction. Now, you might think that higher burden of taxation (extraction) is bad, except, of course, when it comes to the economic effects of the curse of oil. In normal economic setting, a country producing natural resources should aim to capture more of natural resources revenues into reserve funds to reduce its economic concentration on the extractive sectors. So Russia appears to be doing this. Which, assuming (a tall assumption, of course) Russia can increase efficiency of its fiscal spending, means that Russia can more effectively divert oil-related cash flows toward internal investment and development. During the boom years, it failed to do so (see here). although it was not unique amongst oil producers in its failure. Note: WSJ just published some figures on the same topic, which largely align with my analysis above: Link. Update: Bloomberg summarises impact of low oil prices on U.S. banks' balancesheets: Link. Update 2: Meanwhile, Daily Reckoning posted this handy chart showing the futility of forecasting oil prices with 'expert' models: Poster Comment: teddyfromcd... while it is complicated for someone like me to understand these techicalities...it still boils down to COST OF LIVING - IN RELATION TO STANDARD OF LIVING. imo. for an american living in the ''high standard USA" TO buy a loaf of bread the corresponding loaf of bread in russia is priced in rubles and according to THEIR COST of living to reach a comparable STANDARD of living in the USA. i was curious about price of living and so i studied a bit how russians ''survive" in certain areas... so i chose EDUCATION: AND being a musician , naturally looked into the MUSIC education. the BEST in the world standards -- ST PETERSBURG music school or MOSCOW conservatory where the legendary composers and performers of russia went or taught (although many still did also in PLENTY other institutions) - COSTS PER YEAR - IN TUITION - 4,000 US dollars - tops. or something like 130,000 RUBLES PER semester - in the USA - the best school will set you back at least , AT LEAST 30,000 DOLLARS A YEAR - FOR AN EDUCATIONAL STANDARD that can NOT surpass that of russia's. !! a 3 month summer course in RUSSIAN LANGUAGE ANYWHERE IN RUSSIA, GIVE OR TAKE the cost of living in a CITY or a smaller one or moscow compared to somewhere in central siberia with still very good STATE level standards -- costs 100 dollars a month INCLUDING room and board!! that is LIKE STEALING!! IT IS literally saying == to become an ENGINEER in the russian educational system costs PEANUTS compared to becoming one in the USA. russia EDUCATES her people at FAR LESS - a mere FRACTION of what it takes an IDIOT education in the USA..TO produce VERY SMART PEOPLE from russia. Post Comment Private Reply Ignore Thread
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