US sanctions push Russian oil to crisis as prices fall to $40

The Russian oil industry is entering a deepening crisis as rising American sanctions push crude prices to $40 a barrel and below, triggering a string of bankruptcies among smaller producers in key extraction regions.

Thus, state-owned VTB Bank is planning to file for the bankruptcy of First Oil, the oil group of former Sibur shareholder Yakov Goldovsky, Caliber.Az reports per Russian media.

Operating in Khanty-Mansi Autonomous Okrug — Russia’s main oil-producing province — First Oil has accumulated around 6 billion roubles in debt that it is unable to repay.

The company’s portfolio includes several modest fields with combined reserves of 14 million tonnes and an annual output of 500,000 tonnes. Sources informed that First Oil’s troubles began during the pandemic and were exacerbated by the latest US sanctions, which have forced Russian producers to sell crude at discounts of up to $30 per barrel. As debts mounted, servicing them became increasingly difficult.

Late last year, Youngpur Oil, which represents Belarusneft in Russia and operates two fields in the Yamalo-Nenets Autonomous Okrug, also entered bankruptcy proceedings. Shortly before that, the Astrakhan Oil Company and NK Gorny, owner of three licences in the south of the Nenets Autonomous Okrug, were declared bankrupt following tax claims. In January, Moscow Credit Bank demanded around 7 billion roubles from the owners of the insolvent companies.

Analysts warn that the situation for Russian oil producers is worsening. Vladimir Chernov of Freedom Finance noted that export revenues are falling, particularly for high-cost projects. According to Rosstat, half of Russia’s oil and gas producers were operating at a loss from January to November, with combined losses of 575 billion roubles. Those remaining profitable saw earnings fall by more than half, to 3 trillion roubles over the same period.

The combination of declining export income and high key interest rates has created a “volatile cocktail” for the sector. Data from the Central Bank show that Russian banks have had to restructure 2.7 trillion roubles in loans to the industry, making the oil and gas sector the leader in both volume and proportion of restructurings, at almost 20% of total.

“The Russian oil sector is sliding into crisis, and the latest sanctions will accelerate this process,” said Craig Kennedy, former vice-president at Bank of America and now a Russia and Eurasia expert at the Davis Centre at Harvard. With barrel prices at around $40, half of Russian fields are unprofitable, while only projects benefiting from tax incentives remain in the black. Losses on unprofitable projects amount to roughly $5 per barrel.

Even with increasing discounts, selling Russian oil remains challenging. Apart from China and, to some extent, India, few buyers are willing to risk trading barrels subject to sanctions, Kennedy added.

By Aghakazim Guliyev