With its production increases, Russia is betting on its oil operators’ ability to withstand the resulting price decline when faced with constrained global demand for crude.
Russia has offered its operators two mechanisms for coping with the low oil price, the country’s oil and gas taxation regime that changes with crude prices and a floating currency that closely trails global oil prices.
Shielded by progressive taxes that automatically adjust to the oil price, producers in Russia can remain above the breakeven level even at crude prices below $22 per barrel, the 18-year low for the country’s Urals blend crude.
This price represented a 65% drop from the year high on January 9. However, in Russia, the state would absorb the majority of losses with Mineral Extraction Tax (MET) and export duty decreasing by $32 for every barrel of crude produced in the country.
Whether Russia can absorb such losses, when amplified by over 11 million barrels produced every day in the country, is a topic for another discussion, yet the immediate relief to operators ensures that Russian crude continues to flow even in the current price environment.