Goldman On The Myths & Realities Of Russia's Oil Sector

Tyler Durden's picture

Today's Russian downgrade pulled yet another raft of "smartest people in the room" to tell investors how screwed Russia is by low oil prices (and yet the US Shale industry is fine and will manage through this). However, Goldman Sachs prefers facts in its analysis of the Russian oil sector and concludes, investor concerns about the health of Russia's oil industry should remain more myth than reality.


Via Goldman Sachs,

Geydar Mamedov discusses myths and realities in the outlook for Russia's oil sector

There are increasing concerns among investors that lower oil prices might hit Russian crude production and materially worsen Russian oil companies' financial position. Where are the myths and realities in this narrative? While refining segment margins will narrow, low upstream sensitivity to changes in the oil prices means that, if anything, Russian oil production should grow. And Russian oil companies' strong financial position makes them capable of navigating the oil price downturn - even in the face of sanctions limiting their access to external funding.

Myth: Lower oil prices mean lower production

Two factors contribute to the low sensitivity of Russian upstream cash flow to oil prices. The first is upstream industry taxation: the per-barrel tax rate decreases as oil prices fall, shifting most of the upside/downside due to changes in the oil price from the oil producers to the state. The second factor is a ruble-denominated cost structure. Russian oil producers' opex and capex mainly consist of ruble-denominated contracts, as the services industry is localized. These factors offset the negative impact of oil price declines on upstream earnings.

Effectively, at US$110/bbl oil and 33 RUB/USD, Russian upstream free cash flow (FCF) for the companies we cover is roughly the same as under US$60 oil and 60 RUB/USD. Hence, we do not expect to see a slowdown in upstream activity. Moreover, the Russian government is likely to incentivize output growth in order to mitigate the impact of lower oil prices on budget revenues. Given that Russia has one of the lowest cash costs of production in the world, it would make sense in the current oil price environment for Russia to maintain its market share. We therefore expect production to reach 532 million tonnes in 2015 from 527 in 2014.

Reality: Russian refining will take a hit

In most countries, lower oil prices negatively affect the upstream industry while positively impacting refining due to feedstock cost reduction. In Russia, however, the tax system is designed in such a way that changes in oil prices have no major upstream implications but strongly influence refining profits. Refining margins in Russia mainly consist of the tax differential between upstream and downstream, and this tax differential is linked to the oil price. Hence, at a lower oil price, Russian refining margins get squeezed.

So if Russian oil producers see a need to cut capex, it will mainly happen in refining.

Myth: Russian oils are at risk of default

On our estimates, the Russian oil companies we cover have a combined cash position of over US$90 bn, of which US$26 bn represents cash needed for current operations and US$64 bn is "excess cash," held predominantly in USD. With the sector's total 2015 debt payments at US$40 bn, accumulated cash balances fully cover outstanding 2015 debts payable. On top of that, we estimate that the sector will generate at least US$13 bn of FCF in 2015 (and this is assuming no cuts to capex plans and dividends). Effectively, we believe the industry can navigate through at least next year with low oil prices and no access to external funding. Indeed, at an oil price of around US$60-70/bbl and an exchange rate of 60 RUB/USD, Russian oils should be able to maintain 2015 capex, dividends, and debt payments even without refinancing. Longer term, some companies (Gazprom-Neft and Rosneft) would need funding to maintain investment plans and pay down debts. This funding could potentially be provided by state.

Even if the operating environment turns more negative- assuming RUB/USD of 70, a 20% decline in capex volume, and no dividend payments - the companies' strong starting positions would allow them to navigate 2015 at an oil price as low as $40/bbl (below our commodity research team's forecasts). In sum, provided that the ruble continues to adjust to the shock of weaker oil prices, investor concerns about the health of Russia's oil industry should remain more myth than reality.

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TeamDepends's picture

Goldman: Fozzie Bear told Kermit many things, none of them true.

SickDollar's picture

GS stop your BS, you invented this proxy war

Anusocracy's picture

Stronger dollar equals higher production costs for the US and weaker Ruble means lower production costs for Russia.

That benefits the US oil industry?

Atomizer's picture

GS shoe shine boy has a sell position. Oops!

Atomizer's picture

FCF = Free cash flow. FYI.

RaceToTheBottom's picture

Goldman is full of gas...

5e0V2a3's picture
5e0V2a3 (not verified) Jan 26, 2015 10:00 PM

Russia Cut To 'Junk' By S&P

REUTERS/Umit Bektas

Russia's credit rating has been cut to 'BB+' by S&P

All ratings below 'BBB-' are considered "junk" as they are below the lowest investment grade rating.

The ratings outlook is negative, given Russia’s propensity to invade sovereign territories without sufficient funding. 

In its release, S&P said, "The downgrade reflects our view that Russia's monetary policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy." 

S&P added that, "We anticipate that asset quality in the financial system will deteriorate given the weaker ruble; restricted access of key areas of the economy to international capital markets due to sanctions; and economic recession in 2015."

Here's the full release from S&P:


On Jan. 26, 2015, Standard & Poor's Ratings Services lowered its long- and short-term foreign currency sovereign credit ratings on the Russian Federation to 'BB+/B' from 'BBB-/A-3'. We also lowered the long- and short-term local currency sovereign credit ratings to 'BBB-/A-3' from 'BBB/A-2'. In addition, we removed these ratings from CreditWatch, where they were placed with negative implications on Dec. 23, 2014. The outlook on the long-term ratings is negative.

At the same time, we revised the transfer and convertibility (T&C) assessment on Russia to 'BB+' from 'BBB-'. We affirmed the long-term national scale rating on Russia at 'ruAAA'.


The downgrade reflects our view that Russia's monetary policy is a piece of crap and its flexibility has become more limited, while its economic growth prospects have weakened. As Russia is little more than a commodity economy with kleptocracy leadership, we also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy.

We believe that Russia's financial system is weakening and therefore limiting the Central Bank of Russia's (CBR's) ability to transmit monetary policy.  Russia’s leader has a penchant for judo-flipping adversaries as a means of resolving internal frustrations; however, such modalities are unlikely to resolve Russia’s current financial difficulties.  In our opinion, the CBR faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth. These challenges result from the inflationary effects of exchange-rate depreciation and sanctions from the West as well as counter-sanctions imposed by Russia. We project Russia's real GDP per capita growth to fall into the toilet forthwith, and average less than economies with comparable levels of per-capita income over our 2015-2018 rating horizon.

In December 2014, the CBR increased its key interest rate by 750 basis points over five days to 17% in a futile attempt to stem the ruble’s fall. The ruble briefly appreciated against the dollar but has since continued to depreciate, reaching about 66 rubles to the dollar (as of Jan. 26, 2015), compared to about 35 a year ago. The interest rate on interbank loans increased substantially, to well above the key rat e--although it has since moderated. We see such movements in financial instrument rates as strong indicators of a weakening monetary transmission mechanism. We expect that credit to the economy will be curtailed, which will likely further undermine growth.

We also understand that during 2014 the Russian public had been converting rubles into foreign currency, thereby fueling depreciation. Given the pass-through of more expensive imports to domestic prices generally, we now expect that inflation will rise above 10% in 2015, and citizens will actively seek opportunities to lop off the head of Russia’s Dear Leader.

We anticipate that asset quality in the financial system will deteriorate given the weaker ruble; restricted access of key areas of the economy to international capital markets due to sanctions; and economic recession in 2015. Asset quality deterioration may not be immediately apparent in reported figures, however, due to temporary measures introduced by the CBR that allow Russian banks to apply more favorable exchange rates when valuing foreign-currency denominated assets and apply more flexible provisioning policies.

We project that the economy will expand by about 0.5% annually in 2015-2018 if Mr. Putin is corralled and successfully beheaded, well below the 2.4% of the previous four years. We see this muted projected growth partly as a legacy of a secular economic slowdown that had already begun before the recent developments in the Ukraine. It also reflects a lack of external financing due to the introduction of economic sanctions and the sharp decline in oil prices. Ruble depreciation will subdue GDP per capita in dollar terms, which we forecast at $8,600 in 2015. We also expect that declining domestic purchasing power as a result of exchange rate depreciation and rising inflation will likely hamper Russia's growth prospects.

Balance-of-payment pressures have hit the economy; Russia is experiencing a severe terms-of-trade shock (see "Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions," published Jan. 9, 2015). We nevertheless expect that Russia's current account will remain in surplus over 2015-2018 due to import compression (a consistent drop in import demand).

In our view, balance-of-payment pressures center on the financial account. Private-sector net capital outflows averaged $57 billion annually during 2009-2013; they increased to $152 billion in 2014. Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream.

We estimate Russia's gross external financing requirement for 2015 at close to 85% of current account receipts (CARs) plus usable reserves. We expect that some of this requirement will be accommodated by dollar sales by the CBR, potentially exerting additional downward pressure on CBR reserves. Our figure for CBR usable reserves deducts from the CBR's reported foreign currency reserves: Investments made by the CBR on behalf of the government; The CBR's foreign currency swaps; Funds received under repos with nonresidents; and
Accounts of domestic banks that are counted as reserves.

Various subjects interviewed in preparation of this report expressed the belief that their leader is ‘a dickhead’, and they wish he would depart for other lands with the funds he has purloined from the masses, never to be heard from again.  Unfortunately, the prospect of this appears unlikely.


The negative outlook reflects our view that Russia's monetary policy flexibility could diminish further, and that Mr. Putin may resort to a self-inflicted gunshot if an internal coup does not displace him first.


5e0V2a3's picture
5e0V2a3 (not verified) Jan 26, 2015 10:01 PM

Zero Hedgers, let's keep a close eye on Vlad in the coming weeks.  With all that's befallen him and Russia, I'm afraid he may try to hurt himself, and I know none of us would forgive ourselves if it happened on our watch.

Stay vigilant!!

WTFUD's picture


Make yourself a little more credible with an avatar like, BillyBob and not your NSA password. No fucker here is going to read a non-entity like you. You probably realise this but then again with the low self esteem you .gov whores have you might not.

While you're reading this your girlfriend's at home in a 3 way dildo session.

Rock On Roger's picture

Used to be amerikan patriot

nuke ISIS now's picture



Fuck you, you fucking douche bag fuck...take you propaganda and stick it up you vodka soaked ass


US Busted some of Russia's spies today, maybe US has some future actions coming against fucks like you who post propagada here...

nuke ISIS now's picture

what a suprise to get 10 downvotes from 10 degenerate vodka loving cocksuckers


fuck you

Max Steel's picture

hahaha what a turd you are . 

teslaberry's picture

russian debt to gdp is 15%. hahahah!!!


the west is investing heavily in personal surveillance , riot gas, and secret police for a reaussion. 


5e0V2a3's picture
5e0V2a3 (not verified) teslaberry Jan 27, 2015 12:15 AM

Vlad has rubles but wants dollars.

Can we exchange for him offline?

Urban Redneck's picture

Strange shit you find on the web...

"We created CurrencyFair because we believe that ordinary people, and businesses, should have access to the same great exchange rates for international currency transfers normally reserved only for banks and market professionals dealing in millions.

Three of us are expats, so we'd experienced first-hand what a blatant rip-off international money transfers could be; both in poor exchange rates and high international wire fees. As three of us are also ex-bankers (sorry, sorry, sorry!) we felt that we had the knowledge, the experience, and the network to come up with a better system. So that's exactly what we did with CurrencyFair!"

fel.temp.reparatio's picture

Actually, no. Russia's debt to GDP ratio isn't 15%. It's closer to 11%... :-)

erk's picture

Where are the links to the source of this Goldman Sachs data?


5e0V2a3's picture
5e0V2a3 (not verified) Jan 26, 2015 10:55 PM

Vlad asked that folks not slack off the Western Union care packages.

Stay on guard for Mother Russia!

Also, he said whoever the joker is that's sending him rubles instead of dollars to knock it off already.

Clowns on Acid's picture

Hey Goldman ... what about Greece !

Niall Of The Nine Hostages's picture

In other words Goldman are shorting Russia like there's no tomorrow, in the belief that Saudi dumping will deliver them Russia's oil and white slaves on a silver platter any day now. 

About time they actually lost money for a change. 

theyjustcantstop's picture

the s&p down-grading Russia is just part of their settlement with the doj.

their getting off easy, American tax-payers had to pay, (trillions going overseas in 2008-2009), because of their fraudulent ratings on Americas mortgage instruments.

russias capex, and lowering of cost to transfer gas, and oil, how much of that 400b. dollar deal with china is for capex, (pipe-lines), lower delivery cost, (cheap to transfer through pipe-lines, than tankers).

indias next, and there's plenty of countries joining the Eurasia economic union.

I know it's early, but what's the chances of Greece getting back into shipping in a big way.




SoDamnMad's picture

I have to watch Russia's propaganda Channel 1 each night and Putin and his circle of ministers haven't smiled in months and that look of confidence is GONE. Likewise when prime minister Medvedev meets the cabinet they all look like they want to be somewhere else (like even Venezuela).  "They've lost that lovin feeling, "

Grouchy-Bear's picture

I sit here in Russia and type this comment and everything around me is just fine...

I am planning to spend the summer in our Russian village and grow, turnips, beets and rutabagas. The price I pay for food staples has actually gone down, but that is definitely not what many want to hear, and most have no idea what the hell is happening in Russia, much less Ukraine, where we (America) are walking all around Kiev, like we own it. I know I have been there recently and the article that I posted on my website, was attacked by the TSA and DHS so bad that I was down for days. They finally hacked that article and destroyed half my data base to keep it off the air...

I am ex military and met several old pathetic lifers that I knew. Kiev is a wet dream for the US military...

Then I look at comments by some of the sickest commenters I know and they surf the net from site to site, lay their special love for all to read. I think we call that trolling and I know I call it, "Sick Fucks!"

People just do not get it...

I pay 20,000 rubles (about $300) a year for health insurance in Russia. I even get hospitalization with that. How about you? I get damn good healthcare and I have had six heart attacks, in America. I came to Russia to get a life and live a decent life. Nine years and I have not had another heart attack, I have great care and damn fine doctors. Doctors in Russia are almost all women and underpaid, but they care much more about you than money...

I go shopping and everyday is like Christmas, with the stores packed full of people buying and stocked to overflowing. Last weekend I went to Globus and it looked like pre-Christmas shopping going on. Ate a huge meal at Globus in their cafe and it cost 389 rubles ($6) for two people. Did I say huge meal?

Yes, the sanctions have hurt, but you want to know what hurts more?

The fact that so many people in the west and even right here on ZH, are allowed to play games and lie like a stripped ass ape and no one seems to care to find out the truth. We Americans are the ones allowing all this shit to happen to the world, for it is our elected government that is destroying good countries...

I have been to Libya before we killed it. Good country and the people were happy. Can't say that now...

I have been to Syria and it was (was) beautiful and prosperous...

I was in Iraq before it became a concrete walled society...

I live in a better society than I did! I use to live in America and now I live in Russia. I am freer and live a life that I lived 50 years ago in America. I can honestly say, "In Russia, I am not looked down upon because I am different, or a veteran, or have outside the box viewpoints. I am accepted and live a free, open, liberated, and uncensored existence, compared to when I lived in America..."

Fact: A better society is basically anywhere else in the world. If you traveled like I do, you would realize that almost anywhere is a better place than America. Not all countries, but most...

I would be dead if I had stayed in the US and I know this. If I stayed in the US, I would have to have lived on welfare and handouts, for I had finally worked myself to almost death. Six heart attacks was the proof of the pudding and I was not ever able to relax. It was get back to work or be fired...

I guess I could write a thousand things here, but I will just be attacked by trolls and such. No one will believe it anyway, for very few of you are sitting here in Russia and typing a comment like I am...

And no, I do not try to link to comments like so many wannabes do on ZH, I write about Russia because I really believe in Russia. I have experienced Russia by walking, jet, ship, car, and train. I drive a year 1999 - 310221 Volga and call her Sammy. Nothing beats a Volga and nothing beats traveling Russia by car. I have over 100,000 kilometers by car to prove my love of traveling Russia. My first car in Russia was a Model 2410 Volga, 1986 and yes I love the Volga...

It bothers me that my own country hates Russia so much that we lie and try to hurt the people of Russia. Just like we do to North Korea, Syria, Libya, Iraq, and many more...

I promise you that all is good here in Russia, but would be much better if America and Europe would quit trying to start a war and go away and suck their thumb in the corner...

I say, "Die with dignity, not disgrace!," as the western Empire sinks into the sunset...

Kyle Keeton of Windows to Russia...


Wahooo's picture

You're able to live cheaply in Russia I guess. What's your annual take-home pay?

Vincent Vega's picture

Refreshing to hear an insider's perspective, thank you.

fel.temp.reparatio's picture

Appreciate your insights and insider information GB... have a shot of Moskovskaya for the like-minded ZH'ers and be well.

Latina Lover's picture

Grouchy Bear, Do you still have a website, and if so, what is the URL?

Last of the Middle Class's picture

Goldman is going to talk about myths and realities?  Really?

gmak's picture

"Here. Buy these great Russian OilCo stocks. What? What squid tentacles?"