MOSCOW, August 16 (RIA Novosti commentator Peter Lavelle). President Vladimir Putin and Minister of Economic Development and Trade German Gref are displeased with the large differential between Urals and Brent oil prices.
According to Gref, in an environment of high oil prices, the Russian economy becomes very sensitive to the Urals/Brent discount. Putin wants something to be done about this.
The Urals discount to Brent has been on the rise, reaching $5.9 per barrel at yesterday's close. The reason for the relative cheapness of Urals compared to Brent is attributed to the quality difference, and demand dynamics for certain crude blends. The Urals blend is considered to be of lower quality than Brent, having higher sulphur content and density.
To tighten the price spread, the authorities have a number of options available to them. First, not blending the various crude assortments produced within Russia (crude produced in the Volga region by companies like Tatneft and Bashneft is inferior in quality to that produced in Siberia, particularly by Yukos and Sibneft). This is the technical solution to this problem, though with a high price tag.
Alternatively, a quality bank, long discussed by the authorities, could be established. Producers of heavier crude could be made to compensate producers of higher-quality crude for the loss in value when blending their oil flows in the Transneft system. In theory, establishing a quality bank is the ideal solution, but intensely political. The introduction of a quality bank could only become possible if the government were to establish differentiated mineral extraction tax.
