22-12-2018

Outlook 2019: Russian oil output poised to jump post-OPEC cut deal

Russia’s crude production is poised to increase quickly once restrictions imposed by the OPEC-led oil output cut deal are lifted.

Before energy minister Alexander Novak signed up to cutting production along with the 24-member alliance, output increased by 445,000 b/d to a record high of 11.418 million b/d in October from May. The surge in output gave a glimpse of Russia’s potential to boost output rapidly.

“Russia’s rapid production growth from May through October demonstrated its ability to be a key swing producer, at a level below that of Saudi Arabia but as high as any other country in the world,” said S&P Global Platts Analytics’ Paul Sheldon.

Although it is unclear how long the production cap last, Russia’s potential to increase output may continue to surprise on the upside, at least in the near future. Oil producers had plans to launch full-scale production at a whole string of greenfield projects in 2019 before the OPEC deal required Russia to gradually cut up to 228,000 b/d in the first quarter.

For example, four of Rosneft’s fields were set to increase production by nearly 200,000 b/d by the end of the year. Other companies such as Gazprom Neft, Lukoil and Tatneft, also saw potential to boost liquids production from their high-margin fields. Those plans may now be delayed to 2020, also pushing back a projected peak in the country’s oil output.

Russia’s energy ministry forecasts output will peak at around 11.445 million b/d in 2021, before falling to possibly as low as 6.2 million b/d by 2035. The decline is expected due to the depletion of existing fields and a significant drop in the quality of newly discovered reserves.

The International Energy Agency noted a risk of decline after 2020 “if Russian companies are unable to secure the technology and financing necessary for the next generation of projects and the government fails to offer more extensive tax breaks to encourage investment.”

In contrast, Platts Analytics argues Russia will beat expectations.

“We take any doomsday scenarios with a grain of salt. Betting on any decline in Russian production has been a losing proposition since 1999,” said Sheldon.

He cites Russia’s ample reserves and the increasing technological capabilities of domestic companies as reasons to be optimistic. The eventual removal of sanctions and the emergence of Russian shale basins will also help boost growth “at some point down the road,” said Sheldon.

Platts Analytics forecasts output hovering between 11.3 million b/d and 11.4 million b/d between 2027 and 2040.

In the near term, actual production growth will depend on drilling rates, as most of the increases are likely to come from new high-margin wells. Intensive drilling has already helped to stabilize production at some major mature projects such as Rosneft’s Yuganskneftegaz, or Lukoil’s West Siberian fields where output has fallen over the previous several years.

Moreover, Russia’s energy ministry recently announced plans to ease taxation for West Siberia, the key oil province in Russia. The region has the highest level of oil taxation, which prevents nearly half of the reserves from being profitable, according to the ministry.

At the same time, the production growth seen in Russia over the past decade came mainly from other regions which enjoy significant tax breaks.

In January, Russia starts test implementation of the additional profit tax, or NDD as abbreviated in Russian, at a number of fields, including in West Siberia, to stimulate greater development of a number of oil reservoirs.

If Russia eases the oil taxation burden, which is currently one of the highest in the world on oil producers, the potential to increase crude production could be much greater than current forecasts.
Source: Platts

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