East Siberian oilfields are let off the Opec leash
Russia's remote eastern fields are ramping up as production shackles come off, but also to drive the growth that mature provinces can’t
Russia's icy east Siberian region looks set to further hot up as an oil production centre, boosting output both in the short term following the country's June agreement with Opec to relax production quotas; and in the more medium-term as its increasing output offsets declines in more mature basins.
Rosneft, Russia's largest producer with a 40% share of the nation's crude output, is kickstarting several new east Siberian fields, having postponed start-ups in the wake of the November 2016 Russia-Opec deal. The Kremlin-controlled producer admitted in August that it had been increasing output since late May in anticipation of a relaxation of the pact.
Rosneft alone has the capacity to increase output to 250,000 barrels a day above 2016 levels by the end of this year, according to Russian bank VTB Capital. London-based analyst Energy Aspects predicts a rise in Russian supply of 350,000 b/d between June and December of this year, with a further boost of an additional 250,000 b/d year-on-year next year compared to the 2018 average.
In October, Russia as a whole reported record monthly production of 11.356m b/d for September. Rosneft's output boost will contribute to overall Russian supply of 553m tonnes of oil in 2018-which would be an average of 11.1m b/d over the year as a whole-according to energy minister Alexander Novak.
Headline Russian crude export volumes could jump next year without any material change in barrels available to the market, cautions Ildar Daveletshin, senior oil and gas analyst at London-based bank Wood and Company. The lowering of export duties on crude exports, starting in 2019 and progressing toward full elimination in 2024, will see 400,000-600,00 b/d of so-called "grey refining" volumes-where crude is very lightly processed in Russian equivalents of the Chinese tea-kettle refineries and exported as diesel, when in reality it's closer to unrefined crude, to be eligible for lower taxes on refined products-turning up in the figures as crude exports, Davletshin says.
But additional crude export volumes, whether genuine new barrels or re-assigned grey products, aren't expected to make their way to Europe, nor to reverse the trend of reducing quality of the Urals crude stream. "Crude going to Europe is becoming more sour as volumes sent to China increase from not only east, but also west, Siberia. We are currently hearing reports of a deterioration in quality and some buyers not being pleased with this," says Mitch Jennings, a Moscow-based analyst for investment firm Sova Capital.
Crude is moving to China, based entirely on the price it is prepared to pay, says Jennings, despite some observers wanting to see the move as political, suggesting that the market will also pull any additional volumes east. "Talks of a special pipeline or different blend for a more sour-grade crude for Europe have gone quiet, notably after Rosneft took control over Bashneft. We expect to see more of the higher quality Siberian oil sent east, given the strong demand from China," he continues.
The only potential roadblock to the trend of more crude going east is transport capacity. Davetlin agrees that, assuming no bottlenecks, Europe can't expect more Russian volumes and that the deterioration in Urals quality is here to stay, if not become even higher in sulphur. But he sees the risk of a mismatch between increasing production wanting to move east and the pipeline capacity constructed to facilitate these volumes. This may require more barrels to be routed via Kazakhstan to China or even swaps where Russia delivers to central Asia in exchange for export volumes into the markets beyond.
Jennings is more sanguine about pipeline availability to move crude eastwards. For example, Russia's pipeline monopoly Transneft has already completed work on the Russian side to lift capacity in the Skovorodino-Mohe spur on the East Siberian-Pacific Ocean (Espo) pipeline, which delivers into the Chinese city of Daqing and beyond, from 20mn t/yr to 30mn t/yr (400,000 b/d to 600,000 b/d). Transneft has guided for the Chinese side to be completed next year so that pipeline can reach its nameplate capacity.
East Siberia ramping up while other more mature regions plateau or decline is a clearly identifiable medium-term trend. Rosneft estimates that crude production from its east Siberian and Russian-far-east projects will amount to 1.1m b/d by 2025 and will be achieved by investing RUB3 trillion ($45bn) in upstream projects. Nikolai Novikov, senior Russia research analyst at consultancy Wood Mackenzie, forecasts overall east Siberian liquids production to reach more than 1.3m b/d by 2027.
Siberia and northern Russia-focused producer Surgutneftegas also expects growth from its current 9m t/y (180,000 b/d), again driven by east Siberian expansion. The firm is the sole operator of the region's Talakan field, which is set to hit a peak of 140,000 b/d. In May, its chief executive Vladimir Bogdanov said that the company's future production in west Siberia will be flat, with all its output growth likely to come from east Siberia.
2021 output peak
Energy minister Novak also recognises the trend. He foresees Russian oil production peaking at 570m t/y-or 11.45m b/d, only slightly higher than the figure achieved September this year—in 2021, before rising costs and taxes drive down production. Almost half of current capacity, mainly in the west of the country, could be lost in less than two decades, Novak says, with production levels from existing projects expected to drop to 310M t/y (6.2m b/d) by 2035.
Without stimulating oil production, Novak says the federal budget risks losing RUB3.3 trillion ($46.2bn) in taxes and RUB1.3 trillion ($19.4bn) in investment beginning in 2022. "This is the inevitable result of increased production costs and excessively high taxes for west Siberian oil fields," he adds.
There's tension between his department, which wants to maximise oil recovery, and the finance ministry, which sees tax revenues from hydrocarbons as crucial for balancing the budget. Rosneft very publicly proclaims that it's the most taxed firm in Russia, but also lobbies hard for additional tax breaks—for example tying plans to increase production in its Arctic Trebs and Titov project to obtaining more favourable tax treatment.
Somewhat counter-intuitively, analysts agree that, despite being in more remote and hostile areas, east Siberian projects are unlikely to have significantly higher capex or opex costs going forward that will lift the overall Russian production cost base. On the capex side, the main additional burden is transport across longer distances; but much of this is either completed or will be over the next few years, and has been borne mainly by Transneft rather than producers themselves.
Any higher costs are also offset by east Siberia's more favourable tax regime. Jennings cites the example of Rosneft's giant Yurucheno-Tokhomskoye complex, which enjoys mineral extraction tax breaks and discounts on profit and property tax until 2020. He expects that Rosneft will push hard for extending and even increasing tax advantages in the region by citing the need to increase overall production.
Some fields, such as Talakan, benefit from being shallow, at 700-800 metres (2,300-2,600ft) deep, compared to some west Siberian fields at 3,000 metres down. Yurubcheno-Tokhomskoye, while deep, has such good flow rates that it doesn't even require assistance from pumps. In comparison, west Siberia has "run out of easy oil", says Davetlin, and some of the output there is now seeing 85-90% water content, ramping up opex costs.