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Russian oil ministry sees a collapse in output

Russia has repeatedly defied outsiders’ forecasts of imminent oil decline. Now the energy ministry is the one preaching doom

Oil production in Russia will inevitably decline over the next two decades, says the country’s energy ministry. The only question is by how much, and the answer leaves a lot of wiggle room. Output could ease off by just 1.2%, the ministry says – or by almost half.

In its worst-case scenario, the report says existing oilfields will be able to provide Russia with less than half of today’s production of about 10.7m barrels a day. At best, growth in production is only sustainable until 2020. After that, the report predicts production will contract from 1.2% to 46% depending on prices, taxation and whether sanctions over the Ukrainian conflict remain in place.

The ministry modelled four scenarios but not one of them points to production growth over the long-term. The projections factor in slowing demand from China and other Asian nations as their economies falter, as well as an increase in cheap supplies from Middle East countries.

Russia’s oil majors will be hit by a reduction in output of 39-61% depending on the increase in their tax burden and the depletion of existing fields, according to the report. Production growth is only expected for smaller producers such as Slavnet and RussNeft and for gas condensate, output of which is expected to surge by 37-74% by 2035.

The report, which was leaked to business daily Vedomosti on 9 March, assumes the Urals price will rebound to $80 a barrel by 2020 and $97.5/b by 2030. Several measures are proposed to support the oil sector to stem a production decline over the long term, such as shelf access for independents, a lighter tax regime, more support for small enterprises and a tax stimulus for heavy and tight oilproduction. Russia’s tight oil prospects, including the Bazhenov shale, are hugely prospective – though sanctions and the falling oil price have stalled development.

Needs must

The Ministry also suggests promoting the processing of high-sulphur and super-viscous heavy oil with the introduction of preferential rates of excise duties on fuel produced from those sources.

“The measures proposed to support the industry have been discussed by the authorities on a number of occasions before,” says Dmitry Loukashov, head of oil and gas research at VTB Capital. “However, we do not believe that any of them are going to be implemented in the short term, given the current tough macro environment and significant budget needs in the coming years.”

In 2015, Russia’s production of oil and gas condensate actually increased by 1.4% to a record 0.534bn tonnes (or 10.7m b/d). In December, the country’s energy minister, Alexander Novak, insisted Russia had no plans to reduce production despite clamour for a coordinated output cut to help prop up depressed prices.

Russia and Saudi Arabia, the world’s biggest producers, agreed in February to try to stabilise global oil prices by freezing production at January levels. In the same month, Russia produced nearly 10.9m b/d day, which was another post-Soviet record.

If Russia adheres to the deal to freeze output, it would be a major departure from its former policies. The only time Russia agreed to cooperate with OPEC on cutting production was in 2001, but it never delivered on its promise and raised exports instead.

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