Russian oil production resurgence

By Stuart Elliott

November 5, 2009 - In 1999, Russian oil production just about topped 6 million b/d as the country struggled to recover from its Soviet-era output highs. The country was also only just emerging from its worst ever financial crisis the year before, and the Russian government under then President Boris Yeltsin was considering selling off major stakes in the state-owned energy companies Gazprom and Rosneft.

What a difference ten years can make. By October 2009, Russia's oil production exceeded 10 million b/d for the first time in the post-Soviet Union era. (See related story: Russia's October oil output hits record 10 million barrels per day)

Russia's growing predominance as the world's leading oil producer has been given a major fillip by OPEC's decision late last year, in the face of plunging oil demand, to remove 4.2 million b/d of oversupply from world markets. Saudi Arabia's share of that cut was around 1.3 million b/d.

2009 has seen a welcome resurgence in Russian oil production after 2008 witnessed the first decline in output since the lowly days of 1999. Analysts and market observers then feared the significant growth of the previous decade was about to end, and the decline in production from the mature fields of Western Siberia would trigger an overall drop in the years to come.

Oil output fell by about 1% year on year in every month of 2008 and in the first two months of 2009. Overall 2008 oil production fell 0.7% to 488.105 million mt--the first annual production decline in 10 years.

Analysts, in the first quarter of 2009, were adamant the output decline would continue over the year, and even the government predicted a continuing fall in production.

In March, Russian Prime Minister Vladimir Putin himself forecast Russian crude output would drop 1.1% to 482 million mt (9.64 million b/d) in 2009.

The crude output forecast was, according to the prime minister's office, based on "insufficient volumes of financial resources to maintain production from old depleted fields, mainly in Western Siberia, and to develop new fields in East Siberia and the Timan-Pechora oil province."

Since then, though, Russian oil producers have managed to increase production thanks to the ruble's depreciation against both the dollar and euro and lower oil export duties.

In addition, companies have brought online new fields, that have more than compensated for the falling production from the more mature fields in Western Siberia.

One massive injection of oil came in August from the country's biggest oil producer, Rosneft, launching its giant Vankor field. The company plans to increase output from the field to 220,000 b/d by the end of the year from the current 130,000 b/d.

In addition, Lukoil brought production at its new field, Yuzhno-Khylchuyu, to its planned peak output of 7.5 million mt/year, while TNK-BP, thanks to its Uvat project launch early in 2009, continued to see growth in crude output.

Analysts, however, remain uncertain as to whether Russia can sustain its output growth. Despite some bullish forecasts, some of which see Russian production increasing to around 13 million b/d in the future, most industry observers see 10 million b/d as the country's production plateau.

In a recent report, analysts at Bernstein Research said output would begin to stagnate next year and then tail off as mature fields lose production capacity.

With traditional oil producing regions on the decline, Russia is looking to new, more remote and difficult to exploit areas, particularly in Eastern Siberia.

However, companies are looking for beneficial tax regimes there in order to stimulate activity.

Russian Prime Minister Vladimir Putin approved in July the decision to introduce a zero rate export duty for East Siberian crude to stimulate the development of the remote oil province. But it has been unclear when it will come into force and how long it will last.

"There is no clarity if the planned zero rate for export duty for East Siberian crude will last for three or five years. Without that understanding it is difficult for us to take investment decisions," Peter O'Brien, vice president of Russian oil major Rosneft, said October 21.

He urged the government to clarify its tax policy plans for East Siberia as the company needs to take urgently investment decisions for new fields in the region.

Russian Energy Minister Sergei Shmatko said October 26 the zero rate export duty for East Siberian crude is likely to last a minimum of five to seven years.

Shmatko said it should take five to seven years for companies to recover costs at new fields in East Siberia, and therefore the zero rate should be set in line with this time frame.

"Based on such logic... [the zero rate export duty] should be for a minimum of five to seven years," he said.

The timing on the export duty is still uncertain, however, as Shmatko's proposed time frame has yet to receive formal approval from Russia's government.

OPEC cooperation

Another important factor in Russian crude output growth is whether it will formalize its relations with the oil exporting cartel, OPEC. For a number of years, Russia has hinted it could support OPEC's actions on balancing the crude supply market.

Towards the end of 2008, when oil prices plummeted from all-time highs, OPEC formally requested that non-OPEC producers--specifically Russia, Norway and Mexico--cut output to boost prices.

But despite rhetoric from senior Russian officials, and claims from major producers such as Lukoil that helping OPEC would be beneficial for everyone, Russia made no pledge to help OPEC out.

At the end of October, OPEC invited Russia to take part in the next OPEC meeting, which is due to take place in Angola in December. Russia is to send a delegation to take part in the meeting, energy minister Shmatko said, adding that Russia remained "interested in cooperation with OPEC."

Shmatko also reiterated that Russia expects to hold a join seminar with OPEC before the end of this year in Moscow to discuss greater cooperation. "We are to discuss available steps for cooperation, in particular in the exchange of information and analyses of market scenarios and preparing specialists," he said.

Speaking after the most recent OPEC meeting in September, the group's secretary-general Abdalla el-Badri refrained from criticizing Russia, saying OPEC could not interfere in Moscow's decisions, though he described the rise in Russian output as "disappointing."

Asked at that time whether OPEC would again request non-OPEC help to try to balance markets, Badri said that his visits to Russia in the past had failed to produce any concrete results, though the discussions would continue.