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Why Goldman Sachs Remains Bullish On Russian Oil

Russian Siberia Oil

A deeply troubled global oil industry is cutting production but Russians are defying the trend. Goldman Sachs has forecast Russian crude production to rise to 11.7 million barrels per day (b/d) in 2018, which is an increase of almost 600,000 b/d from 2015.

“We remain positive on Russian oil industry production,” Goldman analysts led by Geydar Mamedov said. “At current oil prices, Russian oils are among the few global majors that can maintain their growth plans and dividends,” reports World Oil.

Goldman believes that the largest Russian producer Rosneft, which produces more than a third of the nation’s output, will be a major contributor to the increase in production. However, Rosneft’s output has been declining steadily and its current production is 3 percent below the peak achieved in late 2013. The giant Vankor field, which had boosted Rosneft’s production, has also declined by around 5 percent, from the highs of 447,000 b/d in the third quarter of 2015.

Goldman believes that new projects in Suzun, Tagul, Yurubcheno-Tokhomskoye and Messoyakha will be the major driver of growth. It expects oil from these new projects to push up overall output from 470,000 b/d in 2015 to 850,000 b/d in 2018, reports Bloomberg. However, the current available pipeline capacity is not adequate to transport the oil from the producers to the export network. So, new projects need to be matched by an expansion in the pipeline network.

Considering these challenges, the International Energy Agency expects Russian production to decline to 10.94 million b/d from 11.06 million b/d in 2016. Related: Exxon Misses Estimates By A Mile, Plunges To Two-Month Lows

As most of the news coming out of Russia is difficult to verify, it’s hard to confidently say which one of the two scenarios will play out, however, the existing challenges faced by Russia point to a drop in production, rather than an uptick. Still, thanks to the low cost of production, Russian oil producers will produce free cash flow as long as oil prices remain above $10 a barrel, says Goldman.

It’s worth noting, at the same time, that Russian ministers have been quoted on various occasions saying that continued low oil prices will lead to a drop in Russian oil production. Back in February, Energy Minister Alexander Novak presented a scenario of low oil prices, where Russian oil production was likely to drop by 14 percent by 2020. Similarly, Maxim Oreshkin, deputy Finance Minister of Russia said back in January that low oil prices may lead to faster closures of a few oil production facilities.

As Russia depends mainly on oil revenues, prices will have to remain supportive if it is to achieve any uptick in oil production. The country is taking steps to ensure this by introducing a profit-based tax system for the oil companies, which is expected to increase both government revenues and oil output by 2018, according to documents seen by Reuters and industry sources. Only time will tell how much this helps in actual production. Related: Forget Inventories – Drilling Cutbacks Will Lead To Much Higher Oil Prices

Nevertheless, Russia’s energy ministry is not as positive as Goldman on increasing production. Their estimates of an increase of 120,000 b/d in 2016 and 100,000 b/d in 2017 are lower than Goldman’s.

For the first half of the year, Russia’s oil production was up 180,000 b/d compared to last year, during the same period, however, the trend is downward, with output in June down by 80,000 b/d compared to January.

Only time will tell if Russia will manage to achieve a new production record in the next three years, especially if the global glut persists.

By Rakesh Upadhyay for Oilprice.com

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