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OPEC Cuts Send Russia’s Oil Heartland Into Decline

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Western Siberia is to Russia what the Permian is to the U.S. Well, kind of. Kind of in a sense that it’s one of the longest-producing oil regions and there’s still a lot of oil in it. Yet, thanks to the production cut deal with OPEC, Russian companies have had additional motivation to move to new territories in the east and the north, where taxes are lower.

In Russia, the older the fields, the higher the taxes operators have to pay. Now that the country has pledged to continue cutting 300,000 bpd for another nine months, the most obvious choices for the cut are the mature Western Siberian fields. In the first quarter of 2017, for example, output at Rosneft’s Yugansk field fell by 4.2 percent, Bloomberg reported.

Production at other Western Siberian fields is set for a decline as well, with the daily output rate from lower-tax deposits in the Caspian Sea, Eastern Siberia, and the North seen to rise to 866,000 bpd by the end of the year, or 74 percent on the year. The shift away from mature fields to new ones will continue over the medium term, according to BofA analyst Karen Kostanian, as overall Russian output grows. No wonder, as tax relief on new projects sometimes reaches 90 percent. Related: You Didn’t Hear About It, But Every Oil Pro Is Watching This Gov’t Decision

Lukoil’s output from the Filanovsky field in the Caspian, for instance, is taxed at 15 percent at a price per barrel of US$50. The average for mature fields is 58.1 percent, in a combination of mineral resource tax and export duty.

And this is not the end of it: in 2018, the Kremlin will test a new tax regime for the oil industry as it seeks to maintain production growth and the respective revenues, contributing a solid chunk of federal budget revenues. The new regime, Deputy Energy Minister Alexei Texler told Reuters, will first be introduced for a selection of 21 fields with a combined output of 300,000 bpd for a period of five years.

In case the government is happy with the results from the test, the new regime would be expanded to the whole industry. Hopes are for a substantial increase in output thanks to the new tax regime: up to 20 percent over the five-year period. These hopes seem to be limited to the Energy Ministry, however, the Finance Ministry worries that the new regime will make it harder to control the flow of tax money. The treasury is also against combining the new regime with already existing tax incentives for the industry.

So, the move away from what Bloomberg calls the oil heartland of the world’s top producer is all but inevitable. It will come at a cost for the state coffers of some US$25 a barrel of Western Siberian oil, or US$2.7 billion annually, according to a Renaissance Capital analyst, but the cost will be worth it. The cost would increase, too, if the current output cut arrangement with OPEC fails to push up prices, which for now is exactly what we are seeing, while the ramp-up in the U.S. oil heartland continues.

By Irina Slav for Oilprice.com

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  • Alex on June 05 2017 said:
    "Russia's Oil Heartland Declines" - bullshit: week ago I was in Western Siberia. Production is in full swing with no sign of decline

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