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Russian Oil Industry Could Begin Deteriorating in 2017

Russian Oil Industry Could Begin Deteriorating in 2017

So far, Russia has managed to maintain generous oil production despite OPEC’s persistent refusal to cut its own output.

“I will tell you when Russian companies are for sure going to decrease production – when oil costs $0,” Deputy Energy Minister Kirill Molodtsov said recently in Moscow.

The reason is that Russia, whose economy relies heavily on commodity exports, has been pumping oil at record rates to fight off a recession caused in large part by the steep decline in oil prices that have contributed to its first recession since 2009. Its economy also has suffered from Western sanctions imposed since 2014 because of Moscow’s involvement in the conflict in neighboring Ukraine.

Moscow’s annual budget also relies on oil production for half its revenues, so you can expect Russia to keep up record production through 2016, according to Lauren Goodrich, a senior Eurasia economic analyst at Stratfor Forecasting Inc. in Austin, Texas.

Related: Colombia’s Oil Dreams Fall Short

“Russia will maintain its current oil production levels within the bandwidth of 525 million to 533 million [metric] tons next year, as the federal government’s budget is set on such production levels,” Goodrich told Bloomberg in an email.

All that could change by 2017 unless Moscow goes through with a plan to reduce its export duty from 42 percent to 36 percent, Russian Energy Minister Alexander Novak said in an interview published Tuesday in the country’s daily business newspaper Kommersant.

The duty is now frozen at 42 percent, and Novak said there is concern within Russia’s oil industry that the freeze will continue beyond 2016, leading to “risks of output decline [in Russia] starting from 2017.”

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“If this decision [to cut the duty] … actually lasts for a year and the companies believe it, they will continue taking loans and invest, and this will allow them to keep output steady in 2017-18,” Novak said. “But if the companies now get a signal that this decision not to cut the oil export duty is for longer, they will not take loans and won’t make investments.”

This isn’t the first time Novak has warned of production declines in 2017. At the Gastech conference in London in October, he told potential foreign investors that Russia will need a cash infusion of about $500 billion to develop its Arctic shelf by 2050.

Novak said Russia needs such stimulus to develop new oilfields in the Russian Arctic, given Moscow’s tax plans. “Today we have some deposits that have become almost unprofitable under the existing tax regime,” he told the Russian broadcaster RT on the sidelines of the London conference. “It’s [in] Western Siberia, Krasnoyarsk region, the north of our country.”

Related: Saudi Arabia Continues to Ramp Up Oil Output in Face of Market Glut

He said a planned cut in the export tax is essential “to increase the efficiency of oil extraction in the places where it has [otherwise] become almost unprofitable.”

He said Russia has other oil fields where extraction requires new and more expensive technologies, and they need new foreign investment, as well as a favorable tax regime. “[W]e need [to] provide for the efficient extraction of hard-to-reach oil reserves on the shelves,” he said at the time. “This includes the Arctic shelf, the Caspian Sea shelf as well as the Black Sea shelf.”

By Andy Tully of Oilprice.com

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  • Amvet on December 28 2015 said:
    Why should we not buy Russian oil? Russia is an enemy only in the minds of the Pentagon and the New American Century Gang and both of these groups should be ignored since they are poison for America.
  • Secret AGENT on December 26 2015 said:
    You have to remember Russian oil is produced in Rubles. and with the trade sanctions dollars are of limited use to them. (thus the gold purchases, 70 tons last month). I think they are pumping like crazy to screw the Saudis who, because of low prices, ran a budget deficit of 20% this year. I had read that increasingly the Chinese are buying this production and so you don't get to choose weather to buy it or not.

    Its perhaps part of a larger plan to push the salafist chaos that is gripping Iraq and Syria south into the gulf while allying with Syria, Iraq, Iran, and perhaps the Taliban to create an arc of stability on their southern border. (stability seems to be their sole strategic goal in this area) In this they are probably supported by China (with cash) who also seeks stability in central asia for their silk road project and is desperate to keep the head chopping cannibal lunatics out of Xinjiang.

    To counter this the US has to work with its totally reliable partners in Saudi Arabia and Turkey. My money is on Russia because their motivation is stronger, their allies are better and they seem pretty well organized these days. Its probably time to make a deal with them as Kerry has been trying to do lately because their position is getting stronger in spite of what the WSJ says.
  • Philip on December 24 2015 said:
    The article is good. Lauren Goodrich is excellent. But one point is askew. It is Saudi that is ‘persuading’ the US to make war on Russia in the Ukraine and impose sanctions. House of Bush House of Saudi work together. Even though Obama is President it makes no difference. Saudi wants Russia out of the oil game. So is trying to bankrupt Russia through war and sanctions. Putin knows this is war of survival. So he has struck out in the ME in Syria. His airbase in Syria could reach Saudi if nec. It’s a high risk strategy but Putin is playing for the highest stakes since he first became President in 2000. He would rather bomb Saudi than see Russia go down. Russia is a democratic authoritarian state; Saudi is an absolute monarchy, very medieval power structure. Both are effectively at war thriogh proxies. The Saudi proxy is the US/NATO; the Russian is Iran/Syria/Hezbollah. The stakes are also ownership of world oil supplies and Islamic globalization through oil.
  • Leo Kobrinsky on December 23 2015 said:
    Lee, you said "Putin will find a way" - but he was supposed to fall apart by that Christmas. What has changed?
  • Lee James on December 22 2015 said:
    Has the world noticed that Russia has lots of weapons to finance? Putin has created a bogey man out of the U.S. The country is in a frenzy to counter U.S. encroachment world-wide, even it means crossing borders and deploying Russia's most advanced weapon systems like nuclear-missile submarines and the most advanced S-400 ground-to-air missiles.

    Putin will find a way to continue pumping the same amount of oil. We need to wonder if we want to buy that oil.

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