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.

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“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.”

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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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