?Russian oil output is falling and the risk is of even sharper declines in the future, according to Barclays Capital Research lead analyst Kevin Norrish.
“It is not so long ago that growth in Russian oil production was viewed as a major threat to OPEC and its ability to achieve its price targets—in case anyone has forgotten that was a price target of $22 to $28 per barrel for the OPEC basket,” Norrish says. “In the early part of this decade shipments of Russian oil were made to the U.S., as a symbol of how Russian output growth would help to reduce the dependence of oil-consuming nations on oil from the Middle East. In hindsight things look very different.
“Without the 3.8-million-barrel-per-day increase in Russian output growth since 2000, oil prices would be much higher than they are now. However, that dynamic is in the process of altering dramatically.”
Norrish says the newest data show Russian oil production has fallen year-to-year for every month, year to date, with the average decline now running at 90,000 barrels per day.
“The consensus is for Russian oil production to continue to fall modestly over the next few years as output from new projects, such as Sakhalin 2, Vankor, Salym and Uzhno-Kylchuyuskoye, help to offset declines elsewhere,” Norrish says.
“The risk is that the decline will be much larger than expected and will last for longer. Lack of clarity and security over ownership is acting to discourage the involvement of foreign capital—and perhaps more importantly, technical know-how—in Russia’s oil industry and this will be important given the difficult nature of some of its offshore projects.”
Another failure by the Russians is transportation, Norrish says.
“Plans to expand Russia’s state-owned pipeline network for oil have been continually delayed and there appears little incentive for Gazprom to speed up investment,” Norrish says. “Perhaps the most important constraint however is the tax burden.”
He says the Russian government has made what he calls cosmetic changes to the oil-extraction tax and provided for tax holidays for new projects in frontier energy regions.
“However these changes look minor when placed alongside the massive increase in export taxes over the past few years. Planned export duties for August will take the export duty on crude to $68 per barrel, a 25% increase from the June-July level,” Norrish says. “These taxation rates are especially difficult for existing fields in Western Siberia and for small independent producers where output is already declining and require significant capital expenditure to arrest them. An acceleration in these decline rates could more than offset new production and result in further steep declines in Russian oil production well into the next decade.”
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