Russia’s oil production is expected to show growth until 2020 even after the prolonged production cut agreement reached with OPEC is taken into consideration. Mature fields, where decline rates have been successfully kept relatively low last year, significant greenfield developments, and soon to be put on stream sanctioned projects are all contributing to sustainable production levels in the country in the medium-term. However, volumes from discoveries are needed to minimize the production decline after 2020. While Russia’s discovered oil resources are significant, these will take time and substantial investments to develop. This article assesses the status and outlook for Russia’s E&P, illustrated by the three key drivers: production, exploration success and spending.
Figure 1 shows the total oil (crude and condensate) production for Russia from 2010 to 2025, split by life cycle type. Among the producing types, old legacy fields that have produced more than 50% of their original reserves represent the mature asset base category, other fields that are producing at plateau or already started to decline are grouped under brownfield, and greenfield shows production volumes from the fields that are still in the ramp-up phase or have just recently reached plateau. Last year, oil production in Russia stood at 10.96 million bbl/d with the Q4 monthly production hitting a record high of ~11.2 milion bbl/d.
In November 2016, Russia reached an agreement with OPEC to cut production by 300 thousand bbl/d from its highest level achieved in October. The agreement has recently been prolonged by an additional 9 months until March 2018. Therefore, we now expect Russian production to average 11 million bbl/d in 2017 and around 11.12 million bbl/d in 2018, which still represents some growth year-over-year. We estimate that mostly big mature fields are affected by the production cut, as decreasing output on legacy fields should be relatively easy for the operators.
Overall, currently producing and sanctioned fields are enough to sustain production levels at 11 million bbl/d and above, at least until 2021. In the long term, we see the need for discoveries to be actively developed to minimize the decline rate in the country. However, total oil production is still likely to decline towards 2025. Mature and brownfield volumes account for 75% of the total production forecast in 2020, and around 67% in 2025, with the largest contributions from Rosneft’s mature oil fields: North Priobskoye, Vankorskoye and Samotlor. In 2017-2018, we expect the start-up of important projects such as Yurubcheno-Tokhomskoe, Vladimir Filanovsky and Novoport Phase 2, and Roman Trebs and Anatoliy Titov. Imilorskoye, Kuyumba and Savostyanov are among the largest discoveries that are expected to come on stream in the future.
Figure 2 shows the discovered oil volumes in Russia from 2005 to 2016.The vast majority of discovered resources are still unsanctioned, as the time from discovery to regulatory approval and final investment decision in Russia is longer than average. Remote location, lack of required technologies, and thus high development costs are the key factors affecting the time from discovery to commercial development.
The period from 2009 to 2012 has been the most successful one for the country as discovered oil volumes stood at around 1.6 billion barrels per year on average. Notable fields discovered in this period include Savostyanov, East Lambeyshorskoye, Lisovskoye, Sanarskoye, and Velikoe. Following a disappointing exploration year in 2013, the Universitetskaya field added almost 1 billion bbl to the discovered oil volumes in 2014. Last year, Gazprom Neft made a significant discovery in the West Chatylkinskoye license area, adding around 240 million bbl in oil reserves. In April 2016, Rosneft announced the discovery of the Nertsetinskoye field in the Timano-Pechora basin.
Figure 3 shows the total spending on oil fields in Russia from 2010 to 2025.Total expenditures have been continuously increasing since 2010 until 2013, flattening out at around $80 billion in 2014, before decreasing by almost 30% in 2015 and an additional 6% last year. The fall in the oil price has had an effect on the devaluation of the Ruble, and thus spending in dollar terms has fallen substantially. The investments in Ruble terms have remained high even in the periods of very low oil price since most of the cost in Russia is spent locally. Capital investments fell around 10% last year from $32 billion to $29 billion but are estimated to start growing again this year, following the expected recovery in the oil price and the exchange rate.
Total spending is currently forecasted to reach more than $70 billion by 2020 and over $80 billion by 2025. The main drivers behind the growth in capital expenditure post 2017 are investments in projects currently under development as well as not yet sanctioned discoveries. Greenfield projects with significant forecasted investments until 2020 include Rosneft-operated Russkoye and Tagulskoye fields, followed by Messoyakha West and Kuyumba, projects jointly developed with Gazprom Neft.
Russian oil production has been steadily growing since 2008 reaching record high levels at the end of 2016. This year, even with the prolonged production cut agreed with OPEC, Russia is estimated to slightly increase output year-over-year. The growth trend is also expected to be maintained at least until 2020. In the long term, however, developing discovered resources is vital to support supply. Around 11 billion bbl of oil resources have been discovered in Russia in the past ten years with 70% of the projects still in the pipeline to be sanctioned. It will take time to develop Russia’s vast resources, with some uncertainty surrounding both the timing and the commerciality of projects. Significant investments are also required to bring these resources on stream.
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