Russian E&P Market – Short-term Slow Down, Long-term Recovery

May 5, 2014

Publication:       PESGB

Author:              Olga Kerimova, Analyst, Rystad Energy

While Russia remains an important E&P player in the global market (still dominating in terms of light oil production), its production growth is slowing down with North America’s unconventionals taking center stage. Production is expected to recover somewhat in the long-term, given sufficient investments both in developing new discoveries and undiscovered resources, in particular offshore gas and onshore tight oil. So what are the production levels and how are the key players going to perform?

Russia’s political history is mirrored in its oil and gas production profile with distinct periods of growth and decline. Production increased strongly at an average annual rate of around 10% during the Soviet era, peaking at ~21 million boe/d in 1988/1989. Following the dissolution of the Soviet Union, Russia entered its second growth phase in the late 90s. Given the current price assumptions, production is expected to level out in the short-term, the decline from producing mature fields (e.g. Gazprom’s Yamburgskoye, Zapolyarnoye, Urengoyskoye) offset by fields that will come under development (e.g. SeverEnergia fields) as well as new discoveries (such as Rosneft’s Novo-Urengoyskoye). Future production growth is expected to come from undiscovered resource potential, mainly from offshore gas resources, with some contribution from tight oil from the Bazhenov and Achimov formations (not expected before 2025) as seen in Figure 2. These formations are geologically complex and expensive to develop even under the recent tax incentive legislation. Future Russia production growth is hence somewhat uncertain; as the production from conventional mature fields making up most of the volumes starts to decline, it may take time for the tight oil resources to be developed.

 

Until tight oil development becomes economical, virtually all of Russia’s production comes from conventional resources, with the conventional volumes placing Russia as the top producing country both historically and in the future. However, the growing interest in unconventionals, in particular in North America, over the last decade has changed the global E&P landscape. United States has taken the lead in terms of total oil and gas production, aided by the strong growth in unconventional production, and specifically shale gas. Looking forward, production from both tight oil and shale gas formations is expected to more than make up for the lower conventional production
in the US, with total production expected to reach almost 30 million boe/d around 2020, while Russia’s production is already flattening out at around 22 million boe/d.


Figure 3 shows the contribution to production volumes from top gas-producing companies in Russia. In terms of produced gas volumes, the E&P market is dominated by the state giant, Gazprom. However, Gazprom’s share in the market is expected to decline over time while both state-controlled Rosneft and independent Novatek show increasing trends in gas production going forward. Moreover, while Rosneft’s liquids production is expected to start declining as the company’s strategy is directed to developing its gas resources, Gazprom’s liquids production is growing in the short to medium term, with e.g. Prirazlomnoye starting commercial production in late December 2013.


Historically, most of the E&P spending in Russia has been directed to onshore development. The capital expenditure in 2013 was around $50 billion for onshore fields (including well costs, infrastructure and exploration costs). In contrast, the 2013 offshore spending is estimated at around $7 billion. However, after 2025, the share of offshore investments is expected to grow significantly (Figure 4) with increasing focus on developing undiscovered offshore gas resources (Figure 1). Onshore investments past 2025 are expected to include the cost of developing tight oil resources. Capital and operating expenditures are expected to grow going forward, both to develop new fields and to reduce production decline on mature fields, which contribute most to Russia’s production. This growth in investments mirrors the production forecast and is needed to maintain production at its current levels going forward.