September 1, 2015
Authors: Olga Kerimova, Analyst, and Theodora Batoudaki, Analyst, Rystad Energy
Publisher: PESGB Newsletter, August & September Edition
Russia’s hydrocarbon production is on a declining trend, which can only be altered when new projects come online, from 2017 and onwards, assuming a gradual recovery of oil prices. This article assesses the outlook for the Russian E&P industry, illustrated by three key drivers: production, exploration success and spending.
Figure 1 shows the total production for Russia, split by field and life cycle, from 2010 to 2025. Production levels increased from 20.5 million boe/d in 2010 to around 21.5 million boe/d in 2014 and are expected to remain at 20-21 million boe/d over the next decade. Producing fields account for over 90% of the total production forecast in 2020, with the largest, albeit declining, contributions from mature gas fields in the Yamalo-Nenetsk: Gazprom’s giant Zapolyarnoye, Yamburgskoye and Urengoyskoye. Another large Yamal gas field, Bovanenkovskoye, which came on-stream in 2013, may offset some of the decline in legacy production. After 2017, contributions from fields currently under development and unsanctioned fields are needed to maintain production. These include Rosneft’s Novo-Urengoyskoye, Novoportovskoye (Gazprom Neft), Vladimir Filanosky (Lukoil) and Russkoye (Rosneft) that are planned to be put into production in the next three years. There is, however, some uncertainty around the timing of new projects, dictated both by financial and logistical as well as political considerations. Earlier this year, Rosneft announced possible delays in the commissioning of the Russkoye field, pending an application for funding to the National Welfare Fund.
Figure 2 depicts the discovered resources in Russia from 2005 to 2014. The vast majority of discovered volumes are still in discovery stage, as the time from discovery to regulatory approval and final investment decision is longer than average due to high uncertainty. The most significant year in terms of discoveries was 2005, when over 3 billion boe of resources were discovered in the Gazprom-operated Urengoyskoye-Achimov field. However, only block 2, which contains 30% of these resources, is currently producing, while blocks 4 and 5 are still pending approval, and further delays are expected given that the joint venture agreement between Gazprom and Wintershall was called off in late 2014, largely due to recent sanctions. Similar exploration success as in 2005 was achieved five years later, when a discovery of about 2.5 billion boe was made by Gazprom in South Kirinskoye. The discovered resources would have been declining post 2010, if it wasn’t for the Rosneft-operated Universitetskaya field that adds about 2.3 billion boe to the discovered volumes. Despite the significance of Universitetskaya, there is high uncertainty around its development, driven by costly and challenging drilling in the Arctic as well as Exxon’s withdrawal from the project after the sanctions imposed on Russia.
Figure 3 displays total spending in Russia over the period 2010-2020. Investments (capex and exploration capex) are projected to increase over the next five years, reaching over $70 billion in 2020, following the spending trough in 2015-2016, which is driven both by the oil price drop as well as higher uncertainty due to sanctions. The main drivers behind the growth are investments in projects currently under development as well as not yet sanctioned discoveries. These include the first phase of the Chayandinskoye gas field in Yakutia as well as the West Messoyakhskoye field (Yamal). Additionally, in December 2013, the final investment decision was made on the South Tambeyskoye gas field, which will supply gas to the Yamal LNG project jointly owned by Novatek, Total and CNPC. Around 5 BUSD is forecasted to be invested in this field over the next five years. The operating costs (opex) are expected to remain around 70-80 BUSD per year, accounting for inflation, consistent with the production trend shown in Figure 1.
Over 20 billion boe in resources have been discovered in Russia in the past ten years. However, most of the projects have not yet been sanctioned. It will take time to develop Russia’s vast resources, with some uncertainty surrounding both the timing and the commerciality of projects. Together with economic considerations, including oil price developments, politics and logistics underlie the relatively high risk environment in which E&P companies operate, particularly in the strategically significant Yamalo-Nenetsk region in the Arctic.
Olga Kerimova, Analyst
Phone: +47 24 00 42 00
Theodora Batoudaki, Analyst
Phone: +47 24 00 42 00
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in the UK (London), USA (New York & Houston), Russia (Moscow), South America (Rio de Janeiro), Africa as well as South East Asia.