Russia Says Its Oil Output May Have Peaked

Russia's production of crude oil and gas condensate may have peaked in 2019 at a level that it will never equal or surpass again, according to a draft document prepared by the energy ministry. Energy Intelligence obtained a copy of the document, which is a road map of sorts for development of the country's oil industry through 2035. • Base-case projections show output of crude and condensate falling to 10.71 million barrels per day this year from 11.25 million b/d in 2019. • Volumes would decline to 10.45 million b/d in 2023 and then start rising again to 11.08 million b/d in 2028, before starting to fall again and shrinking to 9.45 million b/d by 2035. • However, under alternative "favorable" and "moderately favorable" scenarios that assume a lower tax burden for the industry, production could exceed the 2019 level in 2022 and 2025, respectively. Taxes Are Key Factor The draft document says "realization of Russia's [production] potential will be determined primarily by fiscal conditions and to a much lesser extent by macroeconomic conditions." That's because Russia's existing fields are in decline and development of new fields to maintain higher levels of production faces challenges such as smaller reserve sizes, remote and difficult locations and deeper reservoirs. A lower tax burden would help to offset the additional cost of developing such resources, including the construction of new infrastructure. An inventory exercise that covered about 60% of Russia's technically recoverable resources in 2019 indicated that only 36%-64% of them could be developed cost-effectively (IOD Jan.28'21). Required Capital Spending The energy ministry document said additional stimulus measures would be needed to develop sufficient new resources to meet the targets of Russia's previously approved Energy Strategy, which envisaged output of 11.13 million-11.23 million b/d through 2035. At a recent meeting in the Kremlin, President Vladimir Putin promised Russian business leaders tax breaks in exchange for increased investment. According to the draft road map, the base-case scenario would require capital investment in oil development (excluding gas condensate) of 1.3 trillion rubles ($17 billion) annually in 2021-25, the same level as in 2019. But spending would rise to 1.65 trillion rubles a year over the same period under the favorable scenario. Cooperation With Opec Russia is currently subject to production constraints under the Opec-plus agreement, which is set to expire at the end of April 2022. The energy ministry document says Russia will continue active cooperation with Opec to balance supply and demand in the global market but it does not seek to quantify any future production cuts beyond the current pact. It also points out that Russia pays a price for its participation in production cuts in the form of ceding market share to countries that do not participate in such arrangements. Additionally, Russian companies could face additional costs to bring wells back on line after they have been shut in, and in some cases production from such wells could be lost forever. The document pegs prices for Russia's Urals crude blend in a range of $45-$67/bbl in 2025, $45-$77 in 2030 and $45-$80 in 2035. External Challenges The draft road map also outlines external challenges to the Russian oil industry, including the risk of global oil demand peaking before 2030-35, as well as the possibility of a protracted decline in demand until 2023-24 because of the coronavirus pandemic. The Russian oil industry also faces pressure from policies adopted by oil-importing countries to reduce their emissions of greenhouse gases and promote a transition to low- and zero-carbon energy. The document says for example that the EU's proposed carbon border tax would result in losses of €1.4 billion ($1.7 billion) a year for Russian oil exporters. It also notes that big, long-term projects to establish new production centers in areas such as East Siberia and the Arctic offshore are particularly vulnerable to risks such as oil price volatility and an early peak in global oil demand. The document does not specifically mention Rosneft's massive Vostok Oil project to produce more than 2 million b/d by 2030 in the Russian Arctic onshore (IOD Feb.12'21). However, it says that rapid monetization of Russia's oil resources is the best response to the various challenges. Nelli Sharushkina, Moscow