Russia Revises Oil Sector Outlook

Russia says its crude production may have peaked in 2019, raising questions about how it will maximize the value of its reserves in the coming years. The Covid-19 pandemic has pushed forward peak demand for oil, which Russia concedes could happen before 2030-35, while mounting pressures from the energy transition will also take a toll on Russia's oil industry. Western sanctions present another challenge, but Russia could also make its oil sector more competitive by easing the tax burden on its producers. The draft of the Master Plan for the development of the Russian oil industry, a copy of which has been obtained by Energy Intelligence, says full recovery from the pandemic is not expected before 2023. It also says that under the base-case scenario, Russia's output of crude oil -- excluding gas condensate -- will drop to 9.47 million barrels per day this year from 10.41 million b/d in 2019. Production would rise to a maximum of 9.98 million in 2027 and then shrink, coming in at 8.2 million b/d in 2035. Expected growth of 60% in gas condensate production over the next 15 years won't be enough to push overall output past 2019 levels, when Russian crude oil and gas condensate output reached 11.25 million b/d. Combined crude and condensate output is seen rising to 11.08 million b/d in 2028 from 10.26 million b/d last year, then declining to 9.45 million b/d in 2035 (PIW Oct.2'20). Under the base case scenario, Brent prices are not expected to rise above $75/bbl until 2040. Higher production levels could be achieved under alternative "favorable" and "moderately favorable" scenarios, where oil market conditions are stronger. However, these scenarios assume a lower tax burden than the base-case, which expects a continuation of the current regime -- one of the toughest in the world, amounting to 60% of the sales price for oil. Neither scenario includes Russian Arctic Shelf volumes in calculations as the technologically and environmentally sensitive area requires an oil price of over $80 per barrel and is not expected to be developed before 2035. Russia's 2035 Energy Strategy, approved last year, puts crude and gas condensate production at around 11.13 million-11.23 million b/d through 2024 -- close to 2019 levels -- before dipping to 9.82 million-11.13 million b/d in 2024-35. This remains achievable in the "favorable" and "moderately favorable" scenarios in the latest draft plan, but only with fiscal reforms. It would require continued investment in exploration, development of small and medium-size fields, as well as so-called 'hard-to-recover reserves,' to increase recovery rates and to bring on stream new provinces. Such projects would require tax incentives, which Moscow has been hesitant to offer (PIW Feb.5'21). The base-case takes into consideration a 2019 reserves audit that covered about 60% of Russia's technically recoverable resources and indicated that only 36%-64% could be developed cost-effectively. Russia's recoverable reserves stood at 223 billion bbl of crude and 35 billion bbl of condensate on Jan. 1. The draft states there is no urgent market need for the development of the Arctic shelf in the next 15 years (PIW Jan.22'21). None of the scenarios include possible production cuts under the Opec-plus alliance beyond April 2022, when the current pact expires. But the draft says the aim is to continue joint market management efforts with the producer group in the next 15 years. This marks an evolution of Moscow's view of Opec-plus, which it previously saw as a short-term, situational arrangement. Expectations for lower volumes could support Moscow's case for participating in price-supportive production cuts, but Russia's peak demand concerns also could support a policy aimed at rapid monetization of reserves. Regardless, there has been a price for Russia's participation in Opec-plus. The document notes that 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. "Artificial restraint" of production could also result in ceding market share to competitors in the longer term. But gains from higher prices have outweighed losses. Inflows into the rainy day National Welfare Fund could reach $34 billion this year, while Fitch Ratings estimates that Opec-plus cuts in place since last May generated extra revenues of about $30 billion-$40 billion for Russian oil companies (PIW Feb.26'21).