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Russian Oil Production Costs Hit 10-Year High

Copyright © 2021 Energy Intelligence Group

Russian crude oil production costs reached a 10-year high in the second quarter of 2021 as the country's tax burden increased significantly over the past decade and reserves became more complex to extract. According to data from the Federal State Statistics Service (Rosstat), crude production costs in April-June totaled 20,379 rubles per metric ton, which was almost three times higher than the 7,195 rubles/ton in the same period of 2012, a decade ago. In dollar terms, production costs grew by 18.4% over the period to $37.47 per barrel in second-quarter 2021. Energy Intelligence understands that Rosstat means the marginal cost of production for Russian oil companies, including both operational and capital costs, as well as taxes and other expenses. A Rosstat representative told Energy Intelligence that the production costs figures include all costs, including taxes, but failed to provide further details. The Rosstat data is just another illustration that the government will have to amend its tax system if it wants to see sustainable production (NC Apr.15'21). For comparison, Saudi Arabia's marginal cost stands at about $20/bbl, according to Energy Intelligence's Research and Advisory unit. The Rosstat statistics also show that the devaluation of the ruble that sent costs down starting from the end of 2014, stopped having such an effect already in 2018 (table). Experts point out that an increase in costs over the past 10 years mainly has to do with tax changes that the Russian oil industry faced over the period. Indeed, a financial report released last week by Rosneft shows that the state-controlled company's tax burden, excluding income tax, stood at 2.12 trillion rubles in 2020, which was three times higher than 645 billion rubles in 2012. Mineral extraction tax (MET) that Rosneft paid in 2020 amounted to 1.315 trillion rubles versus just 527 billion rubles in 2012. In 2019, when Rosneft's production was not limited by the Opec-plus agreements, MET payments were even higher at 2.185 trillion rubles. Other factors contributing to growing expenses include higher costs for materials and the ever-rising complexity of reserves as oil firms go further and deeper in order to compensate for production decline at traditional fields. The development of more complex reserves in frontier regions forces Russian companies to look for more expensive technologies, while efforts to sustain output in existing areas require further drilling costs and investments in enhanced oil recovery technologies. According to Rosstat data, crude production from reservoirs where artificial stimulation methods are applied grew almost tenfold from 43 million tons in 2012 to 380 million tons in 2020. Opec-Plus Factor Meanwhile, Russia's second-quarter production costs were more than double those in the same period of 2020. That is mainly explained by the Opec-plus production agreement that came into effect in May 2020, prompting oil firms to cut upstream investments. Starting from 2021, Russian producers have been increasing production in line with agreements between the Opec-plus member states, which translated in higher costs for April-June 2021. Rosneft, for example, said its capital expenditure grew by 25.9% in ruble terms and 15.1% in US dollars in the first half of the year, driven by investments at its Vostok Oil megaproject onshore Russian Arctic, and increased drilling by subsidiary Yuganskneftegas. Spending for Vostok jumped to 122 billion rubles in the first six months, up from 30 billion rubles in the same period of 2020. Yugansk capex grew to 117 billion rubles from 78 billion rubles in the first half of 2020. Yugansk operates the giant Priobskoye field that got tax breaks from the government in exchange for bigger investments (NC Feb.11'21). Lukoil has also said it decided to increase its planned capex for this year from some 450 billion rubles to 460 billion-490 billion rubles (NC Jun.3'21). Gazprom Neft and Tatneft have similar plans. Nadezhda Sladkova and Nelli Sharushkina, Moscow Russian Crude Oil Production Costs, 2012-21 2012 (rubles/ton) Exchange

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