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Tuesday, December 6, 2016

Russia can beat the Soviet record oil production


Oil production in Russia in the next three years will not fall, as some experts think, on the contrary, will grow. Moreover, Russian oil companies can break the record of the Soviet Union. This optimistic forecast was given by experts of the American Bank Goldman Sachs. Even the Russian energy Ministry plans more modest. So who is right and how realistic are the forecasts of analysts?

By 2018, Russia will produce even more than in Soviet times. For three years production in the country will increase to 11.65 million barrels per day, while in Soviet times, the RSFSR at its peak in 1987 it reached only of 11.42 million barrels. This is the forecast of American Bank Goldman Sachs, according to Bloomberg.

“At current oil prices, the Russian oil companies are among the few who are able to implement the growth plans and dividend payouts”

According to the calculations of the American Bank, oil production in Russia will grow for three consecutive years. This year the average daily volume of Russian oil production will grow by 1.35% to to 11.21 million barrels (up from 11.06 million barrels in 2015). In 2017 – to 11.41 million barrels in 2018 to 11.65 million barrels. Thus, for three years oil production in Russia will grow by 5.3% or 590 thousand barrels per day.

Interestingly, more recently, other market participants predicted Russia’s decline in production in connection with falling of cost of oil and lack of investment in field development. So, in November 2015, the International energy Agency (IEA) said that Russia does not expect anything good in the oil market: its production will fall from 11 million barrels per day in 2014 to 10.5 million barrels per day by 2020. The main reason for this arabinose forecast IEA experts called the sanctions, which limited the access of Russian oil companies to Western financing and technologies, as well as reducing investment.

Apparently, the experts of the IEA too played in bad forecasts for Russia. In their reports traditionally, the prospects of the oil or gas industries of Russia look worse than it really is. And they clearly exaggerate the impact of sanctions on Russian industry, underestimating the ability of Russian technicians and possibilities of cooperation of Russia with China and other countries. The Russian oil industry has adapted to the new conditions. Started to bear the fruits of the work on import substitution technologies, and to search them in other countries. Similarly, with funding sources – West direction is changed to Asian.

Goldman Sachs forecast looks more realistic and more grounded. So, the main driver of growth of oil production, according to Goldman Sachs, will become the active development of new fields of Rosneft in Eastern Siberia. And dynamics of growth of production in these years may be even more, if you have two Russian companies, NOVATEK and Tatneft will begin more aggressively to increase production, experts of the Bank.

However, Russian oil companies were rather resistant to low world oil prices. Recently Brent exceeded $ 50 per barrel, although occasionally, as now, drops to $ 47 per barrel in January generally traded even at $ 27. However, the Russian deposits is able to generate profit with much lower oil prices. The cost of production of raw materials in Russia is only $ 10, what can not boast of many countries, including Venezuela, Canada, USA and Norway.

“We remain positive about the Russian oil industry. At current oil prices, the Russian oil companies are among the few who are able to implement the growth plans and dividend payments,” – said the head of the group of analysts Goldman Sachs Geydar Mamedov.

The Russian oilmen were helped by the weakening of the Russian currency seen in the first half of the year. The fall of the ruble not only compensated for the fall in black gold, but also provide cost reduction, increasing competitiveness, said in April the experts of Goldman Sachs.

Finally, Russian oil companies helps special system of taxation, reducing the tax burden with the decline in oil prices. This led to the fact that at a price of $ 40, the average free cash flow of Russian oil is around $ 8 per barrel against $ 6 at an oil price of $ 100, thought then to Goldman Sachs. This means that Russian oil companies are not in cramped conditions for the development of new fields.

That is the Russian oil industry was in good position in terms of themselves on the background of reduction in demand fight for market share (OPEC idea). It is not surprising that they are willing to increase production.

“The IEA forecast is close to reality: in the coming two years production in the country will increase,” agrees the Deputy Director of analytical Department of “Alpari” Anna Kokoreva.

First, Russian oil and gas companies interested in the growth of exports and increase profits, which will stimulate them to a new intelligence activities and increased oil production, she adds. So Rosneft needs to increase production to meet the growing demand for fuel from China. By 2018, the company will supply China with 15 million tons of oil. The company now plans to increase the number of commissioned wells in the fields of Yuganskneftegaz.

The money from Russian oil companies really exist. Only in 2016 is expected to increase investment in the oil industry in Russia is 15%. “This will allow companies at low prices to develop new fields and to come to grips with extraction of difficult oil,” – says Kokoreva.

And, of course, your contribution makes the tax system in Russia. In particular, for a number of complex fields in Russia, tax benefits. “The reduction in export duty would encourage companies to sell more abroad and, hence, more to produce,” says Kokorev.

Interestingly, the experts at Goldman Sachs are set up relative to the production of Russian oil even more optimistic than the Russian Ministry of energy. Our office is more modest and careful in the forecasts: in 2016, the daily production will increase to 10.85 to 10.9 million barrels. “However, even in this case, the increase to 11.65 million barrels per day in 2017-2018, it is possible, after all, is only a growth of 7%. Actual production should grow in the next two years on the average on 2,5–3%”, says Anna Kokoreva.

OPEC, incidentally, is also expected from Russia of falling oil production. In the report World Oil Outlook, published at the end of 2015, OPEC experts said that countries outside the cartel, in the medium term will not significantly increase oil production due to the lack of necessary investment volumes. That is, new fields will not be imposed, and the existing production will dwindle, which will lead to a decline in production in countries outside OPEC. However, in a number of countries, their prediction will be accurate, but that Russia can be in this list exception.

In particular, the continued reduction of oil production, analysts at Goldman Sachs expect in the United States. In 2017 it can be reduced in average by 370 thousand barrels per day compared with the year 2016, they say.

This year’s production is already falling due to shale oil. In August 2016, its production will fall by 99 thousand barrels compared with July – up to 4,553 million barrels per day. In the fourth quarter of 2016 oil production at such oil shale deposits of the United States as the Permian, Eagle Ford, Bakken and Niobrara, will fall by 760 thousand barrels per day (compared to the same period last year). And this while maintaining the number of drilling rigs at the same level. The cost of us shale oil ranges from 30 to 90 dollars per barrel, depending on fields vs 10 dollars from Russian oil.

Russia traditionally ranks among the world leaders in oil production. Volumes from the different participants in the market are slightly different. For example, according to OPEC, Russia in 2015 was extracted 10,11 million barrels a day, according to BP – of 10.98 million barrels per day (or 540,7 million tons per year). They recognize the leader of Saudi Arabia, which last year extracted of 10.19 or 12 million barrels per day, respectively, according to various estimates. Second place, OPEC gave Russia and the third United States from 9.43 million barrels a day. But BP’s second place has put the U.S., arguing that they produced 12.7 million barrels per day of 10.98 mln vs Russia (she’s in third place). In any case, it is incontrovertible that Russia is among the three largest oil producers in the world.

* Organization in respect of which the court accepted entered into legal force decision on liquidation or ban the activities on the grounds stipulated by the Federal law “On countering extremist activity”

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