Depleting brownfields dampening outlook for Russian oil industry
The short-term outlook for Russian oil output looks positive, but in the longer term, rapid depletion of the existing oilfields may cause a considerable decrease in domestic production. To maintain desired production levels, Russia needs to take corresponding measures. First of all, the country has to develop and implement its own technologies instead of those unavailable because of Western sanctions.
In Russia, maintaining oil output levels in accordance with official plans for the next decade is likely to require redistribution of oil profits, considers Petroleum Economist. Currently, local producers are enjoying unprecedented oil prices measured in rubles, which make production extremely profitable. Oil deposits that earlier seemed economically unviable are becoming attractive given the current pricing environment.
In January-October 2018, Russia's average oil output amounted to 11,1 million bpd, while in October alone, production exceeded the previous historic maximum of 11,4 million bpd. In 2017, the figure totalled 11 million bpd, as Russia held its production back in accord with an agreement with OPEC. When oil producers agreed to soften the limitations in June 2018 to offset output losses in Venezuela, Iran, Mexico and Angola, Russia accelerated the launch of new projects and the development of the existing ones. As a result, the country's oil production not only reached pre-agreement levels but also exceeded them.
The growth is expected to continue into 2019. This year, Russia's oil output can reach 11,5 million bpd, primarily thanks to commissioning new fields, which have already received investment and will be brought online in any case. However, global market conditions can limit the increase, and permanent control over output may become a long-term reality for oil-producing countries.
Further outlook looks less optimistic: by 2030, production at Russia's brownfields is expected to decrease to 5 million bpd because of their rapid depletion. To maintain current output levels after 2020, Russia needs to take certain measures. Conventional greenfields' commissioning should offset declining production at brownfields. To reach this goal, it is necessary to intensify geological exploration, as there are very few undeveloped conventional reserves. It is also necessary to boost in-depth development of the conventional brownfields. Given an increasing proportion of hard-to-recover reserves, Russia will have to develop technologies and equipment for unconventional, hard-to-recover and offshore oil fields. All these areas are under sanctions, so Russia needs to accelerate the development of its own technologies. Besides, these projects are not viable under the current tax regime, so the development may require changes in taxation.
The final shape of Russia's oil taxation scheme and domestic market management in 2019 will to a large extent determine future investment activities of Russian oil companies, the corporate structure of the industry and export volumes of petroleum products, believes Petroleum Economist. The existing trends are likely to result in the industry's further consolidation in the form of vertically integrated state companies with growing administrative intervention of the state.