Russia may face difficulties with replacing oil reserves
This year, Russia’s new confirmed oil and gas condensate reserves are expected to be well below the country’s output. Moreover, the development of many new oilfields won’t be profitable if oil prices remain below $50 per barrel, as they are difficult to reach and require expensive supporting infrastructure.
Russia predicts a decline in oil reserves replacement, says Upstream adding that reduced investments into exploration, ailing demand and worsening operating conditions may trigger even faster fall than anticipated. According to the latest forecast of Russia’s Ministry of Natural Resources and Environment, national oil companies may cut spending on appraisal and exploration by 20% to 250 billion rubles ($3,2 billion) amid low demand and output cuts under the OPEC+ deal. Crude producers are expected to report a total of 400 million tonnes of new recoverable oil and condensate reserves, while in 2019, the figure amounted to 585 million tonnes. If the forecast comes true, it will be the first time in the last two decades that Russian oil producers discover less then produce.
Industry analysts in Moscow consider that most of the reserves reported by oil producers may not be commercialised if oil prices remain below $50 per barrel, as the majority of new reserves are difficult to reach. Some of them are located in unconventional shallow or deep layers at already developed tracks, the other part — in remote Arctic regions with no supporting infrastructure. Arctic projects require significant investment and tax concessions to move forward. In the first half of 2020, Russian producers announced 11 discoveries of conventional oil in traditional sandstone reservoirs in existing provinces, which were estimated at modest 30 million tonnes (220 million barrels), according to Mikhail Krutikhin from Moscow-based Rusenergy consultancy.
Russia’s adherence to global efforts to stabilise the oil market is expected to result in a 10% decline in the country’s oil and condensate production year on year. As a result, the output may fall to 510 million tonnes (10,3 million bpd). As for oil exports, Moscow’s agency CDU TEK said last week that Russian supplies to international markets declined by 19% to 19,3 million tonnes (141 million barrels) in October compared to the same month of 2019.
However, the Kremlin will continue to increase the tax burden on oil producers despite the pessimistic outlook, believes Krutikhin, as Moscow needs to bankroll its large social obligations. He assumes that Russia’s annual oil and condensate production may fall to 310 million tonnes (2,3 billion barrels) much earlier than in 2035 when it was forecasted by the Ministry of Energy.
At the same time, the Ministry expects Russian gas production to grow from 690 billion cubic metres expected in 2020 to 1 trillion cubic metres by 2035 thanks to the launch of major liquefied natural gas projects operated by Novatek on the Yamal and Gyda Peninsulas.