Russian oil industry hits another peak

The country’s 2019 production reached a further post-Soviet high, marking another year Moscow fell short of cuts promised to its Opec partners, Petroleum Economist reports in its article Russian oil hits another peak.

Russia’s oil and gas condensate output totalled 560.2mn t in January-December 2019, or 11.25mn bl/d, according to data from the country’s energy ministry data, up from 555.8mn t (11.16mn bl/d) in 2018. December production totalled 47.63mn t (11.26mn bl/d), a 3.4pc month-on-month increase month, but a 1.7pc decline year-on-year.

Growth came largely on the back of increased contributions from a number of greenfield projects operated by national oil champion Rosneft, says Vasilii Tanurkov, director at Moscow-based ratings group Acra. These included the Yurubcheno-Tokhomskoye, Srednebotuobinskoye, Kuyumbinskoye and Taas-Yuryakh fields in eastern Siberia and Kondinskoye, Russkoye, and East-Messoyakhskoye in western Siberia.

Eastern Siberia—one of Russia’s less developed basins—has been a key supply growth driver over the past decade, since the launch of the Eastern Siberia-Pacific Ocean (Espo) pipeline in 2009. The western Siberian basin has been flowing since the 1960s and is now mostly mature, but operators have begun exploiting new fields in its remote north.

Rosneft’s 2019 output inched up by 0.6pc to 195.1mn mt (3.92mn bl/d). Other producers posting gains were Novatek, up by 1pc, Tatneft, up 0.9pc, and Gazprom Neft, up 0.3pc. Russia’s three production-sharing agreements (PSAs) also boosted yields by 5.4pc, on the back of growth at the ExxonMobil-led Sakhalin-1 project.

Russian exports were up by 3.3pc at 266mn t (5.34mn bl/d). Flows were curbed in April and May owing to a partial shutdown of Druzhba, the country’s main oil export pipeline, because of oil contamination. But this was more than offset by increased European shipments later in the year, as well as expanded exports to Asia-Pacific markets via Espo.

Conventionally, Russia has had a two-pronged strategy for growing production. On the one hand, it has targeted new fields in frontier areas like the Arctic and eastern Siberia. On the other, it has sought to manage decline at older deposits in western Siberia—a region that still accounts for around 60pc of national supply.

This changed when Russia began co-operating with Opec and other non-Opec producers to try to prop up oil prices. Last year, Russian oil firms intentionally scaled down output at brownfield sites to enable increases of more profitable greenfield production while still fulfilling Opec+ cut quotas, according to Tanurkov.

Russian gas output also set a post-Soviet record of 737.6bn m³ last year, up by 1.7pc year-on-year, according to the energy ministry. Novatek’s Yamal LNG terminal was able to make a full-year contribution after it reached its 16.5mn t/yr capacity at the end of 2018—a little over a year after its launch. State-controlled Gazprom’s Bovanenkovo field also ramped up to its third-stage capacity of 115bn m³/yr during the year.

Gazprom, the country’s top producer, saw its output edge up by 0.5pc last year to just over 500bn m³, marking its highest level since 2012. But the firm’s exports to countries outside the former Soviet Union fall by 1.3pc to 199.2bn m³, in part due to lower European demand, down by 1pc last year, as well as rising competition from LNG suppliers. 

Compliance

Opec+ efforts to bolster oil prices, which, barring brief spikes on geopolitical uncertainty, have stubbornly remained at around $60-65/bl, have been undermined by US shale oil companies and other producers not party to the Opec+ deal. But non-compliance within the group is another issue, with Russia a headline offender.

By far the largest non-Opec producer in the Opec+ group, it promised in late 2016 a 300,000bl/d reduction from an October 2016 baseline level of 11.247mn bl/d. Russia came close to meeting this goal in 2017, when it produced 10.98mn bl/d, missing its commitment by only just over 30,000bl/d. But output then rebounded to 11.16mn bl/d in 2018.

Under a revised deal, Russia then pledged to keep output 228,000 bl/d lower than a new October 2018 baseline of 11.42mn bl/d. Its commitment to this new quota was, though, more lacklustre. 

Russian authorities repeatedly insist they are doing all they can to enforce cuts, proffering various excuses. In early 2019 the energy ministry claimed that the harsh climate and geological conditions of many oil-producing regions made sharp reductions difficult to implement. It also cited its lack of control over output at PSA projects involving international partners such as ExxonMobil and Shell.

Russia more than fulfilled its quota between May and July, but not out of choice. It was forced to slash output in response to Druzhba’s closure, making its previous excuses sound slightly hollow. And, once the pipeline was back on stream, production spiked, more than compensating for the reductions.

Russia’s compliance has also been difficult to gauge, as the country measures its output in tonnes but the cuts quotas are agreed in barrels. The extent it is keeping its promises therefore depends on what barrel-to-tonne conversion rate is used.

Russia’s complaint that the inclusion of condensate in the cuts agreements makes it difficult to comply has some validity. Condensate output in Russia rises and falls with gas production, which is not subject to Opec+ restrictions. And producers cannot cut condensate flows without also lowering their gas output. Following negotiations for quotas for the first quarter of 2020. Russia agreed to deepen its crude production cuts to 300,000 bl/d below the October 2018 baseline, but condensate is now exempt. 

Russian outlook

Russian condensate output typically fluctuates at between 800,000 and 950,000bl/d, depending on season, according to a report by Vienna-based consultancy JBC Energy. And Russia forecasts growth this year on the back of the launch of the Power of Siberia gas pipeline in December, although JBC is sceptical, foreseeing lacklustre demand for Russian pipeline and LNG in an oversupplied 2020 global gas market.

Experts say the impact of the exclusion of condensate from production targets is difficult to predict. “It is totally unclear what the condensate exemption would mean for Russian liquids production in 2020,” Fitch Ratings analyst Dmitry Marinchenko tells Petroleum Economist. “It could remain broadly flat year-on-year despite the pledge to cut production

What is clear is that Russia’s continued co-operation with Opec is holding back considerable growth. “Without the restrictions, production could have exceeded 575mn t (11.55mn bl/d) in 2019 and could exceed 580mn t (11.65mn bl/d) in 2020,” says Acra. The ratings agency points to spare capacity at Taas-Yuryakh, Kuyumbinskoye, Tagulskoye, Lodochnoye and other Rosneft fields. Some wells could also be brought back on stream at brownfields, including those that receive lucrative tax breaks such as Samotlor and Priobskoye.

Fitch estimates that Russia could ramp up production by 200,000-300,000 bl/d if restrictions ended, although it could take several months to restart previously plugged wells to achieve this.

With the restrictions still in place, though, ACRA expects 2020 output at around 558mn t (11.2mn bl/d). The energy ministry has kept an open view, giving a forecast range of this year of 555-565mn t (11.15-11.35mn bl/d).

But it may be that the Opec+ producers’ efforts are in vain. “The market looks well supplied in 2020 because of growing production in the US, Brazil and Norway, and the committed cuts may thus be insufficient to fully absorb the surplus, but it is definitely better than nothing,” says Marinchenko. “Opec+ interventions should support average oil prices above $60/bl this year.”

Russia is in a good position to weather such conditions, given its low production costs—estimated by Fitch at $20-25/bl before tax. This makes Russian producers more resilient than their shale-focused counterparts in the US.

And, on a national level, Russia has a fiscal break-even oil price of $50/bl, whereas lead Opec member Saudi Arabia needs $80/bl oil to balance its budget, according to Fitch. Russia’s resilience gives it more leverage in quota negotiations.

The Opec+ group is due to convene against in early March to discuss options for co-operation on supply. All eyes will be on Russia, both its compliance and even on whether it remains on board.