Ministry of Energy identifies cost of oil production in Russia

Oil companies and analysts name different levels of the cost of extracting oil in the Russian Federation.

The cost of extracting oil in Russia is about $2 per barrel, the cost of extracting oil from difficult-to-extract and offshore reserves is about $20 per barrel, the Russian Deputy Energy Minister Kirill Molodtsov said in an interview to Rossiyskaya Gazeta.

At the same time, these indicators strongly depend on the subsoil development cycle, he noted, explaining that the cost is higher against the background of the declining level of oil production.
The deputy head of the Ministry of Energy denied there was a reduction in investment by the oil companies.

According to him, the Russian oil sector is expected to attract investments worth 1.4 trillion rubles in 2016. The sector has enough resources, there is a margin of safety, which will allow domestic oil companies not to reduce their investment programs, the deputy minister added. "They, of course, will be optimized, taking the tax burden into account, but will keep investment spending around the 2015 levels," he said.

"Despite the fact that 2015 was characterized by low oil prices, our main indicators of the oil industry are positive," he said, stressing that "there is a constant increase in oil production since 2000."

A senior analyst of 'Uralsib Capital', Alexei Kokin, said in an interview with a correspondent of Vestnik Kavkaza that, on the one hand, Molodtsov's numbers are not far from the truth. "We are talking about operating costs for oil production indicated by Russian companies in their reports. Some companies talk about $3-4, but, in principle, the figure is true enough," he said.
However, according to the expert, it should be borne in mind that Molodtsov talks about fields which have already been developed. "There are also transport costs, which can reach $3-4, there are still administrative, management costs of about $2. These costs may reach $8-10. Of course, it's still not very much, because even at the oil price of $40 per barrel, they still will have $30," Kokin noted.

Then the senior analyst of 'Uralsib Capital' pointed out that the government takes $20 out of $30 as duties and taxes. "This is a normal situation in the Russian oil industry. But when the oil price was $100, the percentage was higher, it was approaching 75%," he said.

In this situation, the benefits of oil production at a normal field are not great, but it can be compensated for by deposits with a special tax regime, where the government's withdrawal is reduced to almost zero. "There is a usual deposit, where production costs are $2, transportation costs are $6-8 and $20 dollars for the government, but there is a shelf company, where costs reach $25-30, but the state takes nothing except for income taxes," Alexei Kokin explained.

The leading analyst of National Energy Security, Igor Yushkov, in his turn, said that Molodtsov's evaluation was made on the intermediate basis. "$ 2 per barrel is the average cost price for our Siberian deposits of the Soviet period, where there are no major investments, only production volumes are being supported," he explained.

The expert noted that the extraction price will be higher during the development of new deposits due to the fact that they will need to lay the cost of civil engineering works, drilling of new wells, the construction of housing for oil field workers into the cost of oil.

Yushkov said that these volumes include oil, which is cost-effective to produce. "BP believes that the volume of Russia’s oil reserves is 14.1 billion tons and these volumes are profitable to extract. In 2016 our reserves reduced a little, because the oil price has fallen and it became unprofitable to develop difficult-to-extract reserves," he explained.

"In general, we have enough stocks for the next 20 years with an average volume of production. I think it will be profitable to produce at least 12 billion tons of oil at $ 40 per barrel," the expert stressed.

"A big part of what we produce today is being extracted at low-cost fields. We produced 526 million tons of crude oil in 2014, 313 million tons of which were produced in Western Siberia at the cost of $ 2 and less," the leading analyst of National Energy Security added.

He noted that it doesn't really affect the wells producing 300 million tons, "but the cost will  be higher at the fields in the European part, in particular, in Tatarstan and Bashkortostan, which produces about 150 million tonnes. Bashneft and Tatneft are working there," Yushkov said.

According to the expert, it is likely that the cost will also be higher at deposits of so-called Bazhenov Formation. "Huge oil reserves are located there, but so far we have no technology to develop them. The cost will be about $ 20 there," the analyst noted.

Traditional deposits at low cost still remain in Russia, but they are located in Eastern Siberia. "But it will be necessary to spend a lot of money to find them and develop," he said.

The leading analyst of National Energy Security said that Russia will produce oil regardless of the market price, as all Russian projects are very large, so it will be quite difficult to close them.