Although the rate of increase has slowed, Russian oil production will rise by 2-3% during 2005-06, the International Energy Agency reported after a visit of its secretariat to Moscow.
In its August Oil Market Report, IEA lowered its projection for average 2005 Russian production by 35,000 b/d to 9.5 million b/d.
While year-on-year growth in monthly average oil production has plummeted, this year’s output is still above last year’s. And IEA expects it to increase further in 2006.
The slowdown in production growth follows moves by the Russian government to reestablish state control over national resources and to increase taxes, IEA noted in its report.
But it said the recent slump in investment in Russia’s oil fields comes mainly from “maneuvering by key domestic operators intent on buying up the assets of companies wielding less influence with the government.” The result, IEA said, is less focus on internal company growth and slow production growth for at least 1-2 more years.
“While the stars of Gazprom, Rosneft, Lukoil, and BP-TNK may be rising, prospects for other producers are less certain,” IEA said. Debt and legal issues might distract Gazprom and Rosneft from production growth, it added. Many of the Russians its delegation interviewed expect Russian production ultimately to be controlled by three or four companies.
The reexertion of state control over production in Russia and surrounding countries “is seen as a key national interest,” the agency said. “Consequently, new foreign investment in Russian oil could be limited to a small number of larger operators willing to take minority stakes in large projects.”
In IEA’s view, a proposal to limit foreign company participation in Russian oil fields won’t seriously impede investment. The proposed subsoil law will hold participation by non-Russian oil companies in as-yet unspecified Russian fields to 49% or less as early as late 2006.
The agency said the Kremlin recognizes the need for reform of production taxes, noting that as many as 380,000 Russian wells are idle because of a tax regime that, among other things, doesn’t differentiate between large, new fields and older, smaller producers.
Also, export taxes favor product exports over crude. Export duties are $140/tonne for crude and $60/tonne for products.
“Crude exports by expensive rail and river routes have taken a hit, having earlier been a key outlet for rapidly rising production,” IEA said.
While oil production is rising, Russian revenues from production remain high because of rising crude oil prices, which might discourage tax reform. After the low-investment year of 2004, IEA said, the Russian government estimates oil sector investment grew by 13% in the first quarter this year and projects 20% investment growth for the full year. ✦
