Pumping for Mother Russia

Keeping oil output high is now a political imperative, connected with Russian pride

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RUSSIA’S oil production is likely to remain close to record levels this year as the Kremlin offers producers exemptions for higher dividends and the chance to deflect major tax changes.

President Vladimir Putin has always said that Russia should strive to remain one of the world’s top energy producers: it’s good for cash flow – regardless of the price of oil – and gives the country a seat at the top table of global politics and economics.

And having toyed with plans to cooperate with other producers to limit output and support prices, Russia is now determined to keep pumping hard. It’s the difference a day makes: until 16 April, Russia assumed another freeze deal would be cobbled together with Saudi Arabia and other big producers. By mid-morning on 17 April, when the meeting to decide it all in Doha had descended into a farce, the efforts were over. A battle for market share is back on, and Russia will fight hard.

“Russian oil producers are just as determined as Saudi Arabia not to lose any global oil-market share,” says Chris Weafer, founding partner of Moscow consultancy Macro Advisory. “Allowing oil output to decline would undermine that position. The Kremlin would not want Russia to be viewed as an energy power in decline.”

“Russian oil producers are just as determined as Saudi Arabia not to lose any global oil-market share”

The country’s oil majors have played that theme well and may obtain Putin’s support to deflect major tax changes. Rosneft, Russia’s largest oil producer, is likely to get approval to pay just 35% of its net profit under international financial-reporting standards, instead of 50%, in order not to undermine its investment programme. Gazprom is also seeking an exemption from a new dividend rule, which requires state-controlled companies to pay dividends of at least 50% of their profit.

Russian oil output fell slightly in April, to 10.84m barrels a day, as production declined at larger firms. Energy ministry data showed production by Lukoil dropped by 1.1% in April from the previous month, while the decline for Gazprom Neft was 1.2% and at its parent company Gazprom 1.3%.

But Rosneft’s output rose by 0.5% in April to 3.995m b/d. That is slightly less than the pace of increases in both January and February, and still a 0.9% decline compared with last April. Nonetheless, the company’s rate of decline is slowing down and it may be on the verge of a turnaround. Rosneft’s oil production had been expected to drop by 2% this year.

Keep on pushing

Now the talk is less about how much output Russia will shed this year – and more about how much it will add. Passing 11m b/d may be feasible during some months, although 12m b/d – a target mentioned by energy minister Alexander Novak in the days after the Doha debacle – is a stretch too far. Indeed, a slight drop in production from the 10.9m b/d level is likely in the second half of this year as a result of lower brownfield reinvestment.

Most of the oil majors are struggling to maintain output but are deploying the Mir Space Station spirit of running repairs. If financial sector sanctions remain – as now seems most likely – more slippage could be expected by the end of the year.

The sustained output is thanks to dogged efforts to keep drilling volumes high by pumping as much oil as possible to offset the impact of low oil prices.

Development drilling expanded by 14% in the first quarter of this year, compared with the same period in 2015. For Rosneft and Bashneft, it expanded by more than 50% over the same period; and at Tatneft by 30%. Gazprom Neft and Surgutneftegaz kept development drilling almost flat, posting just a slight 2-3% increase, while Lukoil lagged behind with a 35% decline.

The sustained output is thanks to dogged efforts to keep drilling volumes high by pumping as much oil as possible to offset the impact of low oil prices

A modest dip of production between March and April may have stemmed from a quarter-on-quarter decline in drilling. Activity from both Rosneft and Bashneft was down by 7%.

Declining output at brownfields – which provide a bedrock of Russia’s maturing production – remains a major factor, although Yuganskneftegaz, Rosneft’s main production unit, managed to post flat production figures in April.

But the political mood is defiant. Igor Sechin, head of Rosneft and one of Russia’s most powerful oilmen, has already proclaimed the demise of Opec, saying it had “practically stopped existing as a unified organisation”. That’s a direct outcome of the Doha meeting, when the Russian delegation arrived with the impression that a deal had already been done – only for Saudi-Iranian rivalry to shatter prospects for an agreement. Novak says he doesn’t expect any new initiatives to freeze oil production.

And as Saudi Arabia talks of lifting output, and increases its marketing efforts – including trying to encroach on Russia’s customer base in northern Europe – Russia will do its best to match it. While mature fields will hamper these efforts, new ones will help them. Vygon Consulting, an independent analytical firm, predicts total Russian production could rise in the coming months as recently launched greenfields such as Gazprom Neft’s Arctic offshore Prirazlomnoe field and Bashneft’s Trebs and Titov fields ramp up.

This article is part of an in-depth series on Russia. Next article: Russia's economy off the floor, just.

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