Russia sees oil output slump in worst case amid OPEC talks

By ELENA MAZNEVA on 2/18/2016

MOSCOW (Bloomberg) -- Russian oil production may slump 14% in the next five to 10 years under a worst-case scenario prepared by the Energy Ministry.

Crude output may drop to 460 million metric tons (9.2 MMbpd) by 2020-2025 from 534 million tons last year, before starting to show slight growth, the Energy Ministry’s press service said by email Thursday, in response to a report in Vedomosti newspaper. The worst case, prepared for the nation’s long-term energy strategy, envisages oil prices remaining at about $31–33/bbl in 2016-2017 with a rebound to $42 in 2020, it said.

The scenario assumes demand in China and other Asian nations slows on faltering economic growth, Middle East countries boost cheap supplies and the U.S. increases shale output, while other countries pump more oil after currency devaluations cut production costs, the ministry said. One more factor contributing to the worst case would be a “lack of managing influence on the market from the main players.”

Efforts this week to bring such influence to bear have been inconclusive. Russia and Saudi Arabia, the world’s biggest producers, came to a preliminary agreement on Tuesday to freeze output at January levels to support prices. The deal hinges on the cooperation of other suppliers. Iran, once the second-biggest producer in OPEC, still hasn’t said whether it would deviate from plans to restore exports after international sanctions were removed last month.

Vedomosti reported Thursday that a “stress” scenario for Russia’s oil industry was aired Wednesday by Energy Minister Alexander Novak at a meeting of a government energy commission.

Russia, which relies on energy for more than 40% of its budget, is battling its longest recession in two decades as its economy is battered by the drop in oil prices and international sanctions over the Ukrainian crisis. It has been planning to keep crude output stable at about 525 million tons through 2035, drafting its budget with oil averaging no less than $50 for at least the next three years.

Record Output

Brent crude, the global oil benchmark, traded at $34.77/bbl at 9:22 a.m. in London after gaining 7.2% Wednesday amid the talks between major exporters about stabilizing prices.

Even if Russia freezes production at January levels, it hasn’t ruled out growth in overall output in 2016 compared with a year earlier, Interfax news service reported Thursday, citing Russian Deputy Energy Minister Kirill Molodtsov. Russia increased production each month of 2015 and output was at a post-Soviet record in January. Projects are set to start soon that will keep the country on track for growth, Molodtsov was quoted as saying.

The ministry calculated its worst-case scenario assuming that producers have limited access to financing, which would cut investments by at least 10–15%. Much will depend on the state’s tax policies, it said.

Even if the worst-case scenario comes about, crude prices should rebound after 2020 as global oil oversupply would decrease given spending cuts, according to the ministry.

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