2013-03-21 13:37:33 - Recently published research from Business Monitor International, "Russia Oil & Gas Report Q2 2013", is now available at Fast Market Research
BMI View: Russia may be pumping post-Soviet record levels of oil and is likely to continue to see a shortterm increase in both oil and gas production; however, we warn that a high level of investment will be required to maintain this. It also faces pressure to diversify its gas markets, in view of slower demand growth expected from its core market in Europe and growing competition from other global gas suppliers. There have been promises made to reform Russia's tax and regulatory system, upon which further development of the oil and gas sector hinges. The realisation of Russia's oil and gas potential lies in unlocking the political gridlock that is standing in the way of much needed tax and
licensing reforms which would maximise the country's full oil and gas potential.
The main trends and developments we highlight for Russia's oil & gas sector are:
* Russian oil production reached a post-soviet high of 10.4mn barrels per day (b/d) in 2012, exceeding the 10.34mn b/d targeted by the economy ministry for 2012.
* In the short term, BMI expects oil production to continue growing as it ramps up production capacity from the remaining Soviet-era fields, while new projects barely manage to replace production lost from ageing fields. Between 2013 and 2016, we forecast Russian production to remain relatively flat at around 10.4-10.5mn b/d. However, we believe output will begin to decline starting from 2017 and fall to 10.1mn b/d by 2022. Likewise, the economy ministry also warns that without further investment, output could flatline at 10.24b/d by 2020. Russian oil consumption is currently expected to rise at an average rate of 3.13% in the coming decade, probably ahead of supply expansion. Oil consumption, which was 2.73mn b/d in 2011, should edge towards 3.32mn b/d by 2017 - providing export potential of 7.14mn b/d.
* In 2012, official data from Russia put the country's gas production at 657.6bn cubic metres (bcm). This is 0.85% lower year-on-year than the EIA's estimate of 662bcm for 2011. This drop is mainly attributable to a weakening in demand for Russian gas, especially in its core European market as customers begin to resist Gazprom's high gas prices.
* In the short-to-medium term, there is still room for output to expand based on current projects. Output will continue to grow to 717bcm by 2018, driven by projects due to come online such as Gazprom's Chayadinskoye field in East Siberia and production from fields feeding into Novatek's Yamal LNG project from 2016.
* Beyond 2018, slowing output from existing major gas fields is expected to see production fall to 636bcm by 2022. Our less optimistic outlook for gas production is driven by the following uncertainties that could stifle investment needed in the short term to support long-term growth: policy uncertainty, demand uncertainty and gas pricing uncertainty.
* Gas consumption is expected to rise in tandem with our Country Risk team's forecast for economic growth, from an estimate of 508bcm in 2012 to 532.7bcm in 2017. By 2022, gas consumption is projected to increase to 556bcm. This will provide Russia with a net export capacity of 180bcm in 2017 and 80.3bcm by 2022 - in line with our forecast for gas production to fall if there is insufficient investment pumped into its upstream to support long-term growth.
* There will be considerable upside risks to our long-term forecasts for Russian oil and gas production and exports if the country manages to push through fiscal reforms that would significantly improve the country's business climate for foreign investment. This could help to speed up development of its underexplored offshore acreages - the Arctic and Caspian Sea - as well as its northern and eastern fields.
* Another wildcard that could keep Russian gas production on an upward swing is shale gas production. Gazprom is currently dismissive towards this unconventional resource but as the country's largest gas producer, its approach towards shale gas will have a huge bearing on the resource's growth prospects in Russia.
* There is a pressing need for Russia to diversify its gas markets and attempts to push into the growing Asian market could see an increase in activity in the Russian Far East. Russia's dependence on oil and gas prices leads to high volatility in the country's export revenues. Our assumptions of tight supply due to booming demand in emerging markets is clearly an opportunity for the country. At the time of writing we assume an OPEC basket oil price for 2013 of US$104.40 per barrel (bbl), falling to US$101/bbl in 2014. Global GDP in 2013 is forecast at 2.9%, up from an assumed 2.5% in 2012, reflecting some recovery in the US and China, though uncertainty with regard to the eurozone debt situation will continue to hamper growth. For 2014, growth is estimated at 3.4%.
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