Russia braced for first oil production fall in 10 years

  • 15/04/2008

  • Financial Times (London)

Five years ago Russia's rapidly growing oil exports were seen as the cure for the US and Europe's addiction to Middle East oil, international oil companies' most exciting potential source of revenue and the only thing that could quench China's insatiable new thirst. But today Russia is bracing itself for its first production decline in 10 years. Last month, it failed to increase output for the third month in a row and closed the first quarter with a 1 per cent production decline, which pushed the total to 9.76m barrels per day. Last year, oil output climbed 2.3 per cent to a post-Soviet high of 9.87m bpd, according to the energy ministry. Even politicians are having to admit the country's once double-digit growth has halted and at least one oil executive believes it will not, at least in his lifetime, be able to produce more than it has in the past two years. Leonid Fedun, vice-president of Lukoil, Russia's largest independent oil company, said Russia would be able to sustain levels of 8.5m-9m barrels a day over the next 20 years only if oil companies invested billions of dollars in tapping new fields. Huge investments in eastern Siberia, the Caspian Sea and in the Arctic seas would be needed to mitigate the loss from the declining fields in western Siberia. Mr Fedun estimated companies would need $1,000bn, far more than the $4bn extra a year Lukoil calculates will be available to the industry if Russia cuts its production taxes as is being discussed. Lukoil, Russia's second largest oil producer, has lobbied hard for tax relief. It would gain $1bn to pump into new investment if the law were passed, he said, adding: "That is not enough." The turnround from 1998, when output had sunk as low as 6.2m barrels per day, has been slowing since 2003 because of a mounting tax burden and increasing state takeover of the sector. Russian oil companies see little of the windfall returns generated by high oil prices as the government takes 80 per cent of revenues over $27 per barrel in taxes. Mr Fedun compared Russia with Mexico and the North Sea, although he acknowledged it was declining more slowly than the two competitors because much of its production was onshore, where decline rates were lower. This gave the country more time. The International Energy Agency, the consuming countries' watchdog, sees production growth all but halting this year, but said it was too early to know if the country had reached a peak. Lawrence Eagles, who heads the agency's oil and markets division, said: "You have a lot of areas in Russia that are completely under-explored, but in order to find that oil and get it to market, the country needs considerable investment." Joseph Stanislaw, a consultant who specialises in Russian oil and gas, said: "Four years ago you couldn't get a private jet into Russia because of all the congestion caused by the foreign executives looking for the opportunity of a lifetime." Today,international companies had been relegated to holding minority stakes in big projects. However, the cut in taxes could improve the foreigner's lot, said Sanford Bernstein. In a report released yesterday, the financial services group said: "So can the Russian public and politicians stomach the decline of the world's largest oil producer [by some estimates], and bedrock of the country's rekindled powerbase and nationalistic pride? We think not, and believe that the talk of tax reductions are real, which could herald a huge U-turn in the foreign investment being employed in the Russian oil industry."