STRONG RUSSIAN OIL
Russia's oil sector has shown a surprising resilience to low oil prices and western sanctions over the past two years. The country's output repeatedly hit new record highs despite various negative outlooks.
This surprising pattern could well be repeated both this year and next should certain projects overcome delays and greenfields ramp up output.
Oil production in Russia is likely to continue growing not only this year — as was forecast by many market observers — but also next year.
Russian crude production hitting the 11.3 million b/d level next year. If so, it will get close to Russia's all-time high, recorded in 1987. This is well above other most optimistic estimates.
A general consensus sees Russia's crude production continuing to grow this year by around 100,000 b/d or even slightly above this figure. The growth is supported by investments made in previous years.
Next year, however, output is expected to remain flat or even drop by around the same 100,000 b/d, as greenfields no longer compensate for growing natural decline at mature fields in West Siberia. This view is shared by many market experts both in Russia and abroad, although forecasted figures do differ somewhat.
The International Energy Agency, for example, has warned that while Russia's oil resource base is weakening, the commissioning of new fields is likely to be delayed in the coming years due to capex constraints and rising fiscal pressures, making it increasingly challenging for oil producers to maintain crude output.
Several new projects that are scheduled for commission both this and next year are unlikely to be delayed as they are ready to launch and key capital investments have already been committed to them.
These projects include the Filanovskogo field in the Caspian Sea and the Messoyakha field in northern Siberia, set to come online by the end of this year and a number of new fields expected to start in 2017.
In addition, already commissioned greenfields, including in the Arctic, could increase output to become drivers of crude production growth next year.
As a result, the consultancy estimates, crude production from greenfields is likely to jump to nearly 1.5 million b/d, or 85%, in 2017, from its 2015 level, which would fully compensate for the natural decline elsewhere.
Indeed, this outlook is much higher than the level of natural decline at old fields in Russia, with different estimates putting output at between 100,000 b/d and 400,000 b/d in 2015.
The problem is that crude production in West Siberia is falling by around 3.5-4% a year, despite the sharp increase in drilling and wider use of enhanced oil recovery technologies seen last year. If those operations are reduced due to companies' financial constraints, the natural decline could accelerate drastically.
So far, however, production drilling — including the drilling of horizontal wells — is still on the rise as oil companies' operations are supported by flexible taxation and the forex rate of ruble to dollar, mitigating cuts in oil prices.
But there is the risk that Russia's authorities could opt to increase the tax burden on oil companies to resolve budget problems.
And while at present governmental officials have said there are no plans to raise these taxes, a different approach might prevail when the government considers how to meet the 2017 budget in the autumn.
If the tax burden is increased, the outlook for Russia's crude production could be quite different from that of current forecasts.
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IMF - Output grew by 3.8 percent in 2017, underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors. The banking system remains stable with large capital buffers. Growth is projected to decelerate over the medium term.
IMF - Higher oil prices and short-term portfolio inflows have provided relief from external and fiscal pressures but the recovery remains challenging. Inflation declined to its lowest level in more than two years. Real GDP expanded by 2 percent in the first quarter of 2018 compared to the first quarter of last year. However, activity in the non-oil non-agricultural sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.