Russia’s Largest Oil Producer Bucks Global Slump in Drilling

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Crude’s plunge into a bear market slowed drilling from the U.S. to Africa, but in Russia’s oil heartland of Siberia the opposite happened.

OAO Rosneft, the world’s largest traded oil producer, increased drilling by 27 percent in the first seven months of the year, according to a statement. That helped the company stabilize output in the first half, Chief Executive Officer Igor Sechin said in Moscow on Friday.

The Kremlin-backed company is able to buck the international trend of cutbacks in oil projects because the plunge in the ruble and the quirks of Russian tax law insulated producers from the crude price slump. The nation’s exports remain just as profitable as they were a year ago when the oil price was about $100, according to Citigroup Inc.

“We don’t see a financial reason for Russian production to start falling,” Ronald Smith, an oil and gas analyst for Citigroup, said by phone. “If anyone was out there expecting Russia to balance the market, the signal is that’s not going to happen.”

Brent, the international oil benchmark, is trading at about $50 a barrel, less than half the level a year ago. While oil drilling in the U.S. fell by a record after the Organization of Petroleum Exporting Countries decided last year to defend market share rather than cut production, Russia’s industry has shrugged off the price slump. The nation’s oil production rose to a record in June.

International Cutback

Rosneft drilled more than 800 new wells through the first half of the year, according to the statement. Total depth drilled rose to 4.59 million meters (15 million feet) compared with 3.61 million meters in the first seven months of last year.

The company is buying Trican Well Service Ltd.’s Russian pressure pumping business for $140 million. Pressure pumping, also known as hydraulic fracturing, blasts water, sand and chemicals underground to release trapped hydrocarbons.

Rosneft “needs to drill actively in order to withstand falling production,” said Alexander Kornilov, an oil analyst at Alfa Bank. Results of increased drilling will probably be seen in 2016, he said.

At the company’s largest unit, RN-Yuganskneftegas, drilling increased by 40 percent including a larger number of wells using more advanced technology, the company said. Rosneft has changed its business plan toward increasing output at existing projects including Yuganskneftegas, Sechin told Prime Minister Dmitry Medvedev on Friday.

Output at Yugansk will rise to 66 million tons this year, Sechin said Friday. That’s about 1.3 million barrels a day and compares with output of 64.5 million tons in 2014, according to Energy Ministry statistics.

Weaker Ruble

Producers have delayed $200 billion of investments globally as they cut costs in response to the slump in crude, according to a report by Wood MacKenzie. U.S. drillers have reduced the number of rigs targeting oil by almost 60 percent since December, data from Baker Hughes Inc. show.

In Russia, the rate of return on a typical West Siberian oil well is now even more attractive than it was during 2014, Citigroup’s Smith wrote in a research note in June.

The contraction in Russia’s economy, linked to weaker oil and international sanctions over the nation’s involvement in Ukraine, weakened the ruble. The nation’s currency is trading at about 65 to the dollar, almost twice the rate of a year ago, according to data compiled by Bloomberg.

The devaluation reduced operating costs because companies earn dollars and pay most of their expenses in rubles, according to Citigroup.

Russian Boom

Russian tax laws mean oil producers are only directly affected by one-fifth of the decline in crude prices, Moody’s analyst Julia Pribytkova wrote in research note Aug. 6. The rest of the loss is absorbed by the state budget in the form of lower tax rates.

Based on the tax rates applicable in 2015, the burden on companies decreases from 69 percent of export revenue at an oil price of $100 to 60 percent at $60, according to Pribytkova.

Rosneft has been the laggard in a Russian output boom led by new projects from OAO Gazprom Neft, the liquids arm of the state-run gas company, and OAO Novatek. Its oil output fell 0.9 percent last year to 4.16 million barrels a day as the company was constrained by sanctions limiting borrowing, the burden of the nation’s largest debt load and a dispute with a contractor.

Rosneft’s oil production continued to fall in the first quarter to 4.13 million barrels a day. Russia’s total output rose to a post-Soviet record of 10.72 million barrels a day in June, according to data from the Energy Ministry.

While lower prices will eventually reduce the global oversupply, it may take longer than people realize and “probably won’t involve Russia,” said Smith.

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