Russia Resolves to Make Most of Soviet Oil as New Finds Wane

  • Government sees stronger potential at West Siberian fields
  • Energy Ministry insists on new tax system for oil deposits

Russia plans to squeeze all the oil it can from Soviet-era discoveries to hold crude output stable for the next two decades as new finds are delayed by sanctions and slumping prices, according to the Energy Ministry.

“We’ve got a safety cushion until 2035,” Deputy Energy Minister Kirill Molodtsov said in an interview in Moscow. “The potential for output growth at oil fields already in operation is higher than in unexplored territories.”

Russia, which relies on oil and gas for almost half of its budget revenue, has repeatedly broken post-Soviet production records this year as drillers benefit from a weakening ruble. Nevertheless future barrels may be at risk as exploration campaigns, mostly in undeveloped areas offshore, tail off following investment cuts.

Exploration drilling dropped almost 21 percent in the nine months through September after increasing in 2012 to 2014, government data show. State-run energy giants Rosneft OJSC and Gazprom PJSC are delaying some offshore drilling by two to three years, according to the Natural Resources Ministry.

Production Outlook

Exploration drilling is first in line when companies trim spending, according to Molodtsov. Adding wells at existing fields or using chemicals or fracturing to push out more oil provide a quicker return than tapping new territories, he said, estimating steady annual output of roughly 525 million metric tons (about 10.5 million barrels daily) through 2035 even in a conservative scenario. 

A tax system that provides the right incentives could help drive volumes to 540 million tons in the coming years, Molodtsov said. Output this year and next is estimated at about 533 million tons, according to his ministry.

“There’s a possibility of a decrease in volumes later” as the tax burden is set to climb in 2016, First Deputy Energy Minister Alexey Teksler told reporters in Moscow Tuesday.

Russia’s long-term energy strategy targets an increase in offshore oil production of 33 million tons to 50 million tons in the next two decades. 

Alternatively, “with the right motivation we can get those 33 million tons in West Siberia,” Molodtsov said. Russia has 21,500 idle wells in its main oil-producing province, the Khanty Mansiysk region, mostly explored during the Soviet Union era. It’s there that production needs to be “intensified,” according to the deputy minister.

Insufficient Capacity

The International Energy Agency has taken a less optimistic view on Russia. The nation doesn’t have the capacity to wring enough crude from existing fields to support longer-term growth, the IEA said in its World Energy Outlook 2015 report published this month.

For more than three years, Molodtsov’s ministry has been pushing the government to agree to a new profit-based tax system to spur crude output, while the Finance Ministry has suggested Russia should wait until at least 2017 given the economy’s recession.

Russia’s oil and gas industry deserves incentives because it’s “the driver of the economy,” Molodtsov said. The country should encourage its “strongest” players by stimulating output at existing fields, he said.

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