Goldman Sees Russia Oil Output Rising Amid Doha Freeze Talks

Updated on
  • Rosneft most attractive exposure to Russian potential: Goldman
  • BP, Total have largest Russia exposure among global majors

Morning Meeting: Oil and the Doha Meeting

Russian oil and condensate production will rise through 2017, even as the nation prepares for talks on an output freeze with other producers, according to Goldman Sachs.

Russian output will climb to 11.2 million barrels a day this year from 11.1 million barrels in 2015 due to a weak ruble, low-cost deposits and a tax rate that adjusts to lower prices, Goldman analysts including Geydar Mamedov said in a research note dated April 7. Production is projected to increase to 11.4 million barrels a day in 2017, it said.

“The debate over Russia’s potential is timely as OPEC and Russia discuss a coordinated production freeze,” Goldman said.

Goldman’s projections come as top exporters, including Russia and Saudi Arabia, are set to meet in Doha, Qatar on April 17 to discuss freezing output at January levels. Oil prices collapsed after a 2014 decision by the Saudi Arabia-led Organization of Petroleum Exporting Countries to defend market share rather than cut output amid a supply glut.

Russian Energy Minister Alexander Novak reaffirmed the nation’s commitment to finding a deal in Doha, saying on Friday in Moscow that he would seek a successful outcome to the talks.

Russian crude output may rise as high as 540 million tons, or 10.8 million barrels a day, this year, Novak said. That compares with 534 million tons production last year, according to the ministry’s data. Even so the average will be no higher than January’s output, which was 10.91 million barrels a day, Novak said.

Exports may be slightly higher this year, but that wouldn’t contradict an agreement to freeze production, Novak said.

Tax Burden

Support for Russian growth comes from free cash flow yields, boosted by tax rates that drop in line with oil prices and a weaker ruble that reduces costs. The industry generated $6 per barrel free cash at $40 a barrel versus $8 a barrel at $100 oil, according to the note.

Russian authorities have not ruled out increasing taxes on oil and gas producers as the nation’s budget deficit widened. The state shelved a planned cut in crude-export duty in favor of a freeze and increased excise taxes, boosting the overall tax burden for this year. The state is also examining cutting spending and selling assets.

“We think that Rosneft provides the most attractive exposure to Russian reserves growth and production,” according to the note. Rosneft OJSC has 20 years of proved reserve life, an attractive greenfield portfolio and should generate about an 11 percent free cash flow yield in 2016 at $40 oil, Goldman said. 

Total SA and BP Plc have the largest exposure to Russia amid global majors, it said.

(Updates with Russian Energy Minister comment in sixth paragraph.)
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