Russian liquids production hits record levels of 10.7 MMbpd

7/16/2015

EDINBURGH/HOUSTON -- Russian oil and condensate production reached a new post-soviet record of 10.7 MMbpd in 2015 with condensate being a key driver, according to the latest analysis from Wood Mackenzie.

By 2018 Wood Mackenzie says condensate production will increase by 50% compared to 2014 levels, and that this coupled with greenfield projects and increased enhanced oil recovery (EOR) activity will continue to help stem the decline seen at conventional reservoirs out to 2020.

However, Wood Mackenzie cautions that condensate production will only provide growth in the mid-term: post-2020 Russia could face a sizeable production gap when the impact of Western sanctions kick in. Wood Mackenzie says development of deeper and tighter reservoirs, such as Russia's Tyumen formation, will be key to maintaining production at current levels thereafter - bridging the gap between the development of conventional sands and unconventional shale plays.

Christian Boermel, Russia Upstream Analyst for Wood Mackenzie, said, "We see Russia defying expectations in terms of 2015 liquid production levels achieving a new post-soviet record of 10.7 MMbpd. The steady increase seen in the first half of this year is contrary to many pessimistic predictions, due to the turbulent geopolitical situation for the country as a result of the Ukraine crisis and subsequent Western sanctions. We see actual growth in liquids being driven by condensate, but given the unfavourable macro-economic situation with a volatile Rouble and depressed oil price, there is significant uncertainty for Russian production in the longer-term, post 2020."

Boermel continued, "Greater volumes of condensate are being developed in Russia and particularly in more mature assets. By 2018, we expect condensate production will increase by 50% compared to 2014, making up nearly 8% of Russia's total liquids production. Our latest estimates show around 250,000 bpd of this growth will come from the deep horizons of traditional gas fields in West Siberia. In the Urengoi area alone, Gazprom, NOVATEK and Rosneft are ramping-up strategic projects, such as Achimgaz, SeverEnergia and Rospan International."

Wood Mackenzie forecasts that Russia's overall oil production will remain broadly flat out to 2020, thanks to these increased condensate levels; with Greenfield projects offsetting around 50% of the decline witnessed in conventional reservoirs and the remaining half offset by increasing EOR activity at brownfield sites and developing new reservoirs in West Siberia. In addition, Wood Mackenzie notes that despite the Russian government's move to increase the Mineral Extraction Tax (MET) for condensate in January this year by more than four times, MET payments on condensate are still lower than oil making it very attractive for producers.

Michael Moynihan, Senior Russia Upstream Analyst for Wood Mackenzie, explained, "Despite West Siberia's production peaking in the 1980s, the region remains core and is expected to contribute 60% of Russia's liquids production this year. Russian operators are looking at deeper and more complex reservoirs, such as the Tyumen and Achimov, these areas are widely regarded as 'hard-to-recover' but are still far easier to develop than unconventional shale plays - such as the gargantuan Bazhenov expanse. Currently the Tyumen and Achimov areas each contribute between 6-7% of West Siberian (4% of Russia's overall) production and we expect this could more than double by 2020."

Most notably between 2009-2014 Wood Mackenzie estimate that production from the mid-Jurassic Tyumen formation more than doubled to over 400,000 bpd of oil and was a key factor in stemming the country's decline. "We estimate that in 2014 over $3.5 billion – around 7% of Russian capital expenditure (CAPEX) - was spent on developing the Tyumen formation. However, by 2020, we forecast the formation could account for up to 1 MMbpd – over 15% of West Siberian production - with current oil reserves estimated to be around 6 Bbbl with significant resource upside for producers," Moynihan added.

Moynihan continued, "The Tyumen formation will be key in maintaining Russian production levels thereafter due to the fact it can be developed using traditional Russian technology, albeit at a higher cost. Getting this right could be the stepping stone between the development of conventional sands and unlocking the potential of vast untapped unconventional shale plays - upon which Russia's long-term oil production depends."

Wood Mackenzie does, however, caution that condensate production will only provide growth in the mid-term. "Once these projects start to decline, Russia will face a sizeable production gap post-2020, when the impact of tight oil and Arctic offshore projects impacted by the EU and U.S. sanctions start to bite," Boermel offered in closing.

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