Russian Oil Production ‘Past Peak’
17.04.2008 (14:36) | RBC
Russia saw its peak oil production levels last year, and it will never see them again, Leonid Fedun, Vice President of Russia’s largest private oil company LUKoil, told western reporters.He compared Russia with Norway and Mexico, where oil production is falling. However, experts say the trend may reverse thanks to record high oil prices, but only if Russia rethinks its tax policy on oil producers.
“Russian oil production has peaked and may never return to current levels,” Fedun told the Financial Times earlier this week. Last year's Russian oil production of about 10 million barrels a day was the highest he would see in his lifetime, he said. To keep Russia’s oil output at 8.5 million to 9 million barrels a day over the next 20 years, oil companies will have to invest billions of dollars in the exploration and development of new reserves, Fedun told the Wall Street Journal. To offset declining production in West Siberia, they need to invest in East Siberia, the Caspian Sea and the Arctic region, Fedun believes.
Fedun’s forecast differs from that of the International Energy Agency, which expects Russian oil production to rise from 9.95 million barrels of oil a day last year to 10.5 million barrels by 2012. Natalya Milchakova, at Otkritie Financial Corporation, projects oil production levels in Russia to rise by 1-2 percent in 2008. Alexei Kokin, an analyst with IFC Metropol, disagrees, saying that Russia’s oil output is set to decline slowly, by up to 10 percent over the next decade, while oil exports could drop much more.
Experts say Russia has seen its peak oil production levels, like many other oil producing nations, including the United States and some countries in Europe and South America. The US economy has not been seriously hurt but its dependence on global oil prices increased, according to Alexei Kokin. For his part, Fedun compared Russia with Norway and Mexico where oil production is declining dramatically.
This will clear the way for new players who will be able to dictate their terms despite comparatively low production levels. Milchakova pointed to Kazakhstan and Azerbaijan as rising oil producers. However, they produce much less than Russia, she notes. Sergei Yezhov, Deputy General Director of the Independent Fuel and Energy Institute, expects Russia to remain the second largest oil producer in the world over the next few years.
Meanwhile, world oil prices rose to new highs yesterday, against the backdrop of the declining dollar. The US currency continues to depreciate against the euro, the Swiss franc and the yen, making oil an attractive alternative for investors. According to Prime TASS, Brent crude rose to $111.14 a barrel yesterday, and Light Sweet hit a new record of $112.97 a barrel.
Record high oil prices could help Russia avoid a sharp decline in oil production. According to Fedun, the country's oil industry needs $1 trillion of investment during the next 20 years to maintain production at about 10 million barrels a day. Experts say this could only be achieved if Russian authorities changed their tax policy on oil companies. “With the current taxation system, oil companies do not benefit from increasing oil production,” said Ekaterina Kravchenko, an analyst with BrokerCreditService.
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