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Russian oil output could rise to over 12 mil b/d by 2035: Lukoil

Russian oil producer Lukoil forecasts Russian crude and condensate production could rise to over 600 million mt/year, or around 12 million b/d, by 2035 if there is a significant increase in global access to energy.

Russia could increase output primarily through higher oil recovery rates and development of tight oil reserves, the company said in a report on major trends in the global liquid hydrocarbon market to 2035 released Tuesday.

The company modeled three scenarios for the sector’s development up to 2035. If progress were to be made on the energy transition, the company estimates crude and condensate output could fall to just above 500 million mt/year. Meanwhile introduction of aggressive climate policies would see production drop below 400 million mt/year, the company said.

Russian oil production in 2019 is expected to be around 560 million mt, equivalent to 11.25 million b/d.
KEY GROWTH DRIVERS

Lukoil expects hard-to-extract reserves to play an increasing role in Russian output, particularly at the Bazhenov formation after 2025. It estimates that under a conservative development scenario, output at the Bazhenov will reach 35 million mt/year in 2035. This could be as much as 77 million mt/year if demand growth is significantly higher.

Lukoil also pointed to Russia’s low oil recovery factor as an area for potential development, especially if the government introduces tax incentives for enhanced oil recovery. Lukoil estimates Russia’s oil recovery factor should be 38% under the current taxation framework, but is much lower at 22%.

“Were the government to provide extra tax incentives, the ORF may increase to 45%, which is comparable to that of the US and Norway,” Lukoil said.

The company sees Arctic offshore development as likely to be hindered by a lack of information about reserves, high costs, and Western sanctions against Russia during the period.

“Considering that Russian companies currently have more attractive investment opportunities, we estimate that the launch of new Arctic production projects should not be expected before 2030,” the forecast said.

Western sanctions have forced Russian producers to re-evaluate their plans for production of deepwater and hard-to-extract reserves, as well as those in the Arctic offshore. Russia has already had some success with an import replacement program, however.

“Our estimate is that as early as 2030, Russia will be able to significantly reduce its dependence on imports in all areas critical to the efficient development of the oil industry,” Lukoil said.

Russian companies are prioritizing developing domestic technology, as well as increasing cooperation with Asian partners.

Taxation, specifically a pilot excess profit tax, could also have a potentially significant impact on production prospects over the next decade.

“Unlike the existing tax system, the financial result is taxed rather than each ton of oil produced,” Lukoil said. “Transferring the main tax burden to the later stages of field development allows us to significantly increase production by developing previously unprofitable areas, and to thus increase public revenues.”

Russia will review the results of the pilot excess profit tax scheme in May 2020 and the pilot may be expanded to the whole of West Siberia. Russia will decide in 2022 whether this taxation system can be applied to the whole industry.
OPEC+ EFFECT

Lukoil also expects Russia’s cooperation with other major producers under the OPEC+ agreement to be long lasting.

Despite complaints from some Russian producers that the restrictions make long-term planning difficult, and limit their capacity to fight for market share, Lukoil does not expect a negative impact on long-term opportunities.

“This production management approach does not significantly affect the reservoir quality and, therefore, produces virtually no impact on the country’s production opportunities,” the company said.

Lukoil expects the arrangement to continue to support market stability and reduce the amplitude of price fluctuations.

Lukoil modeled three different oil price scenarios between 2025 and 2035. It looked at prices as high as $90/b if there is a major increase in global access to energy, $70/b if there is significant energy transition, and $50/b if the most aggressive climate policies are pursued.

The company expects the US dollar to continue to dominate oil transactions, despite recent moves by some countries including Russia to increase the use of alternative currencies in oil trade.

“A landmark event towards the adoption of alternative methods of payments for oil was the launch of the RMB-denominated oil futures contract in Shanghai in 2018,” Lukoil said. “Nevertheless, on the time horizon until 2035, in our opinion, the US dollar will retain its leading role in international settlements and continue to influence oil pricing.”
Source: Platts

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