Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Russia’s Oil&Gas Development and Exports Trends Alexey GROMOV, PhD, Principal Director on Energy Studies Institute for Energy and Finance The Eleventh Japan-Russia Energy and Environment Dialogue (JREED) Niigata, Japan 30th January 2019 1 Oil Industry Global oil market context Russian oil production and export trends up to 2023 2 Gas Industry EU Gas market trends Russian gas production and export trends up to 2023 1 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV OPEC+ Agreement has a crucial role to stabilize the global oil market 90 $/bbl Brent WTI 80 70 60 OPEC+ Agreement Update 50 (June 2018) OPEC+ Agreement 40 Update (December 2018) OPEC+ OECD commercial Agreement stocks reduction 30 Decrease (December during 2015 2016) 20 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 09/18 11/18 • OPEC+ Agreement (December 2016) to cut collective oil production of 1,8 MMb/d supported global oil prices and reduced price volatility in 1Q2017- 1Q2018. • The threat of US sanctions against Iranian oil exports led to OPEC+ Agreement Update in June 2018 (increase collective oil production of 1 MMb/d). • New OPEC+ Agreement Update (December 2018) to cut collective oil production of 1,2 MMb/d has to reduce the oil market volatility in 2019 2 OPEC+ Agreement Update in December 2018 lead to gradually balancing the global oil market in 2019 Changes in global liquid fuels market balance Mbd 2.0 1.6 1.2 -0,4 -0,4 0.8 -0,8 0,75 0.4 0,7 +0,2 +0,2 +0,4 0,4 0,35 +0,4 -0,1 0,1 0.0 -0,2 +0,3 +1,2 -0,1 +0,3 -0,5 +0,3 -0.4 +0,2 -0,0 +0,2 Доп. рост -0,1 +0,1 -0.8 спроса +0,2 -1.2 -1.6 -2.0 OPECОПЕКNon Не СШАUS ОПЕКOPEC Non Не СШАUS OPEC ОПЕКNon Не СШАUS OPEC ОПЕКNon Не СШАUS ОПЕКOPEC * ОПЕКOPEC* ОПЕКOPEC * ОПЕКOPEC* 4Q СпросD ПредложениеSupply 1Q СпросD ПредложениеSupply 2Q СпросD ПредложениеSupply 3Q СпросD ПредложениеSupply 4Q 2018 2019 2019 2019 2019 СнижениеDecrease in предложенияsupply /Increase/увеличение in demand спроса УвеличениеIncrease in supply/Decrease предложения in/ снижениеdemand спроса Notes: D - Demand * Not including US 3 Source: IEF estimates bases on EIA, МЭА, ОПЕК data ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Russiaʼs Role in the OPEC+ Agreement 1Q 2017 – 1Q 2018 Russia’s share in the collective oil production cuts planned in 2017 within OPEC+ Agreement (tbd) • Russia played central role bringing about OPEC and non-OPEC output reduction deals of December 2016 • Russia pledged to gradually lower output by 300,000 b/d during first half of 2017 compared with October 2016 level (largest non-OPEC reduction) • Russia with Saudi Arabia now apparently co- determining OPEC+ policy OPEC+ Agreement Update (June 2018) Level of Russian compliance with initial OPEC+ Agreement • Russia and Saudi Arabia ensured the implementation of ‘Vienna Alliance’ members’ production cut target, 2017-18 decision to increase the collective oil production of 1MMbd in coming months • Russia exceeds October 2016 baseline for production cuts for first time in October 2018, setting new oil output record of 11,6 MMb/d (activating most spare capacity built up during period of output cuts) OPEC+ Agreement Update (December 2018) • Russia played central role to reach new Update for OPEC+ Agreement (restart of collective oil output cuts of 1,2 MMb/d from January 2019) Source: IHS Markit 4 1 Oil Industry Global oil market context Russian oil production and export trends up to 2023 2 Gas Industry EU Gas market trends Russian gas production and export trends up to 2023 5 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Russian oil production back to growth in 2018 . Russian oil production cuts within Russia’ crude oil production, 1989-2018 OPEC+Agreement led to oil production decrease 600 in 2017 up to 546,2 MMt (-0,3% y-o-y), for the first MMt CRUDE OIL LEASE CONDENSATE time in last 10 years 500 400 . But Russian oil production back to growth in 2018 300 and ensured new annual oil output record of 556 MMt (11,35 MMb/d) due to the activation of most 200 spare capacity built up during period of output cuts 100 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Russia’ crude oil production by key oil&gas . After 10 years of decline the Western Siberia’ oil regions, 2014-17 output back to growth in 2018 due to increase oil 350 MMt production in Yamalo-Nenets AO lower 1 MMt 1-2 MMt 300 . Greenfield expansion have supported the raise of oil 2-5 MMt more 5 MMt output in the Eastern Siberia (Suzun and Vankor) and 250 on Caspian onshore (Filanovsky’ field) 200 11,4% 10,5% 150 18,6% 18,4% 100 50 32,2% 31,3% 0 2014 2017 2014 2017 2014 2017 2014 2017 Western Siberia Ural-Volga Eastern Siberia and Timan-Pechora Far East Sources: Rosstat, Russian Ministry of Energy, FIEF 6 Gazprom Neft is the main driver of oil productionʼ increase . Gazprom Neft is the main driver of Russian oil Oil output by Russian Oil&Gas Majors, 2008-17 production’ increase (+9 MMt in 2015-17) 600 MMt 77 76 500 65 61 65 69 . Rosneft continue to develop Vankor oil cluster:oil 48 51 57 62 400 output at the Suzun field raised by 4 times up to 4,14 MMt, 46 47 49 49 50 49 51 54 58 60 62 60 60 61 61 61 61 62 62 61 at the Tagul field – by 9 times up to 0,34 MMt 300 90 92 90 85 84 85 86 86 83 82 200 . Sakhalin PSAs had increased oil output in 2017 as well as 100 204 202 200 222 221 independent Russian producers including JV with Japanese 113 115 116 118 121 0 investors (INPEX, ITOCHU, JOGMEC) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Others Gazprom Tatneft . Nevertheless, oil production by Rosneft, LUKOIL and Gazprom Neft Surgutneftegaz LUKOIL Surgutneftegas decreased during this period due to Bashneft TNK-BP Rosneft OPEC+ cuts and oil output decline at the Western OPEX/bbl in upstream by Russian Oil&Gas Majors, Siberia 2014-18 8 Rosneft LUKOIL Gazprom Neft Tatneft . In 2017-18 OPEX by Russian majors have stabilized at $/bbl the level of 3-4$/bbl 6 . Russian majors have kept their costs at such a low level due 4.3 to pressure on contractors who are forced to reduce prices 4 4.2 even in the face of rising world oil prices and volumes of 3.7 work performed 3.2 2 2014 2015 2016 2017 2018 Sources: Rosstat, companies’ data, FIEF estimations 7 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Idling of wells was the main instrument to achieve 2017 OPEC+ production cuts . Deactivation of (most likely marginal) wells was Change in Russian idle well count by company, October key method for achieving production cuts in 2017 2016-September 2018 . Russia’s idle well count jumped by over 5,000 between October 2016 and January 2018 . Idle well rate rose from 12,5% in October 2016 to 15,2% in January 2018 . Sharp drop in idle well count in 2018 coincided with main period of Russian oil production growth in 2018 . Russia’s idle well count has fallen over 3,000 since January 2018 . Idle well rate down to 13,2% in September 2018 . Tatneft and Rosneft have registered biggest reductions in idle well numbers in 2018, indicating new brownfield investment focus by this companies Sources: IHS Markit, FIEF 8 New field development activity up significantly in 2017 despite cuts Indexes for new oil field activity in Russia, 2016-18 Oil production at new felds inRussia,2016-18 Development drilling at new fields in Russia, 2016-18 New well completions at new fields in Russia, 2016-18 Sources: TEK Rossii 9 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Tax Reform ʻBig Maneuvreʼ is neutral for Russian upstream . Starting from 2019 theexportdutyonoilwillbe . To compensate budget losses due to the reduction multiplied by a reduction factor of export duties on oil, a new component is . Starting from 2023, theexportdutywillbereset introduced into the MET (DM coefficient)- KMAN, which actually repeats the formula for calculating . Lower oil export duty will lead to higher theexportdutyonoil domestic oil prices (net back), and alignment . of domestic oil prices and world prices (less As a result, the overall tax burden on oil logistics costs) production will not change Tax reform for mature oil fields: The Samotlor tax break . Russia’s current oil sector tax system, based on gross revenues of production, particularly burdensome for Samotlor oil production and decline rate mature field producers . Samotlor oil field has obtained (2017) major tax relief package in exchange of Rosneft promise to invest more heavily in this field redevelopment • Finance Ministry agreed to annual MET reduction for Samotlor oil field of 35 trillion rubles (around $0,6 billion) and set to last for 10 years . Finance Minsitry of Russia promised to revisit Rosneft committed to drill about 2,400 new wells and question of comparable tax breaks for other produce an incremental 50 MMt (365 MMbbd) at Samotlor mature fields in three years, after evaluating field during next 10 years impact of Samotlor experiment on federal budget Sources: Finance Ministry, IHS Markit 10 CAPEX in Upstream: from stagnation in 2016 to acceleration in 2017 .