Russian Oil Output Declines Could Play Role in Balancing Supply

With oil prices at four year-lows all eyes are on the Gulf to cut output, but a decline in Russian output could also play a role in balancing supply.

Russian oil companies could be forced to ditch new projects and end plans to revamp old ones if prices stay at around $82 a barrel or tumble further, making some of the world's leading energy producer's planned production not viable.

Oil executives and analysts say the falling oil price and the effect of sanctions could cut Russian output as soon as next year, a loss which may come earlier than any reduction of unconventional output in the United States or cuts from energy group OPEC.

"While the investment community is busy trying to understand at what price levels North American unconventional oil projects will be put on hold...the production response could come earlier from the least expected region - Russia," Ildar Davletshin, an analyst with Renaissance Capital, said in a note.

He estimates that Russia could lose 350,000 bpd next year if firms stopped drilling some wells which are not viable at a price of less than $90. On Tuesday Brent crude futures hit a four-year low below $82 a barrel as rising supply meets lacklustre demand.

Valery Nesterov, a veteran analyst with Sberbank CIB, says that so far he expects Russian oil production to be flat or face a moderate fall next year.

"We don't know yet if (any new) sanctions are to hit brown fields," he said, referring to the source of over 80 percent of Russia's current production.

A lack of drilling and issues with parts supply could wipe off some 5-10 million tonnes (100,000 - 200,000 bpd) of Russia's oil output next year, Nesterov estimates.

The International Energy Agency recently said Russia could face an around 80,000 bpd decline in oil production next year as "declines outweigh new production a bit more than in 2014."

So far, Russia's production has not been affected. The world's top oil producer was pumping near post-Soviet highs of 10.6 million barrels per day (bpd) last month. But it needs to keep investing to maintain that rate.

Russia has said it would turn to unconventional oil and invest in older projects to maintain output levels, but with the oil price below the $100 a barrel needed to balance the budget, many projects may have to be put on hold.

Russian oil companies estimate that the Bazhenov formation in western Siberia, for example, which may contain 75 billion barrels of technically recoverable shale oil resources, only just breaks even at prices of around $80 per barrel.

Alexander Kornilov, an analyst with Alfa Bank, said that under current oil prices some of Rosneft projects in east Siberia like Kuyumbinskoe or Yurubcheno-Tokhomskoye could be economically unviable given their need for expensive infrastructure.

Lukoil co-owner Leonid Fedun, speaking at a conference last month, said Russia needed to increase drilling by at least 50 percent to maintain production levels. This would require the investment and drilling teams now hard to come by due to Western sanctions over Moscow's role in Ukraine.

"New big projects wouldn't be enough to offset declines at old ones - an average decline rate (at old fields) is around 11 percent," Fedun said, adding that Russia may lose between 25 million tonnes and 70 million tonnes in oil production by 2017 (0.5 million bpd to 1.4 mln bpd).

"We estimate that due to sanctions and to what is happening with prices 2014 was the last year of growth."

(By Katya Golubkova, Editing by Elizabeth Piper and Michael Urquhart)