Wood Mackenzie’s latest upstream analysis observes that Russia needs to re-focus investment from easier conventional onshore projects to more difficult and expensive tight oil, LNG and Arctic developments to maintain production in the longer-term.
Russia accounts for 15% of global oil and gas production, but only 7% of total capital expenditure (CAPEX). These projects a have much higher cost base and will require a step change in investment and involvement from international oil companies to accelerate development.
Ian Thom, Head of Russian Upstream Research for Wood Mackenzie, told the audience at the Exploration, Production and Processing (EPP) conference in Moscow this week; “Russia is looking to make a shift from easier conventional onshore projects to more difficult and expensive tight oil, LNG and Arctic projects, in order to maintain and secure long-term production levels. These resource themes have a much higher cost base and greater technical complexity. Russia currently accounts for 15% of global oil and gas production but only 7% of global CAPEX – so a significant increase in international investment is required to promote development and realise the production potential from these areas. Over the next 3-5 years we expect significant growth in offshore exploration, progress with pilot projects in tight-oil activity and improved definition of LNG projects. This could result in more than US$100 billion of development CAPEX being invested in these resource themes by 2025.”
Thom asserted: “By every measure, the Russian upstream sector is dominated by indigenous companies. Gazprom and Rosneft control the vast majority of Russia’s reserves, production, upstream value and net acreage – with International Oil Companies (IOCs) barely registering in the top ten. But Russia is looking to attract more foreign investment and we believe that it will seek more foreign investment to help exploit its high cost and high risk reserves. Sizeable tax breaks have been introduced, to help balance the huge costs involved in LNG, tight oil and Arctic offshore developments. We see this as a key step in attracting greater levels of investment and involvement from the Majors”.
Thom continued: “The Majors see Russia as a huge, long-term resource play and have been active in Russia for over two decades in three distinct waves of investment. The first was the introduction of the Production Sharing Agreements (PSAs) from 1994-1996; the second was development in conventional onshore projects from 1997-2009; and the third since 2011 has moved to offshore projects, tight oil and LNG. In the past four years we have seen all of the Majors sign deals or cooperation agreements in these themes.”
However Thom cautioned that business in Russia is never straightforward: “When we look at other large companies, outside of the Majors, there are very mixed outcomes: a number of mid- and large-cap international companies built positions in Russia from 1990 but have since exited – unable to compete with domestic companies that were better equipped to negotiate the regulatory framework and that benefited from synergies with large existing positions. Other international companies have maintained their positions through strategic partnerships with Russian companies.
“Since 2006, Asian companies have bought into a number of Russian projects, as a result of their growing resource demand and ability to finance upstream activity. This has gathered pace as Russia looks to sell more oil and gas into China and the wider Asia Pacific market. This year has been pivotal with CNPC successfully acquiring a stake in the Yamal LNG project. This is a huge vote of confidence in Russia. We expect to see other Asian companies taking on high cost onshore projects and non-operated positions in LNG, offshore and tight oil.” Thom added.
Thom concluded with the message that international companies have signed up to multi-billion dollar investments in offshore exploration, but production is still many years away; “There has been comparatively less commitment to unconventional resources in Russia. The potential scale of this next wave of investment should become a lot clearer in the next 3-5 years, as offshore exploration wells and tight oil projects are completed and decisions on LNG developments are confirmed.”
Press Release, November 22, 2013