Friday, 21 October 2016

What It Takes to Be the World’s Biggest Crude Producer

In Oil & Companies News 21/10/2016

1. Power through obstacles
Russia’s oil industry has proved its strength over the past several years, raising production while powering through the Great Recession, a round of international sanctions, and the steepest drop in oil prices in a generation. In September, Russia set a post-Soviet record for crude output, pumping 11 million barrels a day. Next year its oil companies should be able to produce even more, if the Kremlin wants them to.

On Oct. 10, Russian President Vladimir Putin said a freeze, or even a cut, would be the proper response to the currently oversupplied market. This followed a September agreement between members of the Organization of the Petroleum Exporting Countries to finalize a small production cut in November. Setting aside any deals with OPEC, analysts had anticipated that Russia would increase its 2017 production by 1 percent to 3 percent.
2. Invest in your best assets
Investments made during the years of $100-a-barrel oil are still bearing fruit. Russia’s largest producers, Rosneft and Lukoil, have poured billions of dollars into Siberia, where they’ve been able to slow the decline rates of aging fields and in some instances revive growth. “Russia has a lot of oil that can be produced at competitive prices, so it will look to muscle in on higher-cost competition where it can,” says Christopher Haines, head of oil and gas at BMI Research. That means taking market share from countries that rely on oil sands and deepwater projects.

3. Burn fat and build muscle
Low oil prices have battered Russia’s economy, leading to a recession, the widest budget deficit since 2010, and a sharp drop in the value of the ruble—it’s down about 50 percent against the dollar since 2013. But the cheaper currency is a plus for Russian oil companies. Because they get dollars for the oil they sell, and they pay for services, including drilling, in rubles, they’ve been able to raise the value of their earnings while cutting costs.

4. Pace yourself
Losses from lower oil prices are mainly borne by the government, which gets 37 percent of its revenue from oil and gas. Last year the government responded with a surprise tax increase on oil companies. That helped slow the deterioration of public finances. The threat of another hike looms over 2017. Vagit Alekperov, the billionaire chief executive officer of Lukoil, predicted last month that the nation’s output would flatline next year and potentially decline in 2018 or 2019 because of the state’s tax plans. “The cow that is giving milk today is not being fed,” Alekperov told reporters in Sochi on Sept. 30.

Source: Bloomberg