Oil Production Growth In Ugra No Longer. Ever.

27.08.2009 — Analysis

The worldwide economic crisis shifted the oil production peak in the Khanty-Mansiysk Autonomous Okrug from 2010-2011 to 2007. Only a slow reduction of volumes is expected from now on. According to the RusBusinessNews observer's calculations the long term oil production forecast has been corrected towards a reduction of about 10%.

For many decades Ugra has been the largest Russian oil producing region, currently Ugra has 57% of Russian and 5.2% of world's oil production. Over the last decade (1998-2007) the Autonomous Okrug saw a steady growth of production volumes of hydrocarbons.

According to the initial edition of the long term forecast drafted by the Ugra government the oil production peak should have occurred in 2010-2011 at about 300 million tons annually, and then a gradual decrease of production was expected reaching 270 million tons by 2020. The worldwide economic crisis, however, has reflected on this long term forecast rather significantly.

The 2008 figures show that the Autonomous Okrug for the first time in this decade demonstrated a reduction in oil production, 277.6 million tons which is 0.3% lower than the 2007 figure. The first half of 2009 has aggravated the forming trend, 134.6 million tons has been produced in this time which is 2.8% lower than in the same period of the previous year.

Due to the rapid change in the world oil market environment manifested in a significant drop of oil prices, the oil production became much less attractive for investors and, as a consequence, in the reduction of the field development work.

Veniamin Panov, the Director of Ugra's Department on Oil, Gas, and Mineral Resources, informed RusBusinessNews that the problems caused by the financial and economic crisis have been growing from September 2008 to February 2009. The production drilling during this period has fallen by 33% in the Okrug, the daily oil production - by 3%.

"The continuing worldwide financial crisis notwithstanding, the production drilling has reached the pre-crisis levels this March. There is a tendency of growth in the daily average production output", says Veniamin Panov. "So the oil companies have managed to overcome the consequences of the financial and economic crisis and carry on working steadily in the existing conditions".

The Ugra authorities use the seven new fields being brought into development in the first half of 2009 as a confirmation of the stabilisation in oil production. However, there is a rather long time, up to ten years, between bringing a field onstream and the time when the field reaches the projected output.

2010 is still considered to be the peak year for oil production. According to the Energy Strategy of the Autonomous Okrug it is planned to produce, depending on the forecasting option, from 270 to 279 million tons of oil next year with the following stabilisation and a gradual decrease to 220-253 million tons in 2020.

"Our calculations show that 2009 oil production in Ugra will amount to 271-272 million tons which would match the projected figures of the Energy Strategy. So we do not see any reason to change the long term forecast for oil production in the Okrug", says Veniamin Panov.

At the moment, probably, there are no reasons to introduce new amendment to the Energy Strategy. The amendments made previously would suffice. If we compare the long term forecast with the initial version, the difference amounts to a minimum of 10%!

We should stress that even these corrected figures would only be achieved if the State actively stimulates the work of low profit fields which are so plentiful in Ugra. Quite a lot has been done in this sphere. Measures undertaken on the federal level and, most importantly, the reduction of the tax burden on the fuel and energy complex, have increased the investment component.

In the seven months of 2009 the volume of production drilling in the Autonomous Okrug has grown by 183.6 thousand metres in comparison to the same period of the previous year. The profit tax concessions offered at the subject of the Federation level are still in place.

In order to stimulate the oil production at low profit fields the region introduced two bills for the federal legislation - "On the introduction of changes to the Article 432 of the Part Two of the Tax Code of the Russian Federation" (stipulates the zero tax rate for the taxation of oil produced from the reservoir of the Bazhenovo suite) and "On the support for small and medium business entities in the oil and gas complex of the Russian Federation and on the introduction of amendments to certain legislative acts of the Russian Federation".

Oil companies are of course the ones to make the key contribution. According to the 2009 first half year results the leading oil production positions in Ugra stand as follows - OJSC Rosneft Oil Company (25.5% of the total volume), OJSC Surgutneftegas (21.4%), OAO LUKOIL (19.2%), and TNK-BP (16.9%).

Veniamin Panov reckons that the amount of investment into the construction and reconstruction of oil production facilities in 2009 in the Autonomous Okrug is expected to be no less than in 2008, around 285 billion roubles mark.

Pavel Kober