Goldman’s rosy prediction for Russian oil looks hopeful

International oil companies aren’t spending enough on the extra capacity needed to meet demand by the end of the decade. So it will fall to countries like Russia to provide the additional production on which we will all depend. In a July 19 report, Goldman Sachs analysts painted a hopeful picture for Russian oil production — putting the bank at odds with the forecast made earlier this year by the International Energy Agency. The latter, though, is more likely to be correct.

Goldman expects growth in Russian production to accelerate, with output hitting 11.7 million barrels a day by 2018, an increase of almost 600,000 barrels a day from 2015. By contrast, the IEA expects output to fall by 160,000 barrels a day over the same period.

Rosneft accounts for more than a third of Russia’s output, so the oil giant’s performance over the coming years will be a big driver of what happens in Russia as a whole. Worryingly, the company’s output has been steadily declining ever since it acquired TNK-BP in 2013. Production has fallen by 120,000 barrels a day, or 3 per cent, since then.

More than half of the decline has come at Yuganskneftegaz, the oil production business it acquired from Yukos. Output there declined 5 per cent in the period.

Two of Rosneft’s other key legacy assets are also in decline: Samotlor, once Russia’s most prolific field, is pumping just 400,000 barrels a day — 14 per cent less than in 2013. Orenburgneft’s production also fell to less than 1.2 million barrels a day last month.

Even projects that had been helping Rosneft’s output to increase are beginning to falter. Look at production from the Vankor field, which has slipped 5 per cent from its peak of about 445,000 barrels a day.

Goldman Sachs expects a slew of new projects — among them the Suzun, Tagul, Yurubcheno-Tokhomskoye and Messoyakha projects — will increase output to 850,000 barrels a day by 2018 from 470,000 barrels a day last year.

But output from all of these fields will be limited by available pipeline capacity — and it’s far from clear that there will be enough of it to support a 380,000 barrel-a-day increase in production over the next two-and-a-half years.

Suzun and Tagul are two fields close to Vankor that Rosneft acquired when it bought TNK-BP. Rosneft plans to ship the combined output from Vankor, Suzun and Tagul through its 500,000 barrel-a-day pipeline. That suggests that the new fields can’t add more than 77,000 barrels a day to production — the difference between the line’s capacity and Vankor’s current production. Any output above that level would merely be offsetting further declines at Vankor.

There is a similar problem at the Yurubcheno-Tokhomskoye and Kuyumbinskoye projects. Peak output from the fields, due to commence production this year and next, could total about 400,000 barrels a day. But the pipeline that will connect them to the export network will have an initial capacity of just 180,000 barrels a day. That’s not expected to rise to 310,000 barrels until 2023, according to Goldman.

Meanwhile, Russia’s crude oil production should be higher this year than last. Production in the first half was up 180,000 barrels a day from the yearearlier period. But the figure for June was 80,000 down on January as output fell almost every month. That could make it more difficult to sustain yearon-year growth in 2017.

Managing the decline in output from Russia’s ageing fields in the swamps of West Siberia will be crucial in determining whether the country will be able to boost production in coming years. Nowhere is that more important than at Rosneft.

Rosneft accounts for more than a third of Russia’s output, so the oil giant’s performance over the coming years will be a big driver of what happens in Russia as a whole.