Publication: Eurasia Daily Monitor Volume: 5 Issue: 89

In his inaugural remarks, the new Russian President Dmitry Medvedev stated that the country had sufficient resources to pursue its dynamic economic development. This optimistic statement came, however, against a background of continued debates about whether Russia could sustain its current production levels of crude oil, the country’s major cash source.

Earlier this year, the Russian government announced plans to raise the country’s crude oil production. In March, Russia’s Economic Development and Trade Ministry announced a program to develop the country’s energy sector. The blueprint called for raising Russia’s crude oil production from 9.87 million barrels per day (bpd) in 2007 to 11.23 million bpd by 2015, 11.94 million bpd by 2020, and 12.04 million bpd by 2030.

Yet despite optimistic official plans, since last fall Russia’s crude output has been declining for the first time after a decade of production growth. On May 4 the Russian Industry and Energy Ministry said that April production was down to 9.72 million bpd, from 9.76 million bpd in March and more than 2 percent lower than the post-Soviet high of 9.93 million bpd in October 2007 (Moscow Times, May 5). In the first quarter of this year Russia’s crude output was 1 percent lower than in the same quarter of 2007, according to the governmental data.

Some industry leaders voiced doubts about whether the governmental plans are feasible. Last month Leonid Fedun, deputy CEO of Russia’s LUKoil, warned that the country’s crude production could go down. He said that sustaining levels of 8.5 to 9 million bpd over the next 20 years would require investing billions of rubles to develop new deposits.

In contrast, on April 30 Russia’s state-run GazpromNeft CEO Alexander Dyukov claimed that Russian oil output would continue to go up till 2030-2040. Any significant production decline should not be expected before 2050-2060, he said (Interfax, RIA-Novosti, April 30).

Subsequently, both LUKoil and GazpromNeft lobbied for tax cuts. Oil companies cited high taxes and rising costs as major reasons for the decline in production. Russia’s oil executives have suggested various tax relief schemes, including lower taxes for new deposits.

Nonetheless, last month the Russian government announced plans to raise oil export duties on June 1 to an unprecedented $398 per ton (RIA Novosti, April 24). The government reviews export duties on crude on a bimonthly basis, reflecting changes in the Urals price.

Russian crude exports reached 4.52 million bpd in April, up from 4.23 million in March and 3.99 million in February (Interfax, May 4; Moscow Times, May 5). Russian oil companies were understood to be rushing to export more oil ahead of the hike in oil export duties in June.

In its plans to raise the country’s crude oil production, the Russian government apparently relies on state-controlled companies. The state’s share of Russia’s oil production has risen to more than 40 percent, from just 6 percent in 2000, following controversial acquisition of the Yukos and Sibneft oil companies by government-controlled entities.

Russia’s state-run Rosneft, which took over the bulk of former Yukos, has pledged to pump 3.21 million bpd of crude oil in 2015 and 3.41 million bpd in 2020, up from and estimated 2.23 to 2.25 million bpd this year.

In March GazpromNeft disclosed ambitious plans to hike its oil production up to 0.98 million bpd this year. Acquisition of new assets would allow GazpromNeft to pump up to 1.81 million bpd per year and raise reserves from 10.03 million bpd up to 44.13 million bpd by 2020.

Controlled by the state-run gas monopoly Gazprom, GazpromNeft has been built around the nexus of the former Sibneft oil company. In 2007 GazpromNeft produced 0.66 million bpd of oil, and it now plans to nearly triple crude oil output by 2020, apparently planning on acquiring new assets. In April, however, GazpromNeft oil production was more than 6 percent below the level in the same month last year.

There have been also warnings that Russia’s oil infrastructure has remained under funded due to high taxes, as the companies have failed to invest in developing new deposits. In March the Russian government approved a blueprint on geological research, which stipulates doubling the government funding of all geological research projects by up to $1.69 billion per year from 2011 to 2020, or up from about $848 million in 2007.

On May 6 a board meeting of Russia’s pipeline monopoly Transneft approved a second-stage investment program for the East Siberia Pacific Oil Pipeline (ESPO) but proved unable to decide on whether to build the Baltic Pipeline System-2, also known as BTS-2 (Interfax, May 6).

The BTS-2 project to link Unecha and Primorsk first surfaced in early 2007, following an oil transit dispute between Russia and Belarus. The new pipeline would make it possible to raise the capacity of the port of Primorsk from 1.51 million bpd a year up to 3.01 million bps at an estimated cost of $2 billion.

Earlier this month, then Prime Minister Viktor Zubkov held a meeting with Industry and Energy Minister Viktor Khristenko and Transneft head Nikolai Tokarev to discuss the BTS-2. Khristenko reportedly suggested postponing construction of the BTS-2, because Russia would not have enough oil to fill both the ESPO and the BTS. However, the meeting apparently made no final decision on the issue (Interfax, May 4). Therefore, even the Russian government appeared to have second thoughts about its own plans to raise the country’s crude oil production.