OREANDA-NEWS. Russia’s status in the global oil world is hard to top, but that doesn’t mean the country’s production is guaranteed. As Rosemary Griffin explains in this week’s At the Wellhead column from Oilgram News, questions abound about whether Russia’s current oil production (and profit) trends can continue.

From production to prices to politics, the last year has been unpredictable in Russia’s oil patch. This year is shaping up to be no different as there is little consensus on what the impact of lower oil prices will mean for production.

The Russian Energy Ministry announced last week it expects crude output in the country to fall 0.6% in 2015. The IEA also said recently it is preparing significant negative revisions to its forecasts for Russian crude output, going so far as accusing some Russian industry officials of complacency over the country’s ability to sustain production in the current economic and political climate.

Russian crude production can be difficult to predict, however, and many analysts continue to forecast flat or even some output growth this year.

This divergence of opinion reflects the extent of uncertainty in the Russian market so far this year, as well as the difficulty in evaluating a number of factors that could swing the balance of production in coming months.

The key factor in Russia being able to maintain its output has been its ability to offset declining production rates at mature fields with new production at greenfield sites. From the middle of last year, analysts speculated that 2014 may mark the last year that Russian companies would be able to pull this off.

Negative production forecasts are also based on the potential impact of Western sanctions, which have restricted the ability of Russian companies to raise financing and access cutting edge oil production technology. Towards the end of 2014, the dramatic fall in international oil prices also raised questions over whether Russian oil producers would be forced to cut investment programs to cope with the low price environment, potentially leading to a reduction in drilling and a knock-on effect on output volumes.

While full details of individual companies’ investment plans and production targets for 2015 have yet to be released, the energy ministry based its forecasts on estimates provided by oil producers. The ministry now expects crude output to be around 523.5 million mt, or 10.513 million b/d in 2015, against 526.6 million mt in 2014.

So why isn’t there consensus that output will fall in 2015? For one, the output data over recent months has actually shown growth.

January stats showed that production was up 0.4% on year to 10.657 million b/d, slightly below the December average of 10.667 million b/d, but 0.7% higher than the overall 2014 average of 10.578 million b/d. It is significant that the sector’s major player, Rosneft, continues to see crude production decline, 1.7% in January, and an average of 1% over the course of 2014 — but for the time being, other producers are compensating for the drop.

In the current economic environment, the Russian upstream sector is also in a good position to ride out low oil prices, due to currency dynamics and the local taxation system.

With most of their costs in rubles, and earnings in US dollars, Russian oil companies have yet to take a major hit from the falling oil price, and in ruble terms may be able to minimize the impact on their investment plans. Due to the Russian tax system, the per-barrel tax rate decreases as oil prices fall, putting most of the risk of volatile oil prices on the government’s shoulders.

The importance of the Russian oil sector to state coffers is also underpinning expectations that oil and gas producers will receive sizable handouts from the government to help them deal with current market conditions.

Goldman Sachs said in a recent research note that it expects Russia to maintain its global market share in 2015, and see production rise 1% to 532 million mt this year.

Positive forecasts for 2015 also reflect the nature of the impact of Western sanctions to date, which have overwhelmingly affected projects which were not due to contribute to output volumes in the near future. Restrictions on technology transfer which target deepwater, Arctic and shale oil development have led foreign companies to amend their approach to their activities in Russia.

A number of Western majors, for example, have stalled shale oil cooperation with Russian partners, and it appears unlikely that ExxonMobil will be able to continue cooperating with Rosneft on the major Pobeda project in the Russian Arctic Kara Sea.

In the meantime, Western companies’ involvement continues apace in conventional projects that are already producing.

Even if Russia posts flat or slightly increased production for this year, there is cause for concern that factors at play today could give rise to production declines towards the end of the decade. But then, given the inability for consensus on this year’s production, trying to forecast output for the end of the decade could prove to be a fool’s errand.

— Rosemary Griffin in Moscow