OREANDA-NEWS. The sector outlook for Russian oil and gas companies is negative for 2016 due to Fitch Ratings' expectation of continued low oil prices, higher taxes, an end to recent oil production growth and a gradually increasing impact from Western sanctions. Leverage metrics for most companies are likely to remain reasonable for their ratings, but the sector's rating outlook is also negative as most ratings are capped by the Russian sovereign's 'BBB-'/Negative rating.

Our price deck assumes there will be no recovery in oil prices in 2016 and we also expect gas prices in Europe, Gazprom's key market by value, to remain low until oil prices start to pick up in 2017. Progressive taxation has helped companies mitigate the impact of low prices, but Russia's mineral extraction tax will rise next year while export duties will remain flat, leading to a 5%-10% drop in oil companies' EBITDA with Brent at USD55/bbl.

Lower earnings could lead to further capex cuts, adding to the medium-term pressure on Russian oil production, which we expect to be flat in 2016 on record 2015 volumes and then to start declining by low single digits. Financial and sectoral sanctions imposed since 2014 by the US, EU and certain other countries have had only a limited impact on oil production so far, but this will gradually increase if the sanctions persist into the medium term as reduced access to funding and advanced technology hit brownfield, Arctic and offshore oil and gas production.

Sanctions have effectively closed the western capital markets for the entire sector, with the notable exception of Gazprom. Russian companies have turned their fund-raising efforts to China, but have had mixed results so far, as the Chinese off-takers and banks appear to be selective and demanding.