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Oil output

Renaissance Capital

20 June 2019

Russian oil & gas

Crude in Russia is produced by over 100 companies, the majority of which are small private enterprises, JVs with foreign participation or production-sharing projects. However, oil output is highly concentrated in Russia, with eight large, vertically integrated companies (VIC) accounting for 83% of total output in 2018 (throughout this report, we refer to Bashneft as a separate company, although Rosneft acquired a controlling stake in 2016). Together with Gazprom and NOVATEK, these companies accounted for 87% of total Russian production in 2018.

According to the last reported 2017 data from Russia’s Ministry of Natural Resources

(MNR), Russia has 3,074 discovered fields containing crude oil, of which 2,511 are oil fields and 563 are mixed (crude, gas, condensate). MNR also reported there were 2,641 issued licences for fields containing oil.

Figure 13: Crude oil and condensate production* by company, mnt

	2006	2007	2008		2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	YoY
Russia	480.5	491.3	488.5		494.2	505.1	511.4	518.0	523.3	526.8	534.1	547.5	546.8	555.8	1.7%
Oil companies	439.5	440.1	435.4		443.1	445.4	447.0	451.3	453.6	451.5	450.7	454.6	453.6	459.2	1.2%
Rosneft	81.7	101.7	108.3		116.5	117.5	119.7	122.6	161.6	195.9	194.2	194.8	194.8	200.8	3.0%
LUKOIL	90.4	91.4	90.2		92.2	90.1	85.3	84.6	85.8	86.6	85.7	83.0	81.7	82.1	0.5%
Surgutneftegas	65.6	64.5	61.7		59.6	59.5	60.8	61.4	61.5	61.4	61.6	61.8	60.5	60.9	0.6%
Gazprom Neft	32.7	32.7	36.3		35.3	35.0	35.6	36.8	37.2	38.6	39.3	42.9	45.7	46.0	0.8%
Tatneft	25.4	25.7	26.1		26.1	26.1	26.2	26.3	26.4	26.5	27.2	28.7	28.9	29.5	2.1%
Bashneft	11.7	11.6	11.7		12.2	14.1	15.1	15.4	16.1	17.8	19.9	21.4	20.6	18.9	-8.1%
Slavneft	23.3	20.9	19.6		18.9	18.4	18.1	17.9	16.8	16.2	15.5	15.0	14.3	13.8	-3.4%
Russneft	14.8	13.2	12.7		12.0	13.0	13.6	13.9	12.5	8.5	7.4	7.0	7.0	7.1	1.4%
TNK-BP	72.4	69.4	68.8		70.2	71.7	72.6	72.5	35.7	-	-	-	-	-	-
YUKOS	21.5	9.0	-		-	-	-	-	-	-	-	-	-	-	-
NOVATEK	2.6	2.6	2.7		3.3	3.8	4.2	4.1	4.3	4.3	4.7	8.0	7.6	7.6	0.6%
Gazprom	13.4	13.2	12.7		12.0	13.5	14.5	14.5	16.3	16.2	17.0	17.4	17.4	17.4	-0.4%
Non-integrated	25.0	35.4	37.6		35.7	42.3	45.7	48.1	49.0	54.7	61.7	67.4	68.2	71.7	5.1%
producers and JVs
Note: Consolidated production, not including share of production from JVs.
Figures for Rosneft and Gazprom Neft include their shares of production from Tomskneft and Messoyakhaneftegaz.
											Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

Russian oil output has been steadily on the rise since 2008, except in OPEC+ constrained 2017. The decline in crude output that began in January 2008 was unexpectedly reversed in March 2009. At the start of 2009, the market was expecting that amid falling capex and financing constraints, Russian output would continue its downward trend. In reality, FY09 Russian oil production surprised on the upside, rising by 1.2% on a headline basis to 494.2mnt (9,885kb/d), or 1.5% when adjusted for the 2008 leap-year effect. Production growth in 2010 was 2.2% due to the significant contribution from new fields. In 2011, Russian oil output continued to increase, reaching 511.4mnt (10,228kb/d), or +1.2% YoY, driven by the continued contribution from greenfield projects and significant stabilisation of output from brownfields. In 2012 and 2013, Russian output rose by 1.0% and 1.3%, respectively (in b/d terms), generally in line with 2011 growth. In 2014, production growth decelerated (0.7% for the year), briefly touching 0% in August 2014. However, after that production growth rates started to pick up, as the oil companies began to ramp up a new wave of greenfield projects. Production increased by 1.4% in 2015 and 2.2% in 2016 (adjusted for the leap-year effect).

A key event in 2016 was the oil output cut agreement with OPEC countries, whereby Russia committed to a 300kb/d production cut from the reference level of November 2016 (11.3mnb/d). Russia delivered on this promise and in 2017 Russian production was down 266kb/d, or 2.4%. Russia’s crude production trends in 2018 were affected by the relaxation of the OPEC+ constraints in June 2018. Although it was reported by the media that Russia agreed to raise its production by 200kb/d (i.e. reflecting a 100kb/d effective cut vs November 2016 levels), actual production increased 392kb/d between JuneDecember 2018 reflecting average production growth of 1.7% during 2018. In hindsight, it is obvious to us that the June 2018 agreement did not impose any firm production

In 2018, Russia’s crude output rose by 1.7%

Russia committed to a 228kb/d production cut under a 2018 agreement with OPEC

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Renaissance Capital

20 June 2019

Russian oil & gas

constraints, with all OPEC+ members trying to maximise their output in the following months. The subsequent 20% reduction in the Brent oil price between June and November 2018 reflected higher supply growth expectations and prompted another 1.2mnb/d output cut and a six-month production freeze agreed by OPEC+ countries on 7

December 2018. Russia’s share of the production cut was reported at 228kb/d, reflecting a 2.0% reduction vs the October 2018 actual figure.

Figure 14: Crude oil and condensate production by company, 2013-2018, mnt

	2013		2014		2015		2016		2017		2018

250

200

150

100

50

0

Rosneft

LUKOIL

SurgutNG

Gazprom Neft

Tatneft

Bashneft

Gazprom

Slavneft

NOVATEK

Russneft

TNK-BP

Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

Figure 15: Crude and condensate production by company, 2018, % of total

Bashneft NOVATEK Others 4% 1%

16%

	Rosneft
Russneft	36%
1%
Slavneft
3%
Tatneft
5%
Gazprom Neft
8%
SurgutNG	LUKOIL
11%	15%
	Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

Rosneft led production growth in 2018 among Russia’s VICs with a production increase of 3.0% YoY, compared with growth of 0.3% in 2017. This was driven by Rosneft’s largest production subsidiary, Yuganskneftegas, which accelerated production growth to +5.5% YoY, from +4.8% in 2017 and 1.8% in 2016, following the declines of 3.2% and 2.6% in 2015 and 2014. Rosneft’s greenfield projects also contributed to the YoY production growth, including Taas-Yuryakh (+132.9% YoY), Yurubcheno-Tokhomskoye (+213.5%), Tagul (+267.9%), Kondinskoe (+591.0%), and Uvat (+9.8%) fields, offset by the declines at Vankor (-8.4%), Suzun (-1.8%), and Purneftegaz (-12.5%). Production at Vankor, which was one of the first greenfield projects in post-Soviet Russia, launched in 2009, started declining in March 2016. Vankor produced 16.1mnt in 2018, down 8.4% YoY (kb/d terms), as Rosneft saw compliance with the OPEC+ agreement.

Rosneft’s production surged YoY in

2018 (+3.0% YoY) – above the 0.3% growth rate reported in 2017

Tatneft, a mature Volga-Urals producer, was the second-fastest-growing VIC in Russia in 2018 – its crude production grew by 2.1% YoY. Tatneft’s production growth over the period was mostly due to the relaxation of the OPEC+ constraints, growth in the highly

Tatneft increased production by 2.1% in 2018

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Renaissance Capital

20 June 2019

Russian oil & gas

viscous crude and more intensive application of enhanced oil recovery methods. Tatneft switched to a more growth-oriented approach in 2015, when the company’s production increased by 2.7% following an extended period of non-growth (CAGR was just 0.2% in 2009-2014).

Gazprom Neft’s liquids production reached a new historical record in 2018 of 46mnt, up 0.8% YoY, due to the ramp up of production from its two greenfield projects, Novoportovskoye (+21.9%) and Prirazlomnoye (+20.8%) which together produced 10.4mnt in 2018, or 26.5% of Gazprom Neft’s total liquids output, against 20.2% in 2017.

The ramp-up of production at East Messoyakhinskoye field (+41.4%), which Gazprom Neft develops together with Rosneft on a parity basis, also contributed to the overall increase in production.

Gazprom Neft reached a record output of 46mnt, up 0.8% YoY

Surgutneftegas produced 60.9mnt in 2018, up 0.6% YoY. Surgutneftegas currently has the highest exposure among the Russian blue-chips to the mature and highly depleted fields of West Siberia, with Talakan field driving its East Siberia output (commercial operations began in late 2008).

In 2018, LUKOIL’s production increased by 0.5%, following the declines throughout 2016 and 2017 (3.4% and 1.3% respectively). The key reason behind the increase was the ramp-up of LUKOIL’s Caspian production up to 6.9mnt (+25.1%) and the temporary increase in production at some of the West Siberian fields following a relaxation of the OPEC+ agreement, which supported a lower decline rate of 3.5% YoY, compared with reductions of 5.0% in 2017 and 7.4% in 2016.

Surgutneftegas increased production by 0.6% on the relaxation of OPEC+ quotas

LUKOIL reversed the decline supported by Caspian output

Slavneft’s (co-owned by Rosneft [previously TNK-BP] – and Gazprom Neft) production has been declining since 2005. Last year was no exception – production declined by 3.4% YoY. Production is now 43% below the peak level achieved in 2005 (-4.2% CAGR).

Bashneft’s production decline accelerated to 8.1% in 2018, from 3.3% in 2017, a reversal of a growth trend of 7.0% in 2016 and 11.9% in 2015. We attribute the negative dynamics to the 44.9% decline at the Trebs & Titov field following the acquisition of the controlling interest in the company by Rosneft in October 2016 and its dispute with LUKOIL regarding the tariffs at LUKOIL’s owned Varandey export terminal. Following the recent stabilisation of Trebs & Titov output at 22kb/d in 2018-2019, Bashneft’s production decline slowed down to 1.1% in 5M19.

RussNeft continued to demonstrate production growth in 2018 (+1.4% YoY) and increased production further by 1.0% YoY in 5M19.

Gazprom’s liquids output declined by 0.4% in 2018. Since 2010, Gazprom has increased its liquids production by 28%, caused by a changing mix of dry and wet gas, while a fall in gas output partially offset this trend.

Finally, the other category – independent producers and JVs – achieved 5.1% YoY production growth in 2018, after an increase of 1.4% the year before. However, in absolute terms this represents just 3.5mn tpa of crude production. Their growth in output was mainly driven by a 26% YoY increase, or 2.4mnt, in the production of Sakhalin-1 PSA. We associate this dynamic with the ramp-up at the Arkutun-Dagi field, launched in the end of 2014. NOVATEK’s liquids output increased 0.6% YoY in 2018 on consolidation of Yamal LNG production, while its core production was down 3.4% in 2018.

Slavneft’s production has been in decline since 2005

Bashneft growth has decelerated following its acquisition by Rosneft

Gazprom’s liquids production is explained by the changing mix of dry and wet gas

Independent producers and JVs had increased output in 2018, led by Sakhalin-1 PSA

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Renaissance Capital

20 June 2019

Russian oil & gas

In the early 2000s, VICs accounted for 90%, on average, of Russia’s liquids output.

However, in 2005 their share of total output began to decline. In 2018, their share dropped to 82.6%, from 88.2% in 2010 and 92.0% in 2005. This is largely explained by the fact that the VICs’ portfolios are dominated by mature fields. In 2018, VICs produced 459.2mnt of crude oil and condensate, posting 1.2% YoY growth due to the relaxation of the OPEC+ curbs in the middle of the 2018. The non-integrated producers reported a higher growth rate of 5.1%, which is above Russian average growth of 1.7% YoY, driven by the 26.5% growth in Sakhalin-1 crude production to 11.6mnt.

Figure 16: Crude oil and condensate production growth by company, 2018 and 5M19

2018 5M19

20%

15%

10%

5%

0%

-5%

-10%

Bashneft Slavneft LUKOIL SurgutNG NOVATEK Gazprom Russneft Tatneft	Rosneft
Neft

Notes: Excluding JVs for 5M19

Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

VIC output has lagged the rest of the Russian oil industry since 2005, increasing 1.2% in 2018; the independent segment expanded 5.1% in 2018, while NOVATEK reported growth of 0.6%; Gazprom’s condensate output decreased by 0.4% YoY

According to 5M19 data reported by CDU TEK, Russian crude oil and condensate output saw an increase of 2.8% YoY. We consider this to be a consequence of a higher OPEC+ reference level of 11,421kb/d and a lower cut of 228kb/d for Russia in 2019 compared with the reference level of 11,247kb/d and a more substantial cut of 300kb/d in 5M18. Assuming OPEC+ constraints are extended into 2H19 we expect more difficult YoY comparisons with an unconstrained 2H18 output and calculate Russia’s average 2019 oil production will amount to 11.21mnb/d, still reflecting YoY growth of 0.6%.

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