Energy forecast: Higher investment despite OPEC+ cut

RUSSIA ENERGY / FINANCE - Forecast 20 Dec 2018 by Leonid Grigoriev and Marcel Salikhov

Oil and gas has long been a workhorse for the Russian economy. That’s why, before making a traditional year-end economic forecast for the subsequent year, we make an explicit forecast for the Russian oil and gas sector. Current trends in oil and gas have a major influence on the domestic economy, and also shape views on fiscal policy and the FX market.

Russian oil production is set to grow 1.3% in 2018, due to a quick and strong ramp-up in production in H2 2018. But a new OPEC+ agreement means that Russia needs to bring production back from 11.4 mbd in October 2018 to 11.2 mbd in Q1 2019. We expect a small increase (+0.5% in 2019), as the agreement should soften later in 2019.

The agreement with OPEC can influence the short-term picture, but doesn’t affect fundamental trends. Current investment plans of major oil companies imply that Russia can maintain a 0.5-1% average growth rate of oil production per annum for the next five years.

One of the most confusing and troubling points for the industry was the so-called “tax maneuver,” accompanied by the increased desire of the government to regulate domestic oil product prices. We see a contradiction between “tax maneuver” legislation, which was expected to increase domestic prices, and following actions by the government to “freeze” the current status quo, which is largely influenced by the decline in global oil prices in October-December 2018. But it is unstable. Starting on January 1st, 2019 there will be a new shock for domestic prices, as VAT and excise rates will be increased, while oil majors have an obligation to avoid increasing prices. If global oil prices start to rebound, that will cause old problems to resurface.

Surprisingly, gas exports to Europe were one of the brighter spots for Russia in the last few years. Despite political tensions, Gazprom reached record levels of supplies to the EU. This year there were transport bottlenecks that limited Russian supplies to Europe. In coming years, competition with the LNG will increase, but the main outcome is expected to come as limits on growth in export prices, not as a decline of supplies. After 2020, exports will be supported by the launch of the Power of Siberia pipeline, and the start of the pipeline exports to China.

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