Energy forecast: oil & gas production rise in 2020
Before the release of our macroeconomic forecast, we traditionally publish an update of the oil & gas sector forecast, due to its critical relevance to the Russian economy.
Oil & gas remains a backbone of the Russian economy. We expect that in 2020 oil production will grow by 1.1%, after expanding +0.9% in 2019, even factoring in the effects of the OPEC+ deal. In December 2019, OPEC+ countries agreed to extend the deal, and to add another 0.5 mbd of supply cuts until March 2020. Russia has gained approval to remove condensate production of 0.7 mbd from its production calculations. It agreed to an additional cut of 70 tbd beyond the previously-agreed cut of 230 tbd.
Exports of crude are forecast to grow 3.5% in 2020, while exports of oil products are poised to stagnate. Changes in taxation make exports of fuel oil less profitable for domestic refineries, and stimulate exports of crude.
Natural gas production will decrease by 0.8% to 729 bcm in 2019, due to lower exports. Pipeline gas exports will decline by 4.2% to 211 bcm. Production will rebound next year, because of the start of deliveries by Power of Siberia to China, and continued increase in LNG exports. At the same time, decline in pipeline exports will continue (-1.8%), due to the large volume of accumulated stocks in Europe, and to continued excess supply in the global LNG market.
Uncertainty about the prospects for gas transit through Ukraine puts additional pressure on Russian gas exports in 2020. Ukraine insists on concluding a new contract for the next 10 years with a guaranteed take-or-pay volume of 60 bcm. Gazprom wants a short-term agreement (for one to two years) and mutual settlement of all judicial claims. The agreement on the transit terms since January 1st, 2020 is still not established.
After the completion of Nord Stream-2 and the Turkish Stream, the construction of new gas pipelines in the European direction seems unlikely. No major new Gazprom projects are expected in coming years. We also expect that even with the new U.S. sanctions against Nord Stream-2, Gazprom will finish the construction in 2020.
Russian President Vladimir Putin in September announced the development of a project for the supply of gas from Russia to China, in transit through Mongolia. This is a replacement for the Altai gas pipeline (Power of Siberia-2), which Russia and China had long been discussing. But the true prospects of this project are still unclear.
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