Oil Markets Pay Scant Attention to Russia

MOSCOW – Oil markets may not be pricing in the extent of dwindling output in the world’s biggest producer, Russia, a factor that could buoy prices later this year, traders and analysts said. Last week, the Russian government predicted 2009 oil output of 9.68 million barrels a day, a 1.1% annual drop. But a Dow Jones Newswires survey of 12 analysts puts the decline at more than twice that rate, with the most pessimistic predicting a slump of 7%. Having plunged to a third of last summer’s peak, oil prices have stabilized lately. They remained strong in the past week despite a March 15 decision by the Organization of Petroleum Exporting Countries to leave production quotas unchanged until at least May.

The market is focused on the possibility that slumping economic growth will hit demand for energy in the world’s biggest oil consumers, the U.S. and China. But little attention is being given to Russia, where crude-oil output fell last year after a decade of increases. Russian producers pay high taxes, which leave them with limited cash to spend on maintaining fields and bringing new production online. Meanwhile, tight credit markets are slowing the flow of loans to the sector. "We believe [Russia] will add to the growing global supply curtailment by the end of 2009, a factor which isn’t fully appreciated by the market," said Oswald Clint, an analyst at Sanford C. Bernstein in London. This month, the brokerage cut its forecast for Russia’s crude production this year to 9.1 million barrels a day, a 7% drop from last year.

While the Russian government, whose coffers rely on oil revenue, has eased the tax burden somewhat in a bid to stabilize output, it is unlikely to do anything more, despite producer pleas, as the federal budget looks set to post its first deficit in 10 years. In early January, Russia’s five biggest producers — OAO Rosneft, OAO Lukoil Holdings, TNK-BP Ltd., OAO Surgutneftegas and OAO Gazprom Neft — announced an average annual reduction in capital spending of 15% for 2009. But analysts said the industry may cut more spending, crimping new production capacity. Officials agree that the situation is bleak. Producers "may lack funds to support production levels at mature oil fields in West Siberia or to open up new fields in East Siberia and Timan Pechora [in Northern Russia] while also having to deal with the current tax burden," the government said in a statement last week.

Since 2000, oil companies ramped up production at fields in West Siberia — the source of most of Russia’s oil — by bringing in new technology. But as output from those fields declines, big investments are required to tap new deposits in more difficult-to-access areas. Moscow-based Alfa Bank reckons the annual rate of decline in production at Russian oil fields already in operation totals 15% to 17%, compared with a rate of 7% in 1998. The higher rate implies producers would need to bring 1.5 million barrels a day in new output on stream just for production to stay flat. "That’s just not going to happen," said Alfa’s head of research, Ron Smith. OPEC also remains unclear about the future of Russian production. "The uncertainty over Russian oil supply remains high," OPEC said last week in a statement. At present, the cartel forecasts Russia’s daily oil production at 9.65 million barrels in 2009, a notch below the government’s official estimate.

While Russia is responsible for about 20% of non-OPEC oil supply, falling output from other exporters could also influence prices, traders said. Last week, the International Energy Agency lowered its forecast for 2009 non-OPEC supply growth to zero, largely due to production problems in the Caspian state of Azerbaijan. Merrill Lynch said in a research note that the combination of OPEC’s cutting output in recent months and the worsening outlook for non-OPEC production from Russia, Azerbaijan and Norway suggests that "supply availability will be significantly reduced in the second half of the year." On Tuesday, crude oil for May delivery on the New York Mercantile Exchange rose $0.18 per barrel, or 0.3%, to $53.98, marking a second consecutive day of gains. It was the highest settlement price since Nov. 28.