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*Chart shows 96% of total 2013 production.
Source: Russian Ministry of Energy
Rosneft 42% Lukoil 19%
Tatneft 6%
Bashneft 3%
Russneft 2%
Gazprom 4%
SNG 13%
Gazprom Neft 7%Slavneft 4%
150803OGJtov-z01
FIG. 1
RUSSIAN OIL PRODUCTION*
66 Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8
Vol. 113, No. 8
Daniel Fjaertoft
Sigra Group
Indra Overland
Norwegian Institute of International Affairs
In reaction to Russia’s involvement in the conf lict in
Ukraine, the European Union and the US have launched
two-pronged sanctions against the Russian oil sector. The
equipment export ban will have limited effect during the
next 10 years because it targets shale, deep water, and
the Arctic, and few such projects are planned to come on
stream before 2025. But the effect of financial sanctions
is immediate and significant.
This conclusion stems from modeling Russia’s oil
production outlook in three scenarios. These encompass a
range of possibilities, from a 2.5% fall by 2018 followed by
recovery on one end, to a more long-term decline leading
to 7% lower production by 2025 on the other. These
estimates are conservative and do not fully account for
the impact of sanctions and lower oil prices on companies
like Gazprom Neft and Lukoil. They also do not take
into account possible side effects of the equipment ban,
the blurred boundaries of which may cause it to affect
projects outside the targeted environments.
Financial sanctions impact Russian oil,
equipment export ban’s effects limited
SANCTIONS OVERVIEW Table 1
Equipment designated for
Deep water
Equipment export ban Offshore Arctic
Shale oil production
Ban on credit lasting longer than
30 days to state banks and oil
companies
Banks
Sberbank
VTB Bank
Gazprombank
Financial instruments ban Vnesheconombank
Rosselkhozbankg
Bank of Moscow (US only)
Oil companies
Rosneft
Transneft (EU only)
Gazprom Neft
Sources: EU Commission, US State Department
150803OGJtov-z02
FIG. 2
MONTHLY OIL PRODUCTION*
Million boe
350
340
330
320
310
300
290
280
270
260
*Including associated gas.
Sources: Russian Federal State Statistics Service (GKS), Ministry of Energy
2010 2011 2012 2013 2014 2015
Log trend = 5.5634ln(x) + 305.04
150803OGJtov-z03
FIG. 3
ANNUAL OIL PRODUCTION
Million boe
4,000
3,000
2,000
1,000
0
2007 2007 2011 2013 2015 2017 2019 2021 2023 2025
Source: A. Novak, GKS, Ministry of Energy, draft Energy Strategy 2035
Status quo
Tax reform
ES-2035 target
150803OGJtov-z04
FIG. 4
Source: Russian Ministry of Energy
FIELD DEVELOPMENT SCHEDULE*
Yurubechno-Tokhomskoe,
Rosneft
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Production start
Reserves, million boe
No sanctions
Financial sanctions
Export sanctions
Russkoe, Rosneft
Lodochnoe,
Rosneft
Filanovskogo,
Lukoil
Trebs & Titova,
Bashneft
Prirazlomnoe,
GPNSH
Naulskoe, Rosneft
Piakiakhinskoe, Lukoil
Suzunskoe, Rosneft Russkoe-Rechenskoe, Rosneft
Khaliamerpalutinskoe, Lukoil
Tazovskoe, Gazprom
Salym-Bazhenov,
Shell + Gazprom
Zapadno-Messiakhskoe,
Gazprom Neft + Rosneft
Kharampurskoe,
Rosneft
Tagulskoe, Rosneft
Novoportovskoe,
Gazprom
Kulumbinskoe, Rosneft +
Gazprom Neft
Vostochno-Messoiakhskoe,
Gazprom Neft
Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8 67
The expected fall in Russian oil
output is linked to the decline in
production from existing fields,
the substantial investment needed
to counter this decline, and the
dominant role in the industry of
state-controlled Rosneft. Rosneft
produces more than 40% of
Russian oil and its debt burden, in
combination with sanctions-limited
access to finance, make it unlikely
that the company will be able to
commit the resources necessary to
maintain current production levels
(Fig. 1).
The fall in oil prices aggravates
the predicament of the Russian
oil sector, but for Rosneft—which
has low production costs, espe-
cially after the drop in the value
of the ruble—sanctions are the
main problem. Also other oil com-
panies, among them Russia’s larg-
est private oil company Lukoil, are
revising investment budgets, sug-
gesting more new production is
likely to be shelved.
Russia is the world’s second larg-
est oil exporter, and developments
in the Russian oil sector affect in-
ternational markets, both for sup-
plies and services and for the oil it-
self. The effect (or not) of sanctions
(Table 1) is therefore significant for
both Russia and the global petro-
leum sector.
Production
Exports of oil and gas make up
around two thirds of Russian
export income and half of Russian
government revenue. In attempting
to put pressure on the Russian
state, sanctions therefore target
the Russian state-controlled oil
companies, Rosneft and Gazprom
Neft in particular.
As Fig. 2 shows, however, Russian
oil production has so far kept up,
and both second-half 2014 and
first-quarter 2015 showed year-
on-year growth of 0.4% and 0.8%,
respectively. These more modest
growth rates reflect a slowdown that
150803OGJtov-z04
FIG. 5
Source: Rosneft
ROSNEFT’S DEBT REPAYMENT
$ billion
25
20
15
10
5
0
Year due
2014 2015 2016 2017 2018 2019 2020
68 Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8
cussion on tax reform in 2012: pro-
duction remained comfortably high,
but maturing fields introduced vul-
nerability, and increased investment
was needed to avoid decline (OGJ
Online, Aug. 12, 2013).
Novak introduced two scenarios,
both reflecting the main ideas in
the General Oil Scheme of 2010, a
government strategy document that
was drafted but never adopted:
• Do nothing and watch oil
production drop.
• Introduce tax stimuli and
prompt its rise.
Peak production could be
postponed to 2017 and 2010
production levels maintained until
past 2022, according to this scheme.
The government launched a massive tax break program
and production growth stayed on course (Fig. 3).
Novak’s report also put forward a list of new fields
that would have to come on stream in order to avoid pro-
duction declines. Should current sanctions impede these
projects, the consequence would be reduced production.
Fig. 4 links the Energy Ministry’s planned projects and
current sanctions. Only one project, Shell and Gazprom’s
Bazhenov exploration at the Salym fields, is affected by
started well before sanctions, suggesting they have had
little immediate impact on Russian oil production. The
question is what effect they will have in the longer run.
The Russian Ministry of Energy warned already in 2010
that 90% of greenfield and 30% of brownfield resources
would be uneconomic under the existing fiscal and leg-
islative framework and that production would therefore
decline unless taxes were reduced.1 Energy Minister Alex-
ander Novak reiterated the warning in a government dis-
ROSNEFT 2015 FINANCIAL OUTLOOK1Table 2
Variable 2014 Forecast 2015 Change, 2014–2015, % Comment
Market factors
Oil price, $/bbl 98.9 60 –39 Average, market analysts’ expectations.2
Exchange rate, rubles/$ 38.42 50 30
Income
Revenue, $ billion 143 87 –39 100% correlated with oil price.
Revenue, rubles billion 5,503 4,345 –21 Combination of oil price and exchange rate.
Expenditure, rubles, billion
Opex 4,446 3,840 –14
Production, operating costs 469 469 –– Assumes 100 % Russian cost base; 0% ination.
Hydrocarbon rening services 495 495 ––
Corporate costs 114 114 ––
Transportation 471 471 ––
Exploration 19 19 ––
Gross taxes 1,195 943 –21 Tax burden reduced in line with oil price and adjusted by
exchange rate. Price and exchange rate coefcients simplied in
tax rate calculation formulas.
Export duty 1,683 1,329 –21
Net earnings
EBITDA, rubles billion 1,057 505 –52
EBITDA, $ billion 28 10 –63
Financial obligations
Capex, $ billion 13.9 9.73 –30 From statement by Rosneft Pres. Sechin.
Capex, rubles billion 534 487 –9 Affected by exchange rate.
Debt due, $ billion n/a 23.5 n/a
Debt due, rubles billion n/a 1,175 n/a
1At $60/bbl crude. 2Analysis from: Conerly Consulting LLC, University of Stavanger, Oil–Price.net, Nordea, Barclays, DNB Markets, and ABN AMRO.
Sources: Rosneft, Sigra estimates
PLANNED PRODUCTION, 2012 VS. 2015
150803OGJtov-z06
FIG. 6
Source: Sigra Group
Million boe
140
120
100
80
60
40
20
0
2015
2012 2015
2015
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
2022
2022
2023
2023
2024
2024
2025
2025
Russkoe
Kuiumbinskoe
Yuburechno-Tokhomskoe
Russkoe
Kuiumbinskoe
Yuburechno-Tokhomskoe
150803OGJtov-z07
FIG. 7
Source: Sigra Group
REVISED PRODUCTION OUTLOOK, SCENARIO 1
0.1
Million boe
4,100
3,900
3,700
3,500
3,300
3,100
2,900
2,700
Expected
replacement
Postponed
production
Estimated production
growth; year-on-year, %
Estimated production
growth; vs. 2014, %
Status quo decline
from target
New production
forecast
–0.3
0.3 –0.1
–1.0
–0.2
0.2
0.9
0.5 0.6 0.2 0.3 1.1
0.0
–0.4
–1.5 –1.7 –1.5
–0.6
–0.1
0.5
0.7 1.0
0.0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8 69
values were. The exception is gross taxes, which are
reduced in line with the oil price and boosted in line
with the exchange rate to reflect current gross tax-rate
calculation practices.
Converti ng dolla r revenue to rubles and subtracti ng ruble
costs yields earnings before interest, tax, depreciation, and
amortization (EBITDA). Since gross taxes constitute the
vast majority of taxes payable and are already subtracted,
this is essentially the money Rosneft retains after selling its
products and paying the direct costs of production, which it
may then channel to debt servicing or capital investments,
for instance in new fields.
the export ban. The two planned
offshore projects are either already
in production (Prirazlomnoe) or
in shallow water, and therefore
largely unaffected by the sanctions
(Filanovskogo).
Rosneft and Gazprom Neft,
however, which now face credit
constraints due to the sanctions,
respectively operate 10 and 1 of the
19 fields planned for production.
These fields are also the largest,
accounting for more than 75% of the
total planned new fields’ output.
The overview of planned projects
in Fig. 4 is not exhaustive (Lukoil
for instance has tight-oil projects
not listed), but it is clear that Russia
does not have any other giant fields
short-term. Do Russia’s oil compa-
nies—and Rosneft in particular—
have the financial resources to keep
projects on schedule? Or, will they
start to slide?
Debt vs. investment
Russia’s production outlook
appears to hinge on Rosneft and the
company’s financial ability to sustain
its field development program. But
the acquisition of TNK-BP in 2013
left the company with significant
debt, a large repayment chunk of
which is due this year (Fig. 5). This
payment normally might have been
manageable, but Rosneft is both
barred from refinancing in Western
markets and faces a substantial
revenue shortfall due to the lower
oil prices. Rosneft Pres. Igor Sechin
stated in February that capital
expenditure (capex) would be cut by
30% from 2014 (in US dollars).
Table 2 recalculates key financial statistics for Rosneft
for 2015. Assuming production stays at 2014 levels,
Rosneft’s revenue for 2015 is adjusted so that the relative
revenue reduction (in US dollars) from 2014 to 2015
matches the decline of the oil price from the average
$98.90/bbl in 2014 to an estimated $60/bbl for 2015. The
exchange rate is adjusted to 50 rubles/$ to reflect the oil
price’s effect on the value of the ruble.
Costs are assumed to be 100% sourced from Russia
and subject to zero inf lation, keeping nominal operating
expenditure (opex) constant in the same way production
150803OGJtov-z08
FIG. 8
Source: Sigra Group
REVISED PRODUCTION OUTLOOK, SCENARIO 2
0.1
Million boe
4,100
3,900
3,700
3,500
3,300
3,100
2,900
2,700
Expected
replacement
Postponed
production
Estimated production
growth; vs. 2014, %
Status quo decline
from target
New production
forecast
–0.3
0.6 0.8 1.1
0.0
–0.4
–1.5 –2.1
–2.5
–1.6
–0.9
0.0
0.7 1.0
0.0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
70 Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8
and Lodochnoe fields), with
unnamed Chinese investors also
said to be interested in investing
in enhanced oil recovery (EOR) in
Rosneft’s fields in Ingushetia.
The Vankor deal may provide
some relief, but quantifying its
effect is problematic. The sales
price was not disclosed, nor were
updated investment plans for the
fields encompassed. Rosneft’s
Chinese connection can therefore
only be loosely assessed and is
kept out of the calculations in this
article. It is clear, however, that
even a 10% Vankor Neft buy-in
from China still would not resolve
the imbalance between Rosneft’s
obligations and income.
Outlook
With access to capital markets barred, Rosneft is in
dire straits. Without spending 30-50% of the National
Welfare Fund to support field development, projects
will be postponed. Rosneft has already signaled that
development of Russkoe and Yurubechno-Takhomskoe
(the two largest fields in Fig. 4) will be postponed
until 2019 and 2018. These delays mark 2 and 1-year
adjustments to a schedule that had already been revised
and may not be the last reschedulings.
Even with government support, therefore, it is hard to
see where Rosneft will find sufficient funds for any capital
expenditure in 2015. The company also has considerable
debt maturing in 2016 and 2017. If the current income
situation persists, Rosneft may have to hold back planned
investment in those years as well.
The following three scenarios will guide the rest of
this article:
• Scenario 1 shows the effect of postponing Russkoe
and Yurubechno-Takhomskoe fields for 2 years and 1
year, respectively, as Rosneft has already announced, and
also Kuiumbinskoe field for 2 years.
• Scenario 2 presents a more restricted investment
outlook than that so far proffered by Rosneft, postponing
the same three fields for a full 5 years.
• Scenario 3 demonstrates the effect on Russian oil
production should Rosneft choose to stick to its revised
investment plan for the three fields in question but do so
at the expense of all other investments in new production.
Since Gazprom Neft is also subject to sanctions,
it could be included when calculating postponed
production in the second scenario. But its modest size
compared with Rosneft limits its impact and to highlight
Rosneft’s importance, Gazprom Neft is excluded.
According to this example there will be a 50% slide
in EBITDA from 2014 to 2015 and a more than 60%
reduction as measured in dollars. Rosneft will have
$10 billion left after paying production costs, making it
difficult to finance both a debt repayment of $23 billion
and a planned capex budget of close to $10 billion.
Rosneft has applied several times for investment
support from the Russian National Welfare Fund in an
effort to close this gap. In September it applied for 1.5
trillion rubles to cover its capital needs for the coming
year. Rosneft subsequently raised its application to
2 trillion rubles, refused by the Ministry of Finance,
which pointed to a total fund size of only more than 3
trillion rubles, 60% of which was ear-marked for national
infrastructure investments.
Rosneft returned early this year with a revised request
for 1.3 trillion rubles. But the government is holding
back, and it seems Rosneft can expect no more than 300
billion rubles, enough to still make it the welfare fund’s
largest single investment.2
This level of support will leave a large enough deficit
that limiting capex reductions to 30% seems optimistic.
Standing $7 billion short of just repaying its $23 billion
dollar debt, it is unclear how Rosneft will afford any field
development investments at all.
China could serve as an alternative source of financing
for Russian oil and gas companies. Gazprom expected to
receive $55 billion in the form of advance payment for
the $400-billion natural gas pipeline deal with China,
but this condition was omitted in final price negotiations.
Tangible results for Rosneft from the Chinese
connection have been limited. China National Petroleum
Co. and Rosneft have concluded a framework agreement
on the former acquiring a 10% stake in Vankor Neft
(holding the licenses for Vankor, Suzunskoe, Tagulskoe,
150803OGJtov-z09
FIG. 9
Source: Sigra Group
REVISED PRODUCTION OUTLOOK, SCENARIO 3
Million boe
4,100
3,900
3,700
3,500
3,300
3,100
2,900
2,700
Expected
replacement
Lost
production
Estimated production
growth; vs. 2014, %
Status quo decline
from target
New production
forecast
–1.0 –1.7 –2.2 –2.5 –2.6 –3.2 –4.1
–5.3
–6.4 –7.6
–1.5
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Oil & Gas Journal | Aug. 3, 2015 | Vol. 113, No. 8 71
by 2019 be at least 2.5% lower than 2014 production.
This still rather conservative adjustment yields a total
postponed production of roughly 530 million bbl, 44%
more than in Scenario 1 and equivalent to 13% of Russia’s
2014 production.
Scenario 3
Both Scenario 1 and Scenario 2 assume that Russian
production will return to targeted levels after production
from postponed fields reaches planned levels. But for
this to happen, production growth must be stronger after
postponed fields come on stream than if they had not
been postponed at all.
This presumes that other planned developments
continue at full speed in addition to the developments
that were postponed, implying increased investment
capacity after the postponement. Given that the rationale
for postponing projects in the first place is limited
investment capacity, it seems counterintuitive that the
investment capacity should be greater than planned
later, particularly after a period of lower revenue due to
production decline and a lower oil price.
A more plausible outcome is that when resuming
development of the postponed fields, Rosneft will
sacrifice other investments. These could include the
remaining seven Rosneft fields in Fig. 4 as well as EOR
and other smaller developments not included in the
ministry’s 2012 plans.
In Fig. 9, Rosneft continues work on Russkoe,
Yuburechno-Takhomskoe, and Kuiumbinskoe fields
according to the schedule in Scenario 1, but to do
so it sacrifices all other investments until 2025. In
this scenario, limited investment capacity causes the
sanctions-induced field postponements to bring Russian
production into long-term decline, 2 years earlier and
Scenario 1
Along with Russkoe and Yuburech no-
Takhomskoe fields, Vostochno-
Messoiakhskoe and Kuiumbinskoe
are among the largest in the Energy
Ministry’s plans for the near future
and are also subject to sanctions.
Gazprom Neft has also asked for
funding from the National Welfare
Fund for Kuiumbinskoe (a joint
development with Rosneft), and we
assume it will also be postponed,
for 2 years from 2017 to 2019.
Vostochno-Messoiakhskoe appears
to be in full development already and
is assumed to remain on schedule.
Applying these adjustments
and Rosneft’s already warned
postponements (Fig. 6) yields 370
million bbl of postponed production from 2015 to 2023
compared with the Energy Ministry’s 2012 projections,
roughly 10% of total 2014 production. Fig. 7 combines
the postponed production with data from the Ministry
of Energy’s 2012 forecast and the draft 2035 Energy
Strategy’s production forecast (Fig. 3).
The production forecast in the draft 2035 Energy
Strategy is chosen as a baseline for the production outlook
rather than the ministry’s tax reform scenario because
the former is more recent and in line with the actual
production trend over the last 2-3 years. Production was
above target in 2014, however, so that the starting point
has been revised to match actual figures and annual
growth has been revised to keep 2025 production in line
with the forecast.
The decline in production envisioned in the ministry’s
status quo scenario is interpreted as inherent decline
from existing fields that must be replaced to maintain
production levels and subsequently subtracted from
the revised forecast to derive expected production
replacement.
Production in Fig. 6 is also postponed to reflect
changes in timing for the three projects shown, leading
to a 9-year dip below targeted production. Production
will decline every year until 2018, when it will be 1.7 %
below 2014 (Fig. 7).
Scenario 2
Once a project has been postponed, it often gets
postponed again. Given Rosneft’s capital constraints, it
would not be surprising if this happened to Russkoe,
Yuburechno-Takhomskoe, and Kuiumbinsko.
Fig. 8 presents a scenario in which production at
these three projects is delayed for 5 years until 2020.
Production will decline year-on-year up to 2018 and
Eprinted and posted with permission to Norwegian Institute of International Affairs from Oil & Gas Journal
August 3 © 2015 PennWell Corporation
72 Oil & Gas Journal | Aug. 3, 2015
starting from a substantially lower level than envisioned
in 2012 (Fig. 3). From 2014 levels, Russian production
decreases on average 0.7 %/year, resulting in 7% lower
production by 2025.
Actual decline, however, may turn out to be greater.
Gazprom Neft’s request for government support suggests
it is facing similar problems, and Lukoil has also signaled
that capital expenditure will be cut 20-25%.3 In sum,
more fields and EOR projects are likely to be delayed,
increasing the amount of postponed (and potentially
lost) production.
Lower oil prices also contributed to these effects. For
companies with limited debt such as Gazprom Neft or
companies not subject to sanctions such as Lukoil, the
oil price in fact may be the main driving force. But for
Rosneft, sanctions are the biggest difficulty. If Rosneft
could refinance its maturing debt, it would have sufficient
operating income to support its revised investment
program. With capex and opex both near $5.00/bbl,4
supporting investments through credits would have been
possible even at $50-60/bbl crude prices.
References
1. “General Development Scheme, Oil Industry of the
Russian Federation for the Period Until 2020,” Ministry of
Energy, Russian Federation, June 2010.
2. Lyutova, M., Papchenkova, M., and Starinskaya, G.,
“Government decides how much money Rosneft needs from
FNB,” Vedomosti, Apr. 14, 2015.
3. Fedun, L., “Financial Results, First-quarter 2015,”
Lukoil, Moscow, June 2015.
4. “Q4 2014 IFRS financial results presentation,”
Rosneft, Mar. 4, 2015.
The authors
Daniel Fjaertoft (daniel.fjaertoft@sigragroup.
com) is managing director at Sigra Group, Oslo.
He previously served as a petroleum analyst at
Econ Poyry and advisor on petroleum and mari-
time issues at the Barents Secretariat. He holds
a MS in economics from the University of Oslo.
Indra Overland (ino@nupi.no) is Professor II at
the University of Nordland, Norwegian spokes-
person for prixindex.net and head of the
energy program at the Norwegian Institute of
International Affairs, Oslo. Before that he headed
the Russia, Eurasia, and Arctic Department at
the same institute and was a senior advisor to
Nordforsk. He holds a PhD from the faculty of earth sciences
and geography at the University of Cambridge.
This article is a product of the RussChange project, which is
financed by the Petrosam II Program of the Research Council
of Norway.
