December 3, 2014 7:00 pm JST
Fossil fuels
Double blow hits Russian economy hard
YOHEI ISHIKAWA, Nikkei staff writer
MOSCOW -- Russia's natural gas and oil development projects are in trouble. Tough sanctions and falling crude oil and gas prices have left many ventures in limbo. Concern over the profitability of some Russian oil development projects and a drop in production volume, have undermined Russia's resources driven economy.
Prices of Russia's major Urals oil came to about $70 per barrel on Monday, down more than 30% from over $100 per barrel at the beginning of 2014. Oil field facilities have aged in Western Siberia, so Russia is developing new projects in Eastern Siberia and on the Arctic continental shelf. The production costs for these projects are steep. Industry experts note that if oil prices drop below $70 per barrel, some new projects will be unprofitable.
Russia's oil production could drop if companies come under pressure to cut investments. The government in Moscow aims to stick to its estimated crude oil production of 525 million tons per year for 2014. In late November, however, the Financial Times quoted Leonid Fedun, vice-president of Lukoil, major Russian oil producer, as saying that a "pessimistic scenario is playing out." He expects Russian production will drop 6.6% over the next four to five years, according to the U.K. business newspaper.
In the mid- to long-term, U.S. and European sanctions against Russia's natural resources and energy companies will likely deal a heavy blow to the nation's oil development. U.S. news agency Bloomberg reported Monday that Exxon Mobil of the U.S. and Russia's state-run and largest oil firm Rosneft had scrapped contracts for leasing service vessels to jointly explore the Arctic continental shelf. The move came after Exxon decided in September to stop resources exploration in the Arctic sea following U.S. and European sanctions against Russia because of tensions in Ukraine. It has proved difficult for Rosneft to continue Arctic oil development without the sophisticated technology of U.S. and European companies.
Russian President Vladimir Putin said Monday that work will stop on South Stream gas pipeline project during a visit to the Turkish capital of Ankara. © Reuters
Similarly, Royal Dutch Shell suspended a joint development project for shale oil in western Siberia with Gazprom Neft, the oil arm of Russia's state-controled natural gas company Gazprom. According to a BP estimate, shale oil will account for 7% of crude oil production in Russia by 2020. It is widely expected to make up production volume declines at existing oil fields.
Sanctions are also hurting Russia's natural gas development projects. Russian President Vladimir Putin on Monday said he will drop the South Stream gas pipeline project that was to export gas to Europe. The project cannot continue under current conditions, the president said. The pipeline was supposed to have a capacity for transporting 63 billion cubic meters of gas a year. Russia will be unlikely to obtain permission for building the pipeline due to European Commission opposition in light of the Ukraine crisis.
Furthermore, Moscow is facing growing uncertainty over the viability of liquefied natural gas exports to the Asia-Pacific region. Gazprom, Rosneft and other companies have been pressing ahead with four different LNG projects, including the one Gazprom works on with Japanese companies in Vladivostok. Yet, these projects face intensifying competition with U.S. shale gas and resources development in other countries. They are also affected by the sanctions.
In Russia, the oil and gas sectors account for roughly 70% of exports and 50% of the revenue in the federal budget. Gazprom predicts that its gas production volume will drop by about 5% in 2014 compared with a year earlier. Gas prices are also taking a hit in line with falling crude oil prices, putting a further drag on the Russian economy. As a result, the ruble is tumbling against other currencies.
http://asia.nikkei.com/Politics-Economy/International-Relations/Double-blow-hits-Russian-economy-hard
