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Taxes and investment gap hinder Russia’s oil output

Russia, the world's largest crude producer, is unlikely to make substantial production increases in coming years to capitalize on tight markets or even keep pace with demand due to a lack of investment and a heavy tax burden.

Lack of new projects in the pipeline, while existing fields mature, is a worry for the country, which is hoping to at least sustain crude production at over 500 million tonnes (10 million barrels per day) over the next 10 years.

Russia increased its oil output by 1.2 per cent in the first half of 2011 thanks to newly launched deposits. That was a notch above the 1.1 per cent forecast in a Reuters poll for full-year 2011, which was compiled early this year when oil was about $85 U.S. per barrel.

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Since that forecast, prices have jumped above $100, boosted by unrest in the Middle East and a nuclear disaster in Japan, and Russian oil producers have increased their rate of pumping crude.

But analysts say the increase is still small as companies strive to make up for a continued decline in production from their existing fields.

"Certainly, Russia's production growth is not catching up with the world's growing demand. Russia's mature fields base is so large that it needs a lot of new projects just to offset that decline," Julius Walker, senior oil market analyst at the International Energy Agency, told Reuters.

"So any changes to the tax regime would have to be ones that encourage significant new fields start-ups. And/or investments needed into fields with declining production."

Russian Prime Minister Vladimir Putin has said the country will need over 8.6-trillion roubles ($308.7-billion U.S.) to keep pumping oil at current levels until 2020, while the Energy Ministry has warned output could fall by 20 per cent without substantial financing.

According to leading forecasters, global oil demand will rise by 1.4 to 1.6 per cent this year.

Russia produced 10.195 million bpd – 12 per cent of the world total – in June, according to government data. That is down 0.6 per cent from a post-Soviet high of 10.26 million bpd reached in May and compares with its all-time peak of 11.41 million bpd in 1988, when it was still part of the Soviet Union.

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The IEA forecasts that Russia's oil and condensate production is set to peak at 10.57 million bpd next year and then start declining. The IEA's definition of production is slightly broader than that used by Russian officials.

It also forecasts that the rate of increase is set to slow this year.

"Year-on-year, in 2011 I see it up 90,000 bpd, compared with a 240,000 bpd rise in 2010, as growth from new fields slows," IEA's Mr. Walker said.

Government taxation policy has not been helpful for companies that are tapping hydrocarbon reserves in the country, and analysts do not see a light at the end of the tunnel.

Russian oil and gas companies pay higher tax rates than other industries, with taxes taking 78 per cent of total oil company profits and 56 per cent of gas company profits.

Proposals to make taxation more diverse and profit-based have long been mired in discussions, while the government is looking to increase the tax burden to compensate for more spending ahead of parliamentary and presidential elections.

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Russia cancelled preferential export duties for Rosneft's Vankor oilfield – a new field launched in 2010 that has become a major driver of overall output growth – as well as for TNK-BP's Verkhnechonskoye and Surgutneftegaz's Talakan, starting from May.

"The key to the answer of whether Russia will increase its production is Vankor. If Rosneft achieves the target of 25 million tonnes of oil production there in 2013, this will be a decisive factor," Valery Nesterov from Troika Dialog brokerage said.

The country's green-fields such as Vankor together account for only around 15 per cent of total oil output.

According to Mr. Nesterov, green-field production grew over 13 per cent in the second quarter, while output from mature fields declined by 0.2 per cent.

"The output growth in Russia is hardly sustainable due to a heavy tax burden and unclear regulation rules. There are simply no drivers for further growth there," Mr. Nesterov said.

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