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20-06-2007  Oil production in Russia is becoming increasingly less profitable | |
 At least $300 billion in investment will be needed to support Russia’s oil production at its current level over the next eight to nine years, Leonid Fedun, Vice President of private oil company LUKoil, said at the 11th investor conference hosted by Renaissance Capital. Meanwhile, under existing tax regulations, it is becoming less profitable to produce light oil in Russia than hard-to-extract oil in Canada, according to Fedun. Insufficient investment in oil reserves could lead to the shortage of oil in a few years. The government takes all windfall profits from oil companies, Fedun said. From 2002 to 2006 oil companies paid 42 percent of their profits in tax, and the tax burden currently stands at about 60 percent. High taxes make it difficult to attract investment and launch new projects, Fedun underlined. In a few years’ time oil production in the country could half, he warns. To maintain it at the required level, oil companies will have to put into operation as many oilfields as over the past hundred years, Fedun estimated. All this will require huge investment, estimated at over $300 billion for the next eight to nine years (offshore projects and hard-to-extract oil in East Siberia not taken into account). To develop complex oilfields, it is necessary to attract foreign investors and take loans, Fedun reckons. But investors fear to put their money in unprofitable projects. A number of oil companies left Venezuela as soon as Hugo Chavez said the government would take over 40 percent of their profits in tax, Fedun noted. He thinks the development of Canada’s oil sand resources is more profitable than exploration and production of light oil in Russia. “Return on investment in East Siberia is estimated at $14 per barrel provided that the East Siberia-Pacific Ocean pipeline is completed. Without this pipeline, oil production would be loss-making,” Fedun told reporters. He added that Russia’s oil assets have doubled in price over the past two years, from $9 to $18 per barrel. With things as they are it is unclear how oil pipelines built by Transneft will be filled in future. These fears, especially regarding the first section of the East Siberia-Pacific Ocean pipeline, were dispelled by Transneft President Semen Vainshtok. He thinks there will be more than enough oil to fill the pipeline, given that Rosneft alone is going to supply 25 million tonnes of oil from the Vankor oilfield to the pipeline, Surgutneftegaz planning to provide 7 million tonnes, and TNK-BP to deliver another 4 million tonnes a year. Vainshtok stressed that the company was performing “unprecedented investment projects: the first section of the East Siberia-Pacific Ocean pipeline alone is estimated at $11.5 billion, the Baltic Pipeline System-2 will cost about $2.5 billion, and the Burgas-Alexandroupolis pipeline is estimated at about $2 billion.” Analysts are split on the possibility of a pipeline capacity surplus if there’s no significant increase in oil production. Mikhail Krutikhin, partner of the RusEnergy consultancy, thinks the surplus could be 50 percent after two large pipeline projects, Baltic Pipeline System-2 and the East Siberia-Pacific Ocean pipeline. Meanwhile, in 2005 and 2006 Russia produced 1.1 billion tonnes of oil more than it reserved, according to Valery Nesterov at Troika Dialog. He blames this on insufficient investment in exploration and falling oil extraction ratio. Nesterov thinks the government could boost investment in the oil sector to solve the problem. By 2015 oil production in Russia will be 40 million tonnes more than today if tax breaks are awarded and licensing terms are softened. "Alliance Media" News Agency 
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