Analysis: Deciphering Russia's oil production


MOSCOW, September 5 (RIA Novosti political commentator Peter Lavelle). Is Russian oil production really slowing? Well, it all depends on how the production numbers are interpreted.

On Friday The Energy Ministry published Russian oil production figures for the first 8 months of the year, documenting that total daily output rose by 3% in August to 9.33 million barrels per day, and export sales increased by more than 10% as oil companies continued to take advantage of high world prices. Russia's production growth rate seems to have steadily declined, from 3.5% during the first half of the year to 3.2% during the first seven months, to the current 3%. A careful deciphering of the numbers, however, suggests oil production is actually increasing.

Lukoil continues to be the leader in the oil patch in terms of total production and daily output volumes, increasing production by 4.4% year-on-year. At the same time, Surgutneftegaz surpassed TNK-BP in organic production growth to become the sector's number two company, increasing daily output by 8.6% year-on-year, with the latter reporting an 8.2% increase.

A year ago Rosneft was one of the sector's sleepy laggards. This has dramatically changed with Yuganskneftegaz added to its portfolio. In terms of both absolute daily production and total oil produced, Rosneft is now close behind TNK-BP with production reaching 1.46 million barrels a day - a 245% production increase (starting from a low base) in the first eight months of the year.

Number five producer Tatneft's organic growth decreased slightly as compared with earlier months to 1.7%. At first blush this increase may appear insignificant in the scheme of the whole sector, though it should be remembered that the company extracts from some of the most mature reserves in the oil patch. Number seven Slavneft increased production by a whopping 12.3%.

Sibneft continues to under-perform the sector this year, citing a decline of 1.1% in its daily output due to an 8% fall in production at its Noyabrskneftegaz production unit - this subsidiary accounts for about 70% of total output.

Overall, it would appear that Russia's production growth rate is steadily declining. This conclusion, however, may be shortsighted. A closer reading of these numbers suggests the opposite.

Many industry watchers have expressed concern, even alarm, over the slowing production trend, citing heightened political risk in the oil sector and the high tax burden as hampering investment. The apparent decline in production probably has nothing to do with either political risk or the tax burden. It has everything to do with the fall in output at Yukos and Yuganskneftegaz.

Yukos' oil production (including Yuganskneftegaz) was down a substantial 10.8% year-on-year during the first 8 months of 2005, on the back of lowered investment and the change of ownership at Yuganskneftegaz.

Thus, if Yukos and Yuganskneftegaz are removed from total Russia oil production, the condition of the country's oil patch looks very different. Minus the production of these two companies, overall Russian oil production has increased at the very brisk rate of 6.3%, led by strong growth at Surgutneftegaz, TNK-BP, Lukoil and Slavneft.

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