2019 will be a big year for Russia's upstream sector. From growing exploration activity to cutting oil production, and from launching pipelines to progressing LNG plants, companies will be focused on project delivery and unlocking value in challenging developments. Profound changes will continue in the tax system to underpin the commercial attractiveness of future projects.
Below we highlight the top five things to look for in Russia's upstream sector in 2019
1. Satisfying Gazprom’s pipeline ambitions
2019 will see Gazprom launch three major gas pipelines: TurkStream, Nord Stream 2 and Power of Siberia. TurkStream, in the Black Sea, and Nord Stream 2, in the Baltic, offer Gazprom alternative export routes away from Ukraine. Gazprom is also opening up the east, with first gas deliveries to China via Power of Siberia scheduled for 2019.
Gazprom will prioritise development of challenging assets in the Yamal-Nenets region to ensure adequate gas supply for both domestic and export markets. There will be an uptick in development activity at the Kharasaveiskoye field, following FID in 2018. The company will also implement a number of compression projects and tap deeper reservoirs at mature assets in West Siberia. Rosneft will take FID on the Russkorechenskoye field in East Siberia and will plan for full-scale development at the Rospan fields, as well as tapping the Turonian gas formation at Kharampurskoye. NOVATEK will sanction the Dorogovskoye field, part of the North Russkoye cluster.
2. Progressing LNG projects
Russia is poised to become the world’s fifth largest LNG producer in 2019. With Yamal LNG acting as a confidence booster, we expect that Novatek will strive to reach FID 2019 at Arctic LNG-2. We think at least one new investor will join Arctic LNG-2 next year.
Novatek will need to overcome a number of challenges, including the shortage of LNG tankers. 2019 will show whether the temporary arrangement of ship-to-ship transshipment in Norway can keep up with Yamal LNG’s strong output. New Russian LNG technology – Arctic Cascade – will be put to the test with the start of Yamal LNG train 4, due at the end of 2019.
Increasing global demand for LNG will increase foreign investor interest in Gazprom’s Baltic LNG project and add impetus to resolution on a gas supply agreement for the Sakhalin-2 LNG expansion.
3. Delivering exploration success
Gazpromneft and Novatek will lead the way in the exploration sector in 2019, building on the world-class discoveries they made in 2018 - Triton in the Sakhalin offshore and North Obskoye in the Ob Bay.
Gazpromneft will drill another exploration well at the Ayashski Block offshore Sakhalin Island, while Novatek will focus on the Yamal Peninsula and surrounding areas.
To reach the ambitious target of producing a 55-57 million tonnes of LNG annually by 2030, Novatek will need to carry out further appraisal of newly-acquired licences and discoveries. If appraisal of North Obski is successful, Novatek may start firming up plans for Arctic LNG-3.
Lukoil had a relatively subdued 2018 on the exploration front, but that will change in 2019. The success at the Severni Block, in the Russian sector of the Caspian Sea, has encouraged the company’s Lukoil-Nizhnevolzhskneft subsidiary to conduct further exploration and appraisal work in the region. The recent joint venture with NC KazMunaiGas for exploration of the Zhenis Block in the Kazakh sector of the Caspian highlights the region’s importance to Lukoil. Drilling the Hazri-3 well, in the Central Caspian Block, will be a continuation of Lukoil’s strategy to expand its presence in the Caspian.
4. Rebalancing the oil market
Following the OPEC+ agreement to curb 2019 output by 1.2 million barrels per day (b/d), Russia will continue to show restraint in oil production. Under the deal, OPEC members will cut production by 800,000 b/d, with the remaining 400,000 b/d to be distributed among the non-OPEC states. Russia has agreed to curb output by 2% (228,000 b/d) from a record level of 11.42 million b/d reached in October 2018.
In our base case, we anticipate that Russian average annual output will remain at 11.22 million b/d in 2019. We think compliance with the agreement will be achieved through: the shut-in of old, inefficient wells; a delay in new development drilling at brownfields; and slower ramp-ups at certain greenfields. Russkoye, Yurubcheno-Tokhomskoye, Erginskoye and Kondaneft Project fields will likely see delays until the OPEC+ group relaxes output curbs.
5. Unlocking value through fiscal changes
2019 will see major change in Russia's upstream tax terms. 2018 saw a fierce debate about efficient tax terms that would both stimulate investment in greenfield projects and generate additional revenue. The introduction of the additional profit tax (APT) and the continuation of the so-called “tax manoeuvre” in 2019 tick these two boxes.
The tax manoeuvre is a gradual reduction of export duty on oil and oil products to zero by 2024, coupled with a gradual increase in oil Mineral Extraction Tax (MET). . As MET applies to almost every barrel produced in Russia, Wood Mackenzie assumes the tax manoeuvre will generate an additional US$112 billion in 2019-24. 2019 will be the first year under the new regime. A further review of existing tax incentives is likely.