Investment in restarting wells under OPEC+ deal, import substitution of equipment seen as key challenges for Russia to 2035
MOSCOW. April 9 (Interfax) - The need for additional capital investment in restarting wells temporarily mothballed in order to meet Russia's commitments to reduce oil production under the OPEC+ agreement is one of the key challenges facing the country to 2035, the draft general plan for the industry's development indicated.
The draft plan also noted there is a risk that it will be technically impossible to restart a number of mothballed wells.
Another key internal challenge to the development of Russia's oil sector in the period to 2035 is the relatively low level of localized production and high dependence on imports of many types of equipment and services, including due to non-market restrictions on Russian companies' access to the latest foreign technologies and equipment, such as hydraulic fracturing, horizontal directional drilling and technologies to develop deep-water offshore fields.
Another challenge is the ongoing depletion of conventional oil reserves and the resulting need to develop less profitable and hard-to-recover reserves and enter new production regions that are far from existing infrastructure.
In the period to 2035 Russia needs to resolve the issue of rising oil production costs amid an insufficiently flexible tax system that prevents the implementation of less profitable production projects, including ones requiring investment in new infrastructure, if they are not eligible for mineral extraction tax (MET) breaks and reduced export duties or do not use the tax on excess profit.
Other key challenges for the country to 2035 include the low level of exploration maturity of new production areas, foremost Eastern Siberia and Yakutia, as well as the continental shelf in the Arctic.
The draft plan also said there is a risk that the quality of oil shipped through the Transneft pipeline system to Russian refineries and western export markets could gradually deteriorate (increase in sulfur content and density) if timely and effective measures are not taken to stabilize and improve the quality of crude received by the system.
There is also a risk of geographic and chronological imbalances in the development of production, refining and transportation of crude oil and oil products due to high uncertainty regarding the development of domestic and foreign demand, which could lead to both underinvestment and overinvestment in new production and transport capacity.
Another risk is that the correlation between the ruble's exchange rate and world oil prices could decrease, which could lead to domestic prices lagging behind the export alternative or prices for oil products rising faster than inflation, as well as low crack spreads on oil products (wholesale premiums) to crude on the world market, reducing the performance of oil refineries.
There is also potential risk in Russia of a decline in utilization of refining capacity geared toward production of diesel fuel in the event of a downturn in foreign and domestic demand, as well as shortages of winter diesel at the regional level in peak periods of demand, and that the share of counterfeit product in retail motor fuel sales will remain substantial at the local level, the draft plan said.