Analysis: Russia firms split on upstream prospects

Russia's top oil firms, state-controlled Rosneft and private-sector company Lukoil, plan upstream capital expenditure (capex) cuts this year in response to lower oil prices. But their domestic growth prospects are diverging.

Rosneft will cut investment by 30pc this year in dollar terms, although there might be a small increase in rouble terms because of a weakening of the Russian currency. The company's capex is on track to total $9.8bn in 2015, down from $14bn last year, which was lower by $4.5bn from initial guidance. Operational expenditure declined to $3.90/bl of oil equivalent (boe) last year, down by 10pc from 2013.

Rosneft faces a heavy upstream and refinery upgrade investment bill, and has not disclosed which projects will bear the brunt of this year's cost-cutting drive. The company will forego heavy arctic offshore spending, with no drilling scheduled in the August-September window. It will instead focus on exploratory wells in the Barents Sea and Sea of Okhotsk next year, although it is unclear which firm will provide services now that a deal with Norway's North Atlantic Drilling is in limbo because of US and EU sanctions.

Lukoil hopes to maintain production in 2015, but warns that Russia's overall crude output could fall by 100,00-400,000 b/d as oil firms reduce drilling in the second half to save costs. Lukoil is maximising drilling in the first quarter, taking advantage of the "old" prices under contracts with service providers signed last year, the company's vice-president, Leonid Fedun, says. The company plans to cut its 2015 capex to $13.4bn-13.9bn from $15.4bn last year, because of the lower oil price environment.

Lukoil will move forward on the commercial start-up of the 1.2bn bl Filanovsky field in the Caspian Sea in 2016. The firm will start drilling production wells at the field towards the end of this year, Fedun says. Tax breaks should make Filanovsky one of Lukoil's most profitable projects.

In west Siberia, the company will continue developing the 1.4bn bl Imilorskoye field, where first oil flowed last year. Lukoil is building up its resource base in the Timan-Pechora region, having almost doubled recoverable reserves at its Vostochno-Lambeishorskoye field to 302mn bl as a result of exploration last year. Vostochno-Lambeishorskoye, along with the Oshskoye field, was a key growth driver last year in the Komi republic, where Lukoil Komi produced 212,000 b/d of crude, up by 8pc on 2013. Overall Lukoil production in Timan-Pechora amounted to 284,000 b/d last year.

Lukoil aims to lift production in Timan-Pechora to 350,000 b/d next year. The field's output could receive a lift from the 321mn bl Yaregskoye and 562mn bl Usinskoye heavy oil fields, which benefit from tax breaks. The fields produce 10,000 b/d each, but output at Yaregskoye — where Lukoil pays no mineral extraction tax and just 10pc of standard export duty — is due to double this year.

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wpa/wj

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