IEA warns Russian oil output will plateau around 2010

By bne IntelliNews June 13, 2007

Nicholas Watson in Prague -

The International Energy Agency continued its gloomy assessment of Russia's oil industry, warning that the country's oil output could start to level off from 2010 to 2012 and growth will stall until at least the middle of the decade.

In its monthly Oil Market Report, the IEA predicts that oil production will reach around 10.6m barrels per day (b/d) by 2010, up from an actual 9.9m b/d in the first quarter of 2007. However, this level then dips to 10.5m b/d by 2012.

The energy security watchdog for the OECD reiterated its perennial complaint of a lack of transparency in Russia's oil industry, specifically there being no publicly available field-specific data. "It is not possible to perform an in-depth, field-by-field analysis for Russia," the IEA said. "Our approach, therefore, combines a simplified key field overview, with an examination of company growth plans, government and industry forecasts and an assessment of likely pipeline capacity availability.

It said the range of industry forecasts shows Russia's production in 2010 will be anywhere from 10.0m b/d to 11.1m b/d, with traditionally conservative government forecasts showing a level of 10.2m b/d that year. Although higher than this, the IEA's forecast is well below the levels implied by the published growth targets for producers like Rosneft, Lukoil and TNK-BP.

Explaining the conservative tilt to its forecast, the IEA said that although it assumes the 20 biggest development projects scheduled to come on stream in Russia over the next five years 2012 will actually do so, it warned that start-ups could face problems, which might affect company production targets. "An uncertain Russian investment climate and tight drilling/service capacity justify caution on new project start-up," it said.

While remaining a key driver for non-OPEC supply, Russia won’t be able to prevent production growth from such producers falling below the psychologically important 1.0m b/d for the whole of 2007. This, combined with increasing world demand, has prompted the IEA to predict a sharp rise in the price of oil in the second half of 2007 unless the truculent OPEC increases production.

More demand, less oil

The IEA raised its forecast for crude demand this year by about 0.2m b/d, bringing its year-on-year demand growth up 2% to 86.13m b/d this year, against the 1.8% rise it foresaw in last month's report. At the same time as this demand is rising, the IEA lowered its expectation of non-OPEC supplies by 0.1m b/d, to 50.2m b/d, giving annual growth of 0.9m b/d.

"The 1.0m b/d growth seen in the last three quarters eases to 0.7-0.9m b/d for the rest of 2007 due to maintenance, seasonal shut-ins, project slippage and mature field decline," the IEA said.

The organisation appealed to OPEC to increase production, though the producers' organisation has so far resisted frequent calls from the IEA to open the taps in order to reduce pressure on prices. "We would very much hope that OPEC production is at its seasonal low at the moment," David Fyfe, analyst at the IEA, was quoted by Reuters as saying. "We definitely do need more crude oil."

There had been hopes that inventories, which are abnormally low for this time of year, would build ahead of the peak driving season. However, these were dashed Wednesday as a US government report showed that gasoline inventories rose just 3,000 barrels to 201.5m in the week ended June 8, rather than the gain of 1.5m barrels that the market had been expecting. This pushed the oil price above $69 a barrel.

Without a production increase from OPEC, analysts are now predicting that crude prices could easily get to $80 later this year.

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