Russian Oil Output May Fall in 2008

Russian Oil Output May Fall for First Time in Decade in 2008
By Greg Walters
March 27 (Bloomberg)

Russian oil output may fall this year for the first time in a decade as the world's second-biggest supplier struggles with rising costs and harder-to-reach fields, Natural Resources Minister Yuri Trutnev said.

``Two years ago, we said the growth rate was falling, and we said this was bad for Russia, remember?'' Trutnev said in televised remarks after a government meeting in Moscow today. ``Now we're saying the production rate is falling this year. This is not a bogeyman, unfortunately, this is real,'' Trutnev said, without giving a specific forecast.

A decline would end a 10-year, 58 percent surge in production, which fell to 6.2 million barrels a day in 1998, when prices dipped below $10 a barrel and Russia defaulted on about $40 billion of domestic debt and devalued the ruble.

Trutnev's outlook contradicts that of the Energy Ministry, which expects an increase of 1.8 percent to 10 million barrels a day of crude and gas condensate, or about 11 percent of world consumption. The International Energy Agency, an adviser to 27 industrialized nations, expects demand to rise 2 percent this year to 87.54 million barrels a day.

Investment bank Credit Suisse Group today joined Moscow- based UralSib Financial Corp. in forecasting an annual decline in Russian production after output slid in January and February.

`Difficult Start'

``The difficult start to the year indicated that the situation in the Russian oil sector is perhaps much more challenging than major integrated oil companies believed at the end of last year,'' Credit Suisse analysts Vadim Mitroshin and Lev Snykov wrote in a note to clients today.

Output fell 0.7 percent in January and 0.9 percent in February, to 9.79 million barrels a day, compared with the same months last year, according to Energy Ministry data. Saudi Arabia is the world's biggest producer of crude oil.

Zurich-based Credit Suisse said it now expects output to fall 0.5 percent, after earlier predicting a 0.7 percent rise.

``National production has reached a plateau and onshore production appears to be in decline,'' said Ronald Smith, chief strategist at Alfa Bank, by phone in Moscow today.

Smith and UralSib's Chris Weafer are among analysts predicting the government will be forced to cut taxes on the industry, its biggest source of income, to revive production. Finance Minister Alexei Kudrin this week proposed cutting extraction taxes by 100 billion rubles ($4.2 billion) a year to help finance exploration and development.

``We consider it very likely that the government will introduce a series of tax breaks this year to boost upstream spending,'' Weafer said in a report on Feb. 6. ``The state will not want to see production go into a declining phase.''

Rosneft Chief Executive Officer Sergei Bogdanchikov called the current tax system ``too harsh'' in August. Export, extraction and other taxes must be cut or companies won't have any incentive to develop new fields, including in the Arctic, OAO Gazprom Neft CEO Alexander Dyukov said on Feb. 4.