This forecast has been prepared in accordance with General Principles of Socioeconomic Indicators Forecasting.
* Base case forecast accounts for the extension of a production cut agreement into 2H2019 with the parameters of the deal remaining unchanged. If the agreement is not prolonged, oil production in 2019 should amount to 565.2 mln t, while crude exports are expected to total 260.1 mln t.
The extension of the agreement between producers from the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC players to curb crude output by 1.2 million barrels per day (bpd) in 1H2019, as well as the cut of 325,000 bpd announced by Canada in early December, 2018, will make it possible to balance the oil market by 2Q2019. However, further growth in US shale oil production may require the extension of the OPEC+ supply deal into 2H2019.
The lack of pipeline infrastructure significantly hampered the growth of shale oil production in the US in the first six months of 2018. The rapid increase in production in the second half of 2018 was only possible thanks to the rise in oil prices, which was sufficient to compensate for the costs of shale oil shipments by rail. However, the launch of the four new pipelines in the second half of 2019, namely Cactus II, Enterprise, EPIC, and Grey Oak, which have a combined capacity of 2.67 million bpd, will help remove transportation-related restrictions on production. By the end of 2020, another three pipelines (Exxon/PAA JV, Jupiter, and Permian-Gulf Coast) with a combined capacity of 2 million bpd will come online. The launch of new pipeline capacity will lead to a new wave of production growth in the US, subsequently putting pressure on oil prices in 2H2019 and 2020. According to the ACRA forecast, the average annual Urals price will fall from USD 70.01/bbl in 2018 to USD 63.6/bbl in 2019 and USD 58.7/bbl in 2020.
Russia’s participation in the global supply cut agreement led to a slowdown in the commissioning of new fields. Hence, the launch of the Rosneft-owned Russkoye field was postponed from 2017 to the fourth quarter of 2018. Furthermore, the commissioning of the Taas-Yuryakh, Kuyumbinskoye and Tagulskoye fields, scheduled for 2018, also happened only in the fourth quarter of the year. The shift in the deadlines for the launch of new large fields postpones the previously forecasted (See “Russian oil industry to set new records regardless of production freeze talks” as of May 17, 2017) peak oil production in Russia until 2021-2022 with peak output seen at 575 million tons per year, according to ACRA estimates.
Despite the extension of the OPEC+ agreement into the first half of 2019, Moscow’s quota of 11.18 million bpd (considering a gradual decline in average daily production to the set level in the first months of the year) makes it possible to forecast an increase in oil production in Russia to 559.5 million tons in 2019 compared to 555.8 million tons in 2018, and 546.8 million tons in 2017. The base case forecast envisages the extension of the pact on the current conditions until the end of 2019. If the deal is not prolonged, production in Russia in 2019 is forecast at 565.2 million tons.
The implementation of the planned projects on further modernization of Russian refineries will make it possible to ramp up diesel production capacity by 22 million tons per year by 2022, as well as naphtha production capacity by 10 million tons per year.
While additional volumes of naphtha can be absorbed by the domestic market thanks to growing demand, buoyed by the increase in petrochemical production, the rise in motor fuel production, which outstrips domestic demand, will require the growth in its exports.
According to ACRA estimates, exports of motor fuel in Russia will rise by 14.4 million tons in 2017-2023 with refining growing by 15.5 million tons over the same period. The increase in oil production in Russia coupled with a relatively slow pace of refining growth will contribute to the rise in crude oil exports up to 266 million tons in 2022 compared to 256 million tons in 2018.
Despite the slow-down effect of the OPEC-led deal on the pace of investment growth, Russian VIOCs’ CAPEX rose significantly in 2018. According to ACRA estimates, VIOCs, excluding Gazprom, will continue to increase investment up to 2020 (Gazprom’s volume of investment will reach its peak a year earlier due to the completion of investment in large pipeline projects).
The spike in oil prices in ruble terms in 2018 has led to a significant growth in EBITDA of Russian oil and gas companies, which contributed to the decline in the CAPEX share in VIOC EBITDA to a rather comfortable level of 54.6%. Additionally, relative debt load decreased too, i.e. the total debt to VIOC EBITDA ratio fell to 1.3х (basically, the 2013 level) in 2018 compared to 2.3х a year earlier. ACRA expects a further decline in this indicator down to 0.77х in 2023.
The introduction of sanctions on Russia had no significant impact on the size of investment but led to a change in the debt structure of oil and gas companies with the share of ruble-denominated loans rising from 13% to 41% and that of bonds from 40% to 66%. The geography of borrowings also changed with the share of US and European banks down and that of Chinese counterparties up.
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