Russia Oil and Gas Report Q1 2013

BMI View: A high level of investment will be required to maintain Russian oil output at close to recentrecord levels, putting pressure on the domestic industry and hindering global expansion. Gazprom facessimilar challenges in developing sufficient gas to meet European and, possibly, growing Asian demand.

There have been promises made to reform Russia's tax and regulatory system, upon which furtherdevelopment of the oil and gas sector hinges. The realisation of Russia's oil and gas potential thus lies inunlocking the political gridlock that has prevented much needed reforms from taking place.

The main trends and developments we highlight for Russia's oil & gas sector are:

Russian oil production reached a post-soviet high of 10.29mn barrels per day (b/d) in 2011 and ison track to achieving an even higher level in 2012, with output for the first nine monthsaveraging 10.35mn b/d. This has exceeded the 10.34mn b/d targeted by the economy ministryfor 2012. However, the ministry also warns that without further investment, output could flatlineat 10.24b/d by 2020.

BMI is forecasting average Russian production of 10.35mn b/d in 2012, with scope for anincrease to 10.45mn b/d by 2016. However, we see output slipping from its 2016 peak to10.20mn b/d by 2021.

Oil consumption, which we estimate averaged 2.73mn b/d in 2011, should edge towards 3.15mnb/d by 2016 - providing export potential of 7.30mn b/d.

With Russia having produced 662bn cubic metres (bcm) of gas in 2011, BMI's latest projectionsshow output rising to 724bcm by 2016 - dependent on growth in European demand andopportunities arising in Asian markets. Gazprom expects that total exports will reach a recordhighof 222bcm in 2012, but BMI believes these will not exceed 170bcm. This is particularly sowith countries such as Ukraine and Poland seeking to take gas at the minimum level required intheir take-or-pay long-term contracts with Gazprom. Our forecasts see gas exports hitting199bcm by 2016, as domestic consumption reaches almost 526bcm.

There will be considerable upside risks to our long-term forecasts for Russian oil and gasproduction and exports if the country manages to push through fiscal reforms that wouldsignificantly improve the country's business climate for foreign investment. This could help tospeed up development of its underexplored offshore acreages - the Arctic and Caspian Sea - aswell as its northern and eastern fields.

Securing a gas supply contract with China could also push up its export numbers, though thecurrent standstill in negotiations does not make us optimistic about the prospects of thismaterialising in the short-term.

Russia's dependence on oil prices leads to high volatility in the country's export revenues. Ourassumptions of tight supply due to booming demand in emerging markets is clearly an opportunity for thecountry. At the time of writing we assume an OPEC basket oil price for 2013 of US99.10/barrel (bbl),falling to US$96.20/bbl in 2014. Global GDP in 2013 is forecast at 3.0%, up from an assumed 2.6% in2012, reflecting some recovery in the US, though uncertainty with regard to the eurozone debt situationand an apparent Chinese slowdown will continue to hamper growth. For 2014, growth is estimated at3.2%.