Russia prioritises new projects at expense of brownfields
The shift towards greenfields may endanger national oil and gas production
From 2021, the development of mature oil and gas projects, or so-called brownfields, will cost Russian producers more due to taxation changes, while greenfields will continue to enjoy tax incentives. Currently, oil consumption is reducing due to unfavourable market conditions, but the changes may backfire when demand recovers.
President Putin’s push for greenfield financing risks bruising Russia’s oil and gas industry, considers Upstream journalist Vladimir Afanasiev. He considers that the call for shifting Russian oil and gas producers’ investment focus to greenfield developments has come at the wrong time for the country’s upstream sector.
In October, the president approved the cancellation of tax incentives for brownfield and unconventional oil projects. While the changes were designed to stimulate the flow of investments into new projects and new provinces, they affected heavily producers that have been reporting rapid progress of their tertiary recovery efforts at exhausted fields and unconventional oil developments.
To guarantee returns of new investments, the Kremlin also worsened the operating conditions for dozens of large brownfields that switched to a trial netback taxation mechanism in January 2019. Due to state support, these projects have been considered significantly less expensive to operate compared to new developments in the Arctic.
Large and capital-intensive offshore and onshore Arctic projects are more complicated and laborious for oil producers, as there is no supporting infrastructure. For example, the Rosneft-operated Vostok Oil project in Krasnoyarsk Krai is estimated to require at least 2 trillion rubles ($31 billion) of investments to create just the minimal infrastructure. Lifetime investments in the project, which is the country’s largest greenfield, may amount to 10 trillion rubles. The Kremlin is going to continue supporting Vostok Oil, which is meant to start producing a significant volume of hydrocarbons only after 2030. Other greenfield projects of Rosneft and Russian gas producer Novatek will also enjoy preferential tax treatment.
Meanwhile, the cost of credit for the global oil industry has already increased, as lenders are cautious to finance long-term and expensive developments amid the current market uncertainty. If the global push for decarbonisation gathers pace, Russia’s taxation changes may lead to an unprecedented decline in the country’s oil and gas production, considers Afanasiev.