Boston, MA -- (SBWIRE) -- 02/18/2014 -- Russia is pumping post-Soviet record levels of oil and is likely to continue to see a short-term increase in both oil and gas production, but a high level of investment will be required to maintain this. It also faces pressure to diversify its gas markets, in view of an increasingly challenging core market in Europe and growing competition from other global gas suppliers. Tax breaks given to encourage offshore and tight oil developments could help support Russian oil and gas output in the longer term, though we warn that the consolidation of Rosneft's position in the country's upstream segment limits gains from regulatory changes to privileged firms with political connections in the country. It also threatens to squeeze out Russia's independent refiners owing to Rosneft's control of crude oil supplies to the market.

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

- Russian oil production reached a post-soviet high of about 10.5mn barrels per day (b/d) in 2013, according to official figures from Russia. Recent changes to its tax regime - including tax breaks for tight oil and offshore production - promises to encourage investment and to support output. As such we have cautiously revised our oil production forecast upwards and expect it to stagnate at about 10.4-10.5mn b/d through to the end of our forecast period in 2023. Faster-than-expected development of its tight oil deposits particularly from the Bazhenov shale poses an upside risk to our outlook.
- An increase in Russia's refining capacity, government policy and production from integrated producers such as Rosneft, Gazprom Neft and Lukoil would support an uptrend in the country's refined petroleum production. In particular, liquefied petroleum gases (LPG) could increase its mix. These underpin our forecasts for refined petroleum production to continue its growth from an estimate of 5.4mn b/d in 2013 to 5.6mn b/d in 2018. Thereafter, output is likely to be capped at 5.6mn b/d till the end of our forecast period to 2023 as efficiency gains from modernisation start to peter out. However, independent producers, hurt by a tightening in crude oil supplies available in the domestic market as a result of Rosneft's consolidation of its position in the upstream, could be excluded from the rewards of Russia's downstream expansion.
- An excess of crude oil produced over the country's refining needs throughout our forecast period will see Russia remain a net exporter of crude oil. Growing demand from Russia's downstream segment for crude oil and weak growth in crude oil production would see net exports fall from an estimate of 5.15mn b/d in 2013 to 4.95mn b/d in 2018 but should stagnate at about 4.7mn b/d through to the end of our forecast period in 2022.

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