Does Russia Need to Spend Money on Producing Hard-to-recover Oil?
A pause in stimulating the development of hard-to-recover oil reserves (HRR) could lead to a failure of production in a few years. Now Russia is reducing production under the influence of external factors and under the terms of agreements with OPEC +. But the investment cycle in the industry is long – at least 5-10 years. As a result, postponing the start of the development of TRIZ may lead to a reduction in tax revenues to the budget in the future, experts interviewed by RG believe.
Earlier, Secretary of State – Deputy Finance Minister Alexei Sazanov, said that the taxation of the oil and gas sector is now at an acceptable level. It allows, on the one hand, to receive the necessary revenues to the budget, and on the other hand, it allows the industry to develop and make investments, including in new projects. At the same time, the Ministry of Finance is ready to consider the issue of stimulating the production of hard-to-recover reserves no earlier than 2027.
The Ministry of Natural Resources told RG that they are working together with the Ministry of Energy and the Ministry of Finance on the promotion of HRR. According to the agency, by the beginning of 2022, the State Balance of Minerals takes into account 9.57 billion tons (or about 31% of the total number of reserves in the Russian Federation) of recoverable oil reserves, currently classified as HRR.
It should be clarified that here we are talking only about those hard-to-recover reserves, the characteristics of which fall under the definition of HRR in the Tax Code, as amended in 2020. That is, these are deposits, the development of which has or had some tax preferences, but not all HRRs were included in the list. At the same time, since 2020, the extraction of even these HRRs has not received new incentives, and the burden on the oil industry has increased.
In the spring of 2023, the Ministry of Energy estimated the share of HRR in hydrocarbon reserves at 60%, with a high probability of its increase to 70% by 2030. Domestic companies have many technologies for extracting hard-to-recover oil and gas, but under the current tax conditions, it may not be profitable. That is, as old fields are depleted on the horizon of the next three years, only part of the resource base can get into development.
As Valery Andrianov, Associate Professor at the Financial University under the Government of the Russian Federation, an expert at the InfoTEK Analytical Center, notes, Russia has huge oil resources in the Arctic zone (both onshore and offshore). According to its commodity characteristics, this oil is “hard-to-recover” – on the contrary, it is light and low-sulfur. But from the point of view of geological and climatic factors, this is also difficult oil, for the extraction of which it is necessary to build a new large-scale infrastructure, including tankers and icebreakers for its transportation along the Northern Sea Route (NSR), to develop and manufacture equipment in a new “Arctic” design etc.
Stimulating the development of R&D is a prerequisite for maintaining stable levels of oil production in the Russian Federation in the long term, Gennady Masakov, an expert at Yakov & Partners, believes. The current decline in production by our country (within OPEC+) is more of a financially stabilizing nature, primarily in the short term.
According to the head of the National Energy Security Fund, Konstantin Simonov, the Russian oil industry is coping with the sanctions, there are new export markets, and production is at an acceptable level. HRR is the medium-term future of our oil industry. If money is not invested in these projects now, this will lead to a serious decline in production, not because of sanctions or OPEC + conditions, but because of internal problems. This already happened in the mid-90s, when production fell to 300 million tons. Now we can again arrange another man-made collapse in production due to ill-conceived tax decisions, the expert explains.
At the same time, the world is expected to increase investment in hydrocarbon production. According to the IEA in 2023 – by 11%, and Wood Mackenzie predicts that by 2025 the cost of exploration and drilling offshore will increase by 20%. The companies will allocate up to $185 billion to develop 27 billion barrels of oil, with their focus on more costly and highly profitable deepwater developments.
In Russia, the share of R&D in the structure of oil and gas production (fields already being developed) has increased from about 8 to 25% over the past 10 years, Masakov notes. At the same time, a small amount of high-tech equipment, a lack of infrastructure and price risks remain a limitation that hinders the active development of HRR and offshore deposits. Underinvestment in the oil and gas industry and increased technological risk are the main reasons for the low investment attractiveness of HRR projects in Russia. Therefore, they often require individual and fair tax conditions, the expert clarifies.
In Russia, the share of R&D in the structure of oil and gas production (fields already being developed) has increased from about 8 to 25% over the past 10 years, Masakov notes. At the same time, a small amount of high-tech equipment, a lack of infrastructure and price risks remain a limitation that hinders the active development of HRR and offshore deposits. Underinvestment in the oil and gas industry and increased technological risk are the main reasons for the low investment attractiveness of HRR projects in Russia. Therefore, they often require individual and fair tax conditions, the expert clarifies.
From Andrianov’s point of view, if Russia plans to maintain its leading position in the field of oil production in the medium and long term, then stimulating the development of HRR is an urgent need. The development of such fields will ensure large volumes of production for decades and guarantee the supply of hydrocarbons to both Russia itself and foreign markets. And so the state should support such projects through a wide range of incentive measures, the expert believes.
