Russia: Alfa Report Sees Trouble Looming in Oil Secto

Alfa Bank warned on Monday that “production stagnation is unavoidable” at the country’s oil fields and further downgraded its target prices for shares in most Russian oil companies.

The dramatic worsening in its outlook was the result of the government’s reluctance to consider lowering taxes on oil firms and a higher proportion of water in the declining output, the bank said in a research report.
Alfa Bank first downgraded its projections in the sector in March, saying that oil majors were depleting existing fields while heavy taxes on the industry were preventing the development of new fields. In Monday’s report, the company described the situation as “substantially more dangerous” than it had suggested four months ago.

The increasing proportion of water in total output was a major source of concern, the bank’s analysts wrote. This causes a quickening in the rate of natural production decline at most fields.

“The growing decline rate simply means that more and more new wells need to be drilled just for output levels to stay flat,” the report said. “This fully explains why rapidly accelerating drilling activity in Russia resulted in smaller and smaller production increases.”

Since 2003, companies have lost 76 million tons of oil due to the rising water component, and have had to drill 5,000 new wells just to offset the lost production, the report said.

Moscow Times