Archive

No. 1, 2006

Prof. Yury Plakitkin
Dr. Sc. (Econ), Member of RF Academy of Mining Engineering

DIVERGENT FORECASTS


An analysis of the Russian oil-producing industry's rates of growth and proportions of development

The statistics of the last 60 years show that Russia's oil-producing industry has been subject to the classical laws of phased development. According to these laws, the industry had already completed its buildup stage in the years before 1975 and moved on to the level of producing approximately 400 to 500 million tons per year. At this level, the volume of oil produced in Russia has been held constant for approximately 30 years; now, however, there are signs justifying the assertion that the stage of stable oil production has ended, and we are entering a new phase in which the volumes of oil produced will gradually decline.

Focusing on rates of growth

The statistical data of the average annual rates of growth in oil production since 1946 show that there was a gradual decline in the tempo throughout that period, except for the fluctuations between 1990 and 1995, and from 2000 through 2004, which were plainly caused by changes in the price ratios on world oil markets.

The dynamic of changes in world prices over the last 35 years and the average annual rates of growth in oil production across the Russian Federation show that when the price of Urals crude rises to more than $30 per barrel, there is a slowdown in the rate of production growth (as in 1970 and 2003). When prices rise to $30 per barrel, the rate of production growth goes up. Starting in 1945, the systemic decline in the rates of oil production growth has been approximately 2% every five years, and is now leading to an inevitable transition to the stage of negative yearly growth in production. Our linear and polynomial forecasting models, constructed for extreme cases with a high correlation coefficient of 7792%, show that rates of production growth could be negative as early as the 20052010 interval. In 2011, the two forecasting models meet at negative rates of approximately 67% production growth annually. The decline in the rates of oil production growth is thus system-wide and has already been in progress for more than 60 years. The changes that will take place in the production situation in 2005-2007 are qualitative only: as a result of the systemic decline in rates of growth (2% every five years), the annual growth rates of oil production will be negative, and volumes of production will continue to fall.

Also affecting the general systemic decline in the rates of oil production recently (especially since 2004) was the rise in world oil prices (now more than $30 per barrel), accelerating further the fall in production growth rates.

The statistical dependence established (beginning with 1998) between the rates of growth in oil production and the price of Urals crude demonstrates that, starting from prices of more than $53$54 per barrel, the rates of growth in oil production are becoming negative under the current tax system. Considering that world oil prices will continue to rise and will peak in 2006 at $50$60 per barrel, we can forecast a drop in the average annual rates of growth in oil production of 2% from their 2006 levels.

Our analysis of the labor productivity dynamic (calculated naturally in thousands of tons per person) demonstrates the general systemic nature of the decline in oil production and its transition to a fading out of production. The above dependence in fact illustrates the stages of oil production: growth, stabilization (plateau), and decline. Since the letting-go of live labor always has greater inertia (at the stage of decline) than a drop in volumes of production, the staging determined according to labor productivity (in a natural calculation) is of an anticipatory nature (in terms of time), compared to the staging determined according to the volumes of annual oil production.

Forecast scenarios: their degree of reality

Taking into account the above trends in the decline of oil production, together with the estimates obtained by modeling that indicate a 7% rate of production increase will be reached in 2011, we can compute the forecast levels of production growth rate and the volumes of oil produced in the interval 2005 to 2011.

For good reasons, we examine three forecast scenarios. The first scenario foresees a linear reduction in the rates of growth, down to 7% in 2011. The second scenario also predicts a linear reduction. Taking the present tax burden into account, however, it assumes a decline in oil production growth rates down to 2% annually as early as 2006. The third scenario lies somewhere between the first and second.

On the basis of these scenarios, forecast models were constructed that demonstrate the volumes of oil production will be 350370 million tons annually in 2015, and 300330 million tons per year in 2020. By 2020, therefore, the decline in the annual production of oil will be approximately 140170 million tons per year from the current volume of annual production. This must be kept in mind when taking decisions to solve problems of infrastructure in the area of transporting oil, especially when drafting international obligations.

One of the main reasons for the decline in the volume of oil production is the increasingly difficult geological and technical conditions in the development of oilfields. This progressive worsening of conditions has led to an increase in the amount of labor involved in recovering oil reserves. In fact, since 1990s every newly produced ton of oil has been more labor intensive than the previous one.

Reserves are getting more and more difficult to recover. As the statistics show, there has been (since 1990) a doubling every ten years in the labor intensity in oil production.

What lies beyond the horizon?

The use of more efficient methods for producing oil (improving the scientific and technical process (STP), in economics, management, and equipment, among others) could neutralize ever-worsening geological and technical conditions for the development of oilfields. Raising the STP level could result in lowering the rate of growth in the volume of labor for recovering reserves. In accordance with this, we can make the three estimates for the level of oil production in 2030, depending on the level of the STP

At the current STP level, oil production up to 150 million tons per year is possible; at an enhanced level, the figures are up to 250 million tons per year; and at a high level, they are up to 300 million tons per year.

According to our calculations, the decline in oil production volumes will continue, to around 400million tons in 2010. From 2010 through 2015, oil production will stabilize at around 350400 million metric tons. From 2015 through 2020, oil production will be at a level of 300350million metric tons. Looking beyond 2020, the production of oil could, at high and enhanced levels of STP, stabilize at 250 million metric tons. At the current STP level, the production of oil could stabilize at only 150250 million tons per year.

High world prices for oil (more than $30 per barrel since 2004) are merely accelerating the systemic trend toward the decline in average annual rates of growth in the production of oil. Throughout the last 35 years, the rise in the price of Urals crude (more than $30 per barrel) has led to a decline in the average annual rates of growth in oil production.

With a price of more than $30 per barrel for Urals crude, there is obviously an additional increase in oil companies' operating and tax costs that forces them to shut down increasingly less productive reserves of oil. As a result, higher rates of production decommissioning lead to a drop in overall volumes of oil production.

The Russian government must therefore review the existing tax burden on the oil industry, especially in the area of the natural resources production tax (NRPT) and export duties, in order to mitigate the systemic decline of oil production growth rates, due to the continued rise in world oil prices. Should it prove impossible to achieve a positive effect by redistributing the tax burden between the NRPT and export duties, the overall tax burden on the industry will have to be reduced by linking such a decline to dedicated capital investments aimed at increasing the rates of preparing new oilfield reserves.

Granting tax holidays at the initial and final stages of developing an oil field is an obvious way of reducing the rates of decommissioning less productive oil reserves while stimulating the introduction of new reserves.

It should be stressed that the demand for Russian oil is not a factor limiting the growth of oil production volumes. Even at high levels of the governing effect on the petroleum industry's production of oil, there would be no increase in production. Under the best possible scenario, it would reach a plateau of 400 million tons per year between 2010 and 2015; between 2015 and 2020, the figure would be 350 million tons per year; and beyond 2020, it would be 300 million tons per year.




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Oil of Russia, No. 1, 2006
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