OPINION: A sudden call from President Vladimir Putin for Russian oil and gas producers to shift their investment focus to greenfield developments has come at the wrong time for the country's upstream sector.
While leading international majors are unveiling plans to plough cash into decarbonisation efforts, Russian authorities have removed tax incentives for brownfield and unconventional oil projects.
Speaking in Moscow last week, Putin said recent changes in the country’s tax system are aimed at stimulating the flow of investments into “new projects and new provinces”.
In October, Putin approved the cancellation of major tax concessions for producers that have been reporting rapid progress of their tertiary recovery efforts at exhausted fields and unconventional oil developments.
Authorities also worsened the operating conditions for dozens of large brownfields that switched to a trial netback taxation mechanism in January last year, in a bid to guarantee returns of new investments.
With the provision of state support, these projects have for years been seen as significantly less expensive to operate compared with large and capital-intensive offshore and onshore developments in remote Arctic areas where there is no supporting infrastructure.
The global oil industry is already facing increased cost of credit as leading international banks are cautious to bankroll long-term and expensive greenfield developments amid uncertain industry fundamentals.
Russia's largest greenfield project, the Rosneft-operated Vostok Oil project in the Krasnoyarsk region, is estimated to require at least 2 trillion roubles ($31 billion) of investments to create just the minimal supporting infrastructure.
Lifetime investments in the project — which may start producing a significant volume of hydrocarbons only after 2030 — could run as high as 10 trillion roubles.
Authorities in Moscow have indicated that Vostok Oil — as well as other greenfield projects of Rosneft and Russian gas producer Novatek — will continue to receive preferential tax treatment to move forward.
Unless the Kremlin reinstates tax concessions for brownfield projects, Putin’s plans could lead to an unprecedented decline in Russian oil and gas production if the global push for decarbonisation gathers pace.
(This is an Upstream opinion article.)