Alexander Novak: “The future production capabilities of Russian oil depend on the level of development of oilfield services”

According to the head of the Russian Ministry of Energy Alexander Novak, the future oil production of Russia depends on the level of development of the oil service industry. In the author’s column for the Energy Policy magazine, Novak spoke about how the Covid-19 pandemic has affected the oilfield services industry, how it can be supported, and how it affects oil production in Russia.

The Russian minister noted: “In recent months, the situation on the world oil market has remained quite volatile. The economic consequences of the worldwide spread of coronavirus infection have joined the fundamental factors that have been affecting the industry for more than one year. Thus, the situation that has developed since the beginning of the year affects not only the budgets of oil-producing countries and oil companies, but also related industries. First of all, we are talking about the sphere of oilfield service orders, the demand for which has dropped significantly in a short time”.

According to him, today the volume of the domestic market for oilfield services is estimated at 1.5 trillion rubles a year, with a significant part taken by Russian companies and subsidiaries of oil companies.

The head of the Ministry of Energy clarified in the column: “In the period from 2009 to 2019, the number of active drilling rigs increased from 842 to 1,762 units, hydraulic fracturing fleets — from 62 to 127 rigs, the drilling footage increased from 14.6 million meters to 29.6 million meters. That is, within 10 years our country has made a qualitative and quantitative leap in this segment”.

According to Novak, the decline in the oilfield services market in 2020-2021 may reach half of the level of last year, the result will be the risks of a significant reduction in the margins of oilfield service organizations. A decrease in the volume of orders will inevitably intensify competition in the market, which in turn may lead to irreversible economic consequences for a number of companies. From the analysis of the department, it follows that in the absence of systemic measures to support the industry, the market share of foreign oil service companies may grow to more than 50% in the period until 2022.

The Minister of Energy stressed: “This threatens the Russian oilfield services industry with the loss of key competencies in high-tech areas, including such strategically important ones as geophysical and seismic studies of wells, as well as specialized software. Over the past months, the Russian Ministry of Energy has taken a number of measures to ensure the stability of the segment and maximize the retention of jobs. To date, the oilfield service employs more than 300 thousand people. To date, 12 oilfield service organizations have already been included in the list of backbone organizations of the Russian economy, and 5 more are under development. At the same time, on behalf of the President of Russia, work is being carried out to create conditions for the formation of a stock of unfinished wells”.

Novak noted that proposals were prepared to supplement the Tax Code of the Russian Federation with new articles in terms of establishing a tax deduction for creating a reserve of new facilities for the extraction of hydrocarbons. Implementation of the so-called “Unfinished Well” program is expected to be completed by April 2022.

The head of the Ministry of Energy explained: “According to the Ministry of Energy of Russia, the introduction of such a mechanism will provide oilfield service companies with the necessary orders in the period from 2020 to April 2022 and build about 2.7 thousand wells. The total amount of the tax deduction, which will be paid for the period 2022–2025, will amount to 32.15 billion rubles. At the same time, the amount of the deduction will be fully offset by tax revenues from new wells put into operation as early as 2023. As a result, the total amount of additional revenues of the Russian budget from the implementation of the mechanism is estimated at 1.15 trillion rubles for the period of the support program, and the planned volume of investments by subsoil users will reach 300-400 billion rubles. Thus, the mechanism will be economically beneficial for all parties — the state, vertically integrated oil companies, banks, oil service companies”.

Experts believe that the recovery of the oilfield services market to the pre-crisis level will not be quick and may take about 2-5 years. Novak said that the state and oil companies, interested in the stable provision of services necessary for work, today will have to jointly support the oilfield services sector in this difficult period.

The Minister of Energy noted in the article: “I would like to emphasize once again: the future production potential of Russian oil depends on the level of development of the oil service, which will continue to remain one of the key components of the global energy balance”.

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