Russia says oil production growth to slow

Russia tempered the enthusiasm of oil supply bulls when it announced that it expected oil production to grow only modestly over the next several years.

Russia, the world's no. 2 crude exporter after Saudi Arabia, said production would increase to only about 10.4 million barrels per day, up only 6% from the current 9.8 million barrels per day, The Wall Street Journal reported [Subscription required].

Viktor Khristenko, Russia's oil minister, said Russia has promising oil finds in Eastern Siberia, Arctic North and Sakhalin Island, but that Russia would not duplicate the superior +10% oil production growth the nation has achieved earlier this decade.

The new oil fields hold promise, but their higher development costs -- think about the cost of drilling and developing oil in Siberia in the winter -- is likely to discourage exploration. Currently, Russia's marginal tax rate on revenue from oil above $27 per barrel is almost 90 cents on the dollar. Russia's officials have talked about modifying the tax code to increase incentives for companies to develop its higher-cost oil reserve zones.

Maturing oil fields

Moreover, most of Russia's recent, impressive oil production gains stemmed from low-cost oil fields, fields with production costs so low it was profitable to pump for oil even under the current tax code. Those fields, although still productive, are maturing and are not likely to record high production gains in the decade ahead.

Russia's lowered oil production estimate is likely to temper the enthusiasm of oil production bulls who were counting on substantial oil production gains from a variety of non-OPEC sources to counter likely rising global oil demand. With rising demand from emerging markets pressuring OPEC's spare capacity, analysts say sizable production increases from non-OPEC sources, such as Russia, Canada and Mexico, are needed to ensure that the developed and developing countries are adequately supplied with oil.

Oil Analysis: Russia's revised production projection is likely to create support for oil's price around $82-$90 long-term, and that's on the low end. If oil traders and other oil market participants interpret Russia's analysis as further lowering oil's safety cushion between supply and demand, the support price could be considerably higher, assuming current global economic growth trends continue.