Industry Trend Analysis - Russian Capex Slowing Into 2018 - NOV 2017

BMI View: Capital expenditure at Russia's largest companies will be approximately USD3bn under early year expectations in 2017, and will fall a nother 2.1% in 2018. Higher lifting costs and reduced spending downstream will limit out flow s as investment into major strategic projects ploughs on.

Capital expenditure across the largest oil and gas companies in Russia will underperform our early year estimates for 2017 of USD58.8bn. Our latest outlook anticipates a USD3.0bn reduction to USD55.8bn. We are also less bullish on our expectation for 2018 where we expect spending to drop to USD54.6bn. Upside risks to 2018 spending will be foreign exchange and oil price related.

Spending Stabilising
Russia - Capex By Major company (USDbn)
e/f = BMI estimate/forecast. Source. Company guidance

Capex Slows In H117 As Lifting Costs Ris e

Our latest data shows spending among Russia's government controlled companies is in line with our previous estimates. By contrast, non-state companies have seen spending estimates remain flat or fall. Both Gazprom and Rosneft spent around 48% of their guidance annual budgets over H117, while Lukoil, Surgutneftegaz, Tatneft and Bashneft have spent under 45% of planned budgets over the same period. Gazprom's spending is likely on par with estimates given the substantial demand for gas from its European partners, while Rosneft is spending to meet oil supply obligations to China starting in 2018.

Part of the underspend may be related to Russia's role in reducing production through the OPEC/non-OPEC agreement, resulting in less aggressive spending to manage output levels. A stronger rouble, largely a result of more stable oil prices, has also increased lifting costs meaning investment does not stretch as far as it did previously. From the companies that report data with sufficient transparency, it is clear that y-o-y production strengthened over H117 (largely due to Rosneft absorbing Bashneft), but dropped off slightly from Q1 to Q2.

Production Up Y-o-Y, But Slowing In Q217
Oil Production By Company (000b/d)
Source: Company data, BMI

We have also observed a shift in spending away from the downstream in favour of midstream and upstream operations. Major refining upgrade projects are largely complete or moving to completion, hence the wind down in spending, while major upstream projects geared at exports to Asia and Europe are under development. Gazprom is spending heavily on pipelines including Turkstream and the Power of Siberia, while also developing the upstream assets to supply the new projects. Rosneft needs to maintain investment to mitigate declining Western Siberia assets and push forward new eastern Siberian developments to help meet oil supply obligations. The company, which already sends 400,000b/d to China, is due to increase send-out to 600,000b/d in 2018. Russia is expanding the Siberian oil network capacity to enable this oil to be sent into China from as early as January 2018.

More Of The Same In 2018

Regardless of whether OPEC/non-OPEC participants decide to extend the current market intervention in November, we expect Russian spending to remain at a similar level in 2018 at USD 54.6bn, down 2.1% y-o-y. The stabilisation of the rouble against the dollar will mean less fluctuation in income and in how much of the USD export earnings can be reinvested domestically. Foreign exchange movements against the oil price have been a crucial pressure value to minimise the impact of lower oil prices on the Russian oil sector. We expect this to have less of an impact in 2018 under a more stable foreign exchange rate. This will also lead to a stabilisation in lifting costs and limit growth in output. As such, Russian companies are expected to increase investments abroad.

Furthermore, many of the major projects targeting increased exports, such as Gazprom's Yamal mega project to Europe and the Chayandinskoye field for China, are mid-development. Spending will be deployed as planned to complete these projects, many of which are key strategic developments for the diversification and securing of sales over the long-term.