Lukoil executive predicts significant fall in Russian oil output

One of Russia's top oil executives has warned that falling oil prices and western sanctions will lead to a bigger fall in Russian oil production than previously forecast, putting the country's output on a similar trajectory to the declining North Sea.

Leonid Fedun, vice-president of Lukoil, Russia's second-largest oil producer, told the Financial Times that Russian production would drop from a peak of about 525m tonnes this year to 490m tonnes within four to five years, although he insisted the decline would not be "dramatic".

Mr Fedun's 9.77 per cent stake in Lukoil makes him the second-largest shareholder after the company's president, Vagit Alekperov, with estimated wealth according to Forbes of $5.7bn. If accurate, his forecast of declining production will be a blow for the Kremlin, which relies on energy for more than half of its revenues.

Mr Fedun said Russia had previously faced two possible scenarios, of a "slight" decline in oil production from next year, or a more substantial decline, as ageing west Siberian fields reach maturity.

But he said the combination of lower oil prices and US and EU sanctions imposed because of Russia's intervention in Ukraine were pushing output towards the "pessimistic" scenario.

Sanctions have banned the transfer of western technology vital for developing new Russian reserves in the Arctic sea and other deepwater locations, as well as in shale formations. They have also restricted access to western financing for investment.

"The second, pessimistic, scenario is playing out," Mr Fedun said. "So our forecast is oil production will decrease. But this decrease will not be dramatic, it will be more similar to what is happening in the North Sea."

"It won't be like what we witnessed in the early 1990s," he added, referring to the steep drop in Russian oil production after the 1991 Soviet Union collapse. His prognosis remains more pessimistic, however, than official Russian forecasts that production will remain steady.

The combination of falling oil prices and the tumbling rouble caused a nearly 50 per cent drop in Lukoil's net profit in the third quarter from one year ago, the company reported on Thursday.

The decline, which was largely because of a $347m accounting loss on its foreign currency position, came in spite of a 8.5 per cent increase in Lukoil's production thanks to the ramp up of its West Qurna 2 project in southern Iraq.

Mr Fedun admitted that, as a private company, Lukoil was irked by western sanctions.

"It's very strange for us, because we're an absolutely independent, non-government company," he said. "But such decisions were clearly taken with the intention of putting pressure on the whole extractive industry in Russia."

But he noted that Lukoil had no deepwater projects in Russia that would be affected, while shale was a very small part of its portfolio. A joint venture with France's Total to develop Russian shale, only announced in May, has been suspended.

Mr Fedun said he expected Chinese and Russian technology would become more widely available within two to three years and could substitute for US equipment in developing new resources in Russia, even if sanctions persisted.

He admitted that Lukoil, similar to other Russian companies, was having difficulty tapping western financing. But the company had just negotiated a Rbs63bn ($1.34bn) loan from Russia's Sberbank.

Unlike some other Russian executives, Mr Fedun also said he believed Chinese financing would replace some western funding over time, though this was slightly more expensive.

"I will surprise you, but Chinese banks are in very active discussions with Russian companies," he said.

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