SGTZY Surgutneftegas PJSC (CE)

Russian oil output reached a new post-Soviet high in September, continuing to perform against expectations this year, and some analysts are now saying the world's biggest energy supplier could boost production further in the coming years.

Russian oil firms have surprised many this year by increasing output, which topped 10.16 million barrels a day in September, boosted by increased volumes from new projects in East Siberia.

Analysts have repeatedly said this year's output growth is unsustainable, as production is falling rapidly in West Siberia--the country's main production area, developed in the 1960s and 1970s.

In 2008, Russia's oil output fell for the first time in a decade, but that trend was reversed in August last year, when Russia's top oil producer, state-controlled OAO Rosneft (ROSN.RS), launched the huge Vankor field in East Siberia--the country's biggest greenfield project since Soviet times.

With expected peak production of 25 million tons a year--or over half a million barrels a day--by the middle of this decade, Vankor is a cornerstone of Russia's attempt to keep up volumes.

The new record reached in September was also down to increased output at OAO Bashneft (BANE.RS) and Anglo-Russian joint venture TNK-BP Ltd., 50%-owned by U.K. oil major BP PLC (BP).

Some analysts say the weakening ruble has allowed oil companies to invest more money; producers get most of their revenue in dollars, while costs are in rubles, allowing them to produce more oil, although this is considered a very short-term influence.

The Russian government, whose coffers rely heavily on oil revenue, last year eased the tax burden on new greenfield projects such as Vankor in a bid to stabilize output.

By creating incentives for companies to invest into new production regions, the government has shown it is prepared to contribute to the long-term sustainability of its oil industry, analysts at Wood Mackenzie said in a research note.

"The government is managing a very fine balancing act between maintaining production and protecting its revenue base," Wood Mackenzie's analysts said.

The consultancy says overall production may rise modestly in Russia through to at least 2017--so long as the general economic environment remains stable--and could reach 11 million barrels a day. The Paris-based International Energy Agency expects production growth continuing at least through 2011.

Some analysts say Russia's failure to create a reliable tax system for the industry could cause production to fall by as early as next year.

"In light of uncertainty about Russia's tax regime, which prevents companies from making long-term capital commitments, we expect this rebound to be short-lived and production to start declining again in 2011," said Alexander Burgansky, analyst at Renaissance Capital.

The shift towards investments into greenfield developments in East Siberia was only maintained at the expense of West Siberia. Analysts agree that continued overall growth hinges on West Siberia, where production decline could be slowed down if the right tax incentives were created.

"Losing focus on the huge upside potential, which still exists in West Siberia, could be a massively costly mistake," Wood Mackenzie said.

The country produced 376.70 million tons of crude oil and condensate in the first nine months of 2010, up 2.4% on the year. September output stood at 41.59 million tons.

The five main contributors were state-controlled OAO Rosneft (ROSN.RS), which produced 2.28 million barrels a day on average in the month, OAO Lukoil Holdings (LKOH.RS), with 1.79 million barrels a day, TNK-BP Ltd., at 1.46 million barrels a day, OAO Surgutneftegaz (SNGS.RS), producing 1.20 million barrels a day, and OAO Gazprom Neft (SIBN.RS), with 604,481 barrels a day.

-By Jacob Gronholt-Pedersen, Dow Jones Newswires; +7 495 232 9197; jacob.pedersen@dowjones.com

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