Wood Mackenzie's Russia upstream research team have assessed the most significant events of 2014 impacting Russia's oil and gas sector, including the Ukraine crisis, the collapse of global oil prices, a shift to conventional domestic production and closer ties with the East, identifying the key areas to watch this year.
 
Michael Moynihan, Principal Analyst for Wood Mackenzie Russia and Caspian Upstream Research says: "2015 will be a year of uncertainty for the Russian upstream sector, as continuing international sanctions will restrict access to capital markets and increase the financing costs for Russian upstream companies. We expect Russia's upstream players such as Rosneft to retreat from high cost and technically challenging frontier developments – such as tight oil and Arctic exploration - which saw increased activity in 2014 and were expected to become key post 2020. Instead we expect the focus this year will shift to conventional production in the heartlands of West Siberia, as Russian players exploit a wealth of experience using domestic technology to drill for volume."
 
Wood Mackenzie's latest upstream analysis highlights some of key upstream activity to look out for in Russia this year.
 
• New tax system now in force – As of 1 January 2015, the new Russian tax system came into force. In addition to the tax manoeuvre legislation the government has introduced other significant tax changes. Designed to be neutral in a high oil price environment, these will have a rather negative impact on producers in comparison to the previous terms as the price continues to decline. Fields, which previously received Mineral Extraction Tax (MET) breaks, will now have to start paying a reduced rate.
 
• Conventional approach to oil production - We anticipate 2015 will continue in the same vein as H2 2014, with the focus on appraisal of remaining discoveries from the Soviet era and continued investment in West Siberian brownfields. With the need for more domestically sourced technology and services, we expect a renewed focus on internal provision and that Russian companies will continue to demonstrate progress on frontier developments by relying on domestic technology and expertise.
 
• Economic outlook in question - In 2015, the Russian economy will continue to be affected by the declining oil price and continued Rouble weakness. This, coupled with a worsening economic picture and deteriorating investment climate in Russia, could lead to an increase in inflation. For upstream companies, the drop in oil price was partially compensated by the depreciation of the Rouble. However, rising Rouble inflation may reduce this advantage. These issues are likely to make setting budgets for 2015 a difficult task for companies.
 
• State and corporate links with Asia to grow -  Hit by sanctions and searching for financing sources, Russia will continue to pursue its pivot to Asian markets. Chinese financial assistance is anticipated at the corporate and project level.  In the past, Chinese equity in the Russian upstream has been limited.  However, the Russian government may be more open to Chinese M&A in 2015.  
 
• Uncertain project pipeline for gas - Tensions with Russia and Ukraine are expected to continue and will be tested during gas pricing negotiations in the spring and in determining the debt that Ukraine will need to repay. Russian LNG developments are expected to show little progress during 2015, however Yamal LNG will continue to receive strong financial support from the Russian government.
Source: Wood Mackenzie