Russia Oil and Gas Report Q2 2008

The latest Russia Oil & Gas Report from BMI forecasts that the country will account for 51.16% of Central and Eastern European (CEE) regional oil demand by 2012, while providing 71.31% of supply.

CEE regional oil demand rose to an estimated 5.45mn barrels per day (b/d) in 2007 and should average 5.59mn b/d in 2008, then rising to around 6.23mn b/d by 2012. Production of an estimated 12.74mn b/d in 2007 is forecast to reach 15.31mn b/d by 2012. CEE gas consumption in 2007 was an estimated 612bn cubic metres (bcm), with demand of 744bcm targeted for 2012. Production of an estimated 701bcm in 2007 should reach 792bcm in 2012, which implies net exports falling from an estimated 89bcm in 2007 to just 49bcm by the end of the period. Russia's estimated share of gas consumption in 2007 was 71.99%, while its share of production was 88.15%. By 2012, its share of demand is forecast to be 68.71%, with the country accounting for 83.29% of supply.

Global oil demand growth is now expected to have been 1.7% for 2007, rising to a little less than 2.0% in 2008. Asia and the CEE continue to dominate. The overall demand outlook for the period to 2012 remains healthy (average growth 1.8%), but subject to review if the macroeconomic outlook deteriorates. We are still assuming some easing of energy prices during the period, but from a much higher level than envisaged earlier. Supply growth is capable of matching demand expansion - but only if OPEC cooperates as non-OPEC forecasts are fragile. Between 2006 and 2012, we see supply rising by an average 1.7% per annum - subject to OPEC strategy. Our revised central view is that the OPEC basket price will rise from around US$69/bbl in 2007 to US$74 in 2008, before settling around US$71/bbl in 2009 and falling further to US$70/bbl in 2010-12.

Russian real GDP growth is estimated by BMI at 6.5% for 2008, down from an estimated 7.3% in 2007.

We are assuming 6.0% growth in 2009, 5.7% in 2010, followed by 5.5% in 2011 and 5.3% in 2012. Statecontrolled Gazprom has a virtual monopoly over gas transportation and exports. With it being the main provider, we see gas output rising from an estimated 618bcm in 2007 to 660bcm by 2012. Russian domestic companies control most of Russia's oil production, with the exception being Anglo-Russian joint venture (JV) TNK-BP. Rosneft is the main state-controlled oil producer. The companies are expected to deliver 2008 output of crude oil and condensates averaging 10.09mn b/d. Oil production seems likely to grow by 2% per annum over the remainder of the decade. Our 2012 production forecast is for 10.92mn b/d.

Russia occupies fifth place in BMI's newly revised Upstream Business Environment rating, in spite of unrivalled hydrocarbons resources. Its oil and gas reserves account for much of the upstream score, but licensing, privatisation and country risk factors are less impressive. Medium-term scope exists for Russia to challenge Poland above it, while Slovakia is no threat below. The country is near the top of the league table in BMI's newly-revised Downstream Business Environment rating. There are a few particularly high scores and progress further up the rankings from second place is possible over the medium term.

There are excellent scores for refining capacity, oil and gas demand, population and nominal GDP.

Romania is just two points below it in the regional rankings, but there is little chance of it challenging for Russia's second place.