Upstream

Russia has the largest oil and gas reserves in the world and is the second largest oil producer with  13% of total global oil output. The oil upstream industry is a backbone of the economy with an impact on the country’s international balance of payments, exchange rate and the formation of the investment resources of the economy.

Following its post-Soviet collapse, Russian oil production has been growing and rebounded from its low of 5.8 million barrels per day to 10.5 million barrels per day in 2013, with around 234.86 million tonnes exported as either crude or oil product.

According to the Russian Ministry of Energy, oil output in Russia grew by 1.2% to 523 million tonnes in 2013, supported by tax legislation incentives and the launch of new pipelines and oil exploration projects.

The well stock reached 165.4 thousand versus 162.8 thousand in 2012 with more than 143.1 thousand (~86%) of them in active production. Russia aims to maintain annual oil production at the current level, or just over 10 million bpd, over the next 10 years.

Capital expenditures in the oil upstream sector grew from Rub 700 billion in 2012 to approximately Rub 840 billion in 2013. Oil prices continued to support favorable conditions in the industry. Following a strong performance in 2011, driven by unstable political situations in key oil producing regions as well as the monetary policy of developed countries, the average oil price continued to demonstrate moderated growth supported by ongoing monetary expansion of the key Central Banks and prolonged instability in some producing countries. The average oil price reached USD 108.8 USD/barrel in 2013 versus 111.7 USD/barrel in 2012.

Midstream

Having over 50 thousand km of oil pipelines and more than 400 installed pump stations, Russia has the largest oil pipeline system in the world. Over 90% of crude oil produced in Russia is transported through the existing trunk pipeline system.

Transneft, the operator of the pipeline system, has significantly improved the pipeline in the past 10 years to meet the needs of the post-Soviet oil boom and transports around 460 million tonnes of oil annually. When the system was created in Soviet times, it was primarily designed to supply the domestic market: the refineries located in European Russia and the nearby republics, with only some excess volumes destined for exports. With the collapse of the Soviet economy, oil producers redirected crude oil flows to more profitable markets in non-CIS countries, which resulted in export capacity bottlenecks in 2002-04. This was resolved by adding new pipeline capacity.

The existing pipeline system is constantly expanding through the following projects:

The ESPO expansion — the construction of oil pipelines from ESPO to the Komsomol’skiy refinery and the Khabarovsk refinery, and the pipeline from the Komsomol’sk refinery to De Kastri sea terminal.

The construction of the Zapolyarye-Purpe oil pipeline, with an overall capacity of 45 million tonnes per year, is planned in order to transport oil from the green fields of the Yamalo-Nenets Autonomous District and from North of Krasnoyarsk District. The overall length of the pipeline is estimated to be 500 km.

In 2013, Transneft finished the construction of the Tihoretsk-Tuapse-2 oil pipeline to increase oil volumes delivered to the Tuapse oil refining plant. The length of the oil pipeline is 247 km with a capacity of 12 million tonnes per year.

The construction of the Kuyumba-Taishet oil pipeline, with an overall capacity of 15 million tonnes per year, began in 2013 to transport oil to the system of pipelines in the ESPO-2 project. The overall length of the pipeline is estimated to be 700 km.

Total capital expenditure by Transneft in 2013 was Rub 161.4 billion.

Downstream

The Russian refining system is the third largest in the world, ranked only behind the U.S. and China, with approximately 275 million tonnes of total capacity.

In 2013, the volume of primary processing hit a record level of 278 million tonnes, up 3% year-on-year. Production growth has been driven by the transition to the European emission standards Euro-4 (affected in 2013), an increase in internal demand and an expansion of gasoline exports.

The majority of refineries still need to be upgraded. The strategic goal set by the government is to reach a processing depth of 83% by 2015.

According to investment plans announced by oil companies, capital expenditure in the sector exceeded Rub 269 billion in 2013.

Industry growth is likely to be driven by new projects in 2013:

• Rosneft is still developing programmes to upgrade in the Tuapse and Novokuybyshevsk refineries: Upgrading Tuapse oil refining complex by putting into operation two stations of primary oil refining and construction of a the catalytic reforming complex and a complex of a low-temperature isomerisation and hydrocracking complex in Novokuybyshevsk refineries plants. The construction of a catalytic cracking complex in the Syzransky plant and hydrocracking complex in the Komsomolsk plant is continuing.

• Lukoil is continuing to reconstruct its diesel fuel production unit and modernise the atmospheric block of the AVT-6 at Nizhegorodnefteorgsintez. Gasprom Neft started to implement the second stage of its primary oil refining upgrade by rebuilding AVT-6 installation and building a combined oil refinery installation with a capacity of 6 million tonnes per year.

Gas pipeline projects

The Unified Gas Supply System of Russia, operated by Gazprom, is the world’s largest gas transmission system and represents a unique engineering complex encompassing gas production, processing, transmission, storage and distribution facilities. It assures continuous gas supply from the wellhead to the end consumer.

The system includes 161.7 thousand kilometers of gas trunklines and laterals, 215 line compressor stations with gas compressor units totaling 42 thousand MW in capacity, 6 gas and gas condensate treatment facilities and 25 underground gas storages locations.

Projects in gas transmission include the following: the South Stream gas pipeline, the coast technological complex for Kirinsky gas-field, the main compressor station “Sakhalin”, the gas-main pipeline Bovanenkovo Ukhta and the “Yuzny potok” gas-pipeline expansion.