OREANDA-NEWS. September 07, 2015. The decline in oil output from Russia's key Western Siberian brownfields is likely to continue in the near term due to the relatively high cost of drilling these ageing fields, Fitch Ratings says. A rebound in the oil price would help slow the decline of these projects, which produce most of Russia's oil. But in the longer term they also face a significant threat from Western sanctions, which have reduced oil producers' access to long-term funding and to the advanced technology needed to extract the remaining oil.

The 1H15 crude production of Russian number-two oil producer LUKOIL (BBB-/Negative) (excluding equity affiliates) from Western Siberia fell 4.3% from a year earlier, nearly three times the average year-on-year fall of 1.5% it reported in 2011-2014. LUKOIL's gas production in the region fell 4.8%, nearly five times the average decline rate in 2011-2014. But the company's overall crude production in Russia was broadly flat, mainly due to higher production from Timan-Pechora, while its total crude output rose by 5% on a significantly higher contribution from Iraq's West Qurna-2 project.

Rosneft, Russia's number-one oil producer, reported a 3.2% year-on-year fall in Western Siberian crude production (excluding equity affiliates) in 1H15. This was a slightly smaller fall than the 3.7% drop it reported in 1H14, but overall volumes have been helped by stronger output from its Uvatneftegaz greenfield, helping offset brownfield declines. Rosneft's gross oil production for the period was down 1%.

The decline in both companies' Western Siberia output was largely due to lower drilling volumes during the period. Eurasia Drilling Company, LUKOIL's principal onshore drilling contractor, reported a 15% drop in 1H15 total metres drilled and an 8% drop in horizontal metres drilled for LUKOIL. Rosneft also revised its drilling programme in the period due to what it describes as "the lack of competitive market of drilling services". We view delayed drilling volumes as one of the oil companies' responses to lower oil prices.

We expect overall drilling volumes to stabilise in 2H15 and gradually start recovering in 2016 even if oil prices remain low, because drillers appear more flexible over the rates they charge. But brownfields will account for a smaller share of this activity than in the past because horizontal drilling and other techniques required to increase oil recovery from ageing fields are relatively expensive.

These techniques are also heavily reliant on imported technology and equipment, which has been affected by sectoral sanctions. We do not believe this has been a significant cause of the recent production declines, but if sanctions persist they will have a more pronounced effect on production in the medium term. We therefore expect LUKOIL and Rosneft's Western Siberia production to continue falling by 3%-4% a year, which is already factored into LUKOIL's rating.