RUSSIAN OIL AND GAS INDUSTRY DEVELOPMENT ......influence factors are adequate to deliver development forecasts for the fuel and energy industry. The method of comparative analysis

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International Journal of Management (IJM)

Volume 11, Issue 5, May 2020, pp. 1195-1213, Article ID: IJM_11_05_108

Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=11&IType=5

Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com

ISSN Print: 0976-6502 and ISSN Online: 0976-6510

DOI: 10.34218/IJM.11.5.2020.108

© IAEME Publication Scopus Indexed

RUSSIAN OIL AND GAS INDUSTRY

DEVELOPMENT AMID CHANGING GLOBAL

CONSUMPTION STRUCTURE

Sergey Oganovich Kalendjyan

Higher School of Corporate Management, Russian Presidential Academy of National

Economy and Public Administration, Moscow, Russia

Tamara Yuryevna Safonova

Higher School of Corporate Management, Russian Presidential Academy of National

Economy and Public Administration, Moscow, Russia

ABSTRACT

The purpose of this paper is to analyse the existing forecasts of Russian energy

sector development, assess their quality and compile proposals on generating industry

development forecasts considering macroeconomic factors and demand for Russian

energy from foreign buyers.

The authors use forecasting methods to assess whether the applicable external

influence factors are adequate to deliver development forecasts for the fuel and energy

industry.

The method of comparative analysis is used to determine whether statistics are

correct in the industry forecasts.

Research results: Industry development forecasts are analysed and divergence is

established as a result of missing alignment with the external markets.

The authors propose a systemic approach to forecasting industry development,

which integrates all aspects of economic, technological, information and political

influences.

Key words: forecast, oil, gas, LNG, oil products, outlook, imports, exports, domestic

market supplies, forecast automation based on digital technologies

Cite this Article: Sergey Oganovich Kalendjyan and Tamara Yuryevna Safonova,

Russian Oil and Gas Industry Development Amid Changing Global Consumption

Structure. International Journal of Management, 11 (5), 2020, pp. 1195-1213.

http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=5

Russian Oil and Gas Industry Development Amid Changing Global Consumption Structure


SPECIFICS

The specifics of forecast demand and supply indicators in the market are that their

adjustments are subject to macroeconomic, political, technological, seasonal factors and the

market's price conditions.

The paper outlines a description of the automation process in the consolidation and

development of industry development forecasts.

To automate the forecasting process, we produced a model integrating digital technology

(machine learning), multi-factor analysis and the identification and elimination of fluctuations

(noise) exerting additional influence on the output. Alongside, the coefficients measuring the

degree of influence of factors on the forecast output were included in the system.

The proposed hybrid forecasting system, on the one hand, allows to include the available

institutional analysis of Russian energy sector development and, on the other hand, to shape

the range of expected change subject to a comprehensive set of factors and to make

adjustments in the model on an ongoing basis to consider the constantly evolving

macroeconomic, production and information outlook in the global energy sector.

MATERIALS

Researchers and institutes of the Russian Academy of Sciences contributed to the study of the

reproduction theory and methodology, socioeconomic analysis and forecasting, cross-

disciplinary analysis and modelling, development of complex applied programmes of social

and structural technological transformations of the national economy. These include:

the Central Economics and Mathematics Institute of the Russian Academy of Sciences

(CEMI RAS),

the Institute of Economic Forecasting of the RAS (IEF RAS),

the Energy Research Institute of the RAS (ERI RAS).

1. INTRODUCTION

Forecasting plays an important role in the implementation of the industry's investment and

innovation projects, which directly influence future production and economic indicators.

With the fuel and energy sector accounting for much of the GDP in Russia and some other

countries, correct forecasting is a key factor of future economic growth or stagnation.

This calls for automation of the process of forecasting of production and marketing both

for exports and in the domestic market to a degree of precision allowing one to make well-

informed decisions based on the output of automated models.

The main updated forecasts of the fuel and energy sector of Russia include:

the Forecast of Socioeconomic Development Forecast of the Russian Federation until

2036 issued by the Ministry of Economic Development (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018),

the Energy Strategy of Russia (Draft energy strategy of the russian federation until

2035, n.d.).

the Global and Russian Energy Outlook to 2040 of ERI RAS and the Energy Centre of

Moscow School of Management Skolkovo (Global and Russian Energy Outlook to

2040 of ERI RAS and the Energy Centre of Moscow School of Management

SKOLKOVO, 2019).

Sergey Oganovich Kalendjyan and Tamara Yuryevna Safonova


Foreign organisations that publish forecasts include the US Department of Energy, OPEC,

the International Energy Agency, BP and many others interested in living up to forecasts in

line with their development strategies.

Figure 1 Consensus forecast of global demand for hydrocarbons until 2040

Source: US Department of Energy, OPEC, International Energy Agency, BP. Analysis by NAANS-

MEDIA.

The medium and long-term demand forecasts for liquid hydrocarbons by the US Energy

Department, OPEC and the International Energy Agency for the period from 2018 until 2040

indicate planned growth in the long term. However, the difference in estimates for 2040

reaches 5.7 million barrels per day, which is comparable to the current level of Russian

exports of oil supplies.

According to the forecasts, after approximately 100-102 million barrels per day as of late

2019, the figure will stand at 104-109 million barrels a day by 2030 and will only reach the

range of 106-111.7 million barrels per day by 2040, i.e., the pace of growth will begin to slow

down between 2030 and 2040 and is expected to turn negative after 2040.

Simultaneously, there may be excess and still growing refinery capacity in the market in

the coming decades due to slowing demand for oil products, pressured by alternative energy

and electric car market development standing to receive considerable further impulse over the

next few years.

An important consideration here is that global refinery capacities will be outpacing

demand growth for oil products and such growing excess refinery capacities will exert

pressure on the sector's margins.

The prospects of global demand growth in the coming decades will be largely driven by

the growing market of the Asia-Pacific region relying largely on imports as it lacks any

meaningful local hydrocarbon reserves.

1.1. Forecast Dynamics of Russian Oil Production

The Forecast of Socioeconomic Development of the Russian Federation until 2036 (Forecast

of Socioeconomic Development of the Russian Federation for the period until 2036, 2018)

refers to a stable oil production level over the whole long-term period that will be sufficient to

meet the needs of the domestic market and maintain economically viable exports of oil and oil

products.

102.9 102,0

105,0

108,0

110,0 109,0

101.9

106,0

108.6

110.5 111.7

102,0

104,0 105,0

106,0

96

98

100

102

104

106

108

110

112

114

2020 2025 2030 2035 2040

US Department of Energy BP OPEC International Energy Agency



The main regions of production will be West Siberia and the Urals-Volga region, where

the stabilisation of production is attained by new drilling and well interventions at the existing

fields.

In line with the forecast, development in East Siberia continues at the operational

Verkhnechonskoe and Talakanskoe fields. Moreover, commercial oil production has begun at

the Suzunskoe and Tagulskoe fields. Expansion is underway at the V. Filanovski,

Prirazlomnoe and Novoportovskoe fields. Higher oil production rates in East Siberia help to

mitigate the effects of a production plateau and gradual declines in West Siberia. Further

growth is expected from drilling new exploitation wells, improved efficiencies of well

intervention activities, development of hard-to-recover deposits in low permeability reservoirs

and high-viscosity oil. Meanwhile, the main expansion is seen in putting into operation new

fields.

The Forecast of the Ministry of Economic Development (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018) envisages oil

production growth by 2036 at the rate of 1.1% compared to 2017.

Table 1 Dynamics of oil and gas condensate production, % vs. the same period of the previous year

according to the Forecast of the Ministry of Economic Development 2036 (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018)

2018 2019-2024 2025-2030 2031-2036 total

Oil and gas

condensate

production

0.51

0.2 -0.1 0 1.1

Source: Ministry of Economic Development

The Energy Strategy until 2035 (Draft energy strategy of the Russian Federation until

2035, n.d.) is meant to represent changes between 2008 and 2018 and progress on the

objectives of the oil industry.

Table 2 Progress on goals of the oil industry according to the Energy Strategy until 2035 (Draft

energy strategy of the Russian Federation until 2035, n.d.): oil production

2018 actual 2024 2035

Oil and gas condensate

production

555.9 555-560 490-555

We consolidated the indications of forecasts (Forecast of Socioeconomic Development of

the Russian Federation for the period until 2036, 2018; Draft energy strategy of the russian

federation until 2035, n.d.; Global and Russian Energy Outlook to 2040 of ERI RAS and the

Energy Centre of Moscow School of Management SKOLKOVO, 2019) as shown in Figure 2.

As can be seen in Figure 2, the Forecast of the ERI RAS-2040 (Global and Russian

Energy Outlook to 2040 of ERI RAS and the Energy Centre of Moscow School of

Management SKOLKOVO, 2019) diverges from the draft Energy Strategy-2035 (Draft

energy strategy of the russian federation until 2035, n.d.) and the Forecast of the Ministry of

Economic Development until 2035 (Forecast of Socioeconomic Development of the Russian

Federation for the period until 2036, 2018), which makes it difficult to create business plans

for companies operating in the fuel and energy industry.



Figure 2 Consensus forecast of oil production in Russia for the period until 2040

Source: (Forecast of Socioeconomic Development of the Russian Federation for the period until 2036,

2018; Draft energy strategy of the russian federation until 2035, n.d.; Global and Russian Energy

Outlook to 2040 of ERI RAS and the Energy Centre of Moscow School of Management

SKOLKOVO, 2019)

Table 3 Dynamics of gas production, % vs. the same period of the previous year according to the

Forecast of the Ministry of Economic Development-2036 (Forecast of Socioeconomic Development of

the Russian Federation for the period until 2036, 2018)

2018 2019-2024 2025-2030 2031-2036 total

Gas volume 2.5

1.1 2.9 0.3 28.7

Source: (Forecast of Socioeconomic Development of the Russian Federation for the period until 2036,

2018)

According to the Forecast of the Ministry of Economic Development-2036, "the projected

growth of gas production (to 897.3 billion cubic metres in 2030 and to 912.3 billion cubic

metres in 2036) will be supported by intensified development of fields by Gazprom and

increased gas production by independent companies amid non-discriminatory access to the

Unified Gas Supply System (UGSS). Meanwhile, there will be no major fluctuations in the

domestic gas market, and by 2036, it will reach 510.9 billion cubic metres (505.2 billion cubic

metres in 2030), while maintained demand in the external market would allow exports at

414.1 billion cubic metres (402.5 billion cubic metres in 2030)".

The Energy Strategy-2035 (Draft energy strategy of the russian federation until 2035,

n.d.) indicates maintained gas production within the range of 795–820 billion cubic metres

until 2024 and further within the range of 850–924 billion cubic metres until 2035.



Table 4 Progress on goals of the oil industry according tothe Energy Strategy-2035 (Draft energy

strategy of the russian federation until 2035, n.d.): natural gas production

2019 actual 2024 2035

Natural gas production 738 795-820 850-924

Simultaneously, we estimate that natural gas motor fuel will come to serve the growing

demand primarily in the inaccessible gas-producing territories where there are no regional

hubs of motor fuel production.

It will push up the domestic consumption of gas amid narrower use of gasoline and diesel.

We consolidated the data from gas production forecasts (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018; Draft energy strategy

of the russian federation until 2035, n.d.; Global and Russian Energy Outlook to 2040 of ERI

RAS and the Energy Centre of Moscow School of Management SKOLKOVO, 2019) and

outlined the aggregated outcomes in Figure 3.

Figure 3 Consensus forecast of gas production in Russia for the period until 2040

Source: Forecast of the Ministry of Economic Development-2036, 2018; draft Energy Strategy-2035,

n.d.; Forecast of the ERI RAS-2040, 2019.

1.2. Forecast dynamics of oil refinery output and motor fuel production

The Forecast of Socioeconomic Development of the Russian Federation for the period until

2036 (Forecast of Socioeconomic Development of the Russian Federation for the period until

2036, 2018) indicates a continued trend toward the substitution of "black" products with

"light" oil products and, subsequently, higher oil conversion ratios. Considering the projected

timelines for refinery upgrades as set forth in agreements with oil companies to secure higher

oil conversion ratios, the amount of oil supplies flowing to crude oil distillation is expected at

291.8 million tonnes by 2036.

Meanwhile, new commissioning of crude oil distillation facilities is envisaged in the

medium term at Russian refineries alongside further continued closure of inefficient refineries



with low conversion ratios where the output falls short of the technical requirements for motor

and aviation fuel, diesel and marine fuels, jet fuels and fuel oil.

Table 5 Dynamics of crude oil distillation, % vs. the same period of the previous year according to the

Forecast of the Ministry of Economic Development-2036 (Forecast of Socioeconomic Development of

the Russian Federation for the period until 2036, 2018)

2018 2019-2024 2025-2030 2031-2036 total

Crude oil distillation 0.9 0.3 0.0 0.0 1.7

Motor gasoline

production

3.3 3.4 1.1 1.6 43.0

Diesel production 2.6 2.4 2.2 2.6 52.0

Source: Forecast of the Ministry of Economic Development-2036 (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018)

The Forecast of the Ministry of Economic Development-2036 (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018) indicates an increase

of crude oil distillation by 1.7% by 2036 vs. 2017[1], an increase of 43% in motor gasoline

production and 52% in diesel.

Thus, based on the percentage estimates of the Forecast of the Ministry of Economic

Development (Figure 4), Russian diesel production should rise to 120 million tonnes (vs. the

2019 production estimates of 78.0 million tonnes), and gasoline production should rise to 58.1

million tonnes (vs. 2019 production estimates of 39.9 million tonnes).

Figure 4 Estimates of gasoline and diesel production on Russia for the period until 2036


Development of the Russian Federation for the period until 2036, 2018), authors' analysis.

No targets are indicated for oil distillation for the period from 2035 to 2040 in the Energy

Strategy-2035 and the Forecast of ERI RAS.

Viability assessments of such considerable production growth forecasts (Forecast of

Socioeconomic Development of the Russian Federation for the period until 2036, 2018) in

motor fuels in Russia can be based on evaluations of prospective consumption.

At the end of 2019, more than 66% of diesel production and 13% of gasoline in Russia

were exported, while domestic demands are fully met by domestic production

The course of dieselisation was chosen by many Russian refinery owning companies as

part of the refinery upgrade programme.



However, the Dieselgate followed in 2015, when Volkswagen was found to have

downplayed the emission levels of its diesel vehicles. Following a media storm, the popularity

of diesel cars began to plummet rapidly. Their share stood at 51% in 2016 but then, in a

matter of only three years, it came down to 36%. In 2017, the German government ordered

that approximately 5 million diesel cars be recalled from the market to reduce nitrogen oxide

emissions. Moreover, some car manufacturers, including Volvo, Fiat and Lexus, decided to

withdraw from designing light vehicles with diesel engines.

Many automotive giants cut diesel vehicle production due to the excess nitrogen oxide

levels above the acceptable limits. Germany, France and other European countries are looking

at banning diesel cars.

This is a signal to assess future investment efficiencies as particularly envisaged in the

parameters of the tax manoeuvre (Part.1 of the Tax Code of the RF, 2019), namely, the rate of

cash allocation for refinery upgrades (Decree No. 1725 of the Government of the Russian

Federation of 29 December 2018).

1.3. Forecast dynamics of LNG production

According to the baseline scenario of the Forecast of the Ministry of Economic Development-

2036 (Forecast of Socioeconomic Development of the Russian Federation for the period until

2036, 2018) for the period from 2017 until 2036, LNG exports will increase by 57.2 million

tonnes (to 68.8 million tonnes from 11.5 million tonnes), compared to growth under the

conservative scenario of 52.1 million tonnes (to 63.6 million tonnes from 11.5 million

tonnes).

Figure 5 Russia's LNG exports forecast for the period until 2036 according to the Forecast of the

Ministry of Economic Development-2036 (Forecast of Socioeconomic Development of the Russian

Federation for the period until 2036, 2018)


Development of the Russian Federation for the period until 2036, 2018), authors' analysis.

The draft Energy Strategy-2035 (Draft energy strategy of the russian federation until

2035, n.d.) indicates a key role of LNG production and exports in the development of the

global gas market. The share of LNG in gas trade will rise significantly. Another aspect

concerns a complex of measures to facilitate the modernisation and construction of auxiliary



infrastructure (ports, transport, power, etc.) under the principles of public-private partnership,

development in the Russian Arctic zone of specialised hubs for transshipment, storage and

marketing of LNG, implementation of terminal construction projects in Kamchatka and

Murmansk, development of small-scale LNG production and domestic market as an

instrument of energy security in the areas out of reach to the UGSS.

Table 6 Progress on goals of the gas industry according to the Energy Strategy-2035 (Draft energy

strategy of the russian federation until 2035, n.d.)

2018 actual 2024 2035

LNG production, million

tonnes

18.9 46-65 70-82

Source: Energy Strategy-2035 (Draft energy strategy of the russian federation until 2035, n.d.)

While the indication for LNG exports in forecast (Forecast of Socioeconomic

Development of the Russian Federation for the period until 2036, 2018) for 2024 is 27.6

million tonnes, (Draft energy strategy of the russian federation until 2035, n.d.) puts it at 46-

65 million tonnes; the figures for 2035 are respectively 63.6-68.8 million tonnes in (Forecast

of Socioeconomic Development of the Russian Federation for the period until 2036, 2018)

and 70-82 million tonnes in (Draft energy strategy of the russian federation until 2035, n.d.).

The Forecast of the ERI RAS-2040 (Global and Russian Energy Outlook to 2040 of ERI

RAS and the Energy Centre of Moscow School of Management SKOLKOVO, 2019) does not

specify LNG exports clearly, but indicates that the "potential of growing Russian LNG

exports in the CIS will largely correlate with the situation in Ukraine and the decisions on

energy supplies in the country beyond the term of active nuclear power plants".

The main opportunities for increasing supplies to external markets for Russia will depend

on growth in the Asia-Pacific region (China, Japan, the Republic of Korea, etc.) and the

development of the global LNG trade. However, there is significant uncertainty with regard to

further outlook of these new markets and the competitiveness of Russian gas in them. Major

hopes are hinged on the development of a flexible and adaptive LNG industry in Russia

capable to support a significant increase of LNG exports depending on the scenario. However,

in absolute terms, even the best-case scenario of LNG production growth envisages exports

across all directions by 2040 at only 42% of the current supplies to Europe. Thus, the

European market of pipeline gas will continue to account for approximately 52-55% of

Russian exports in 2040.

At the same time, the situation associated with a landslide drop in the consumption of

hydrocarbons and motor fuel that arose in 2020 due to the spread of the coronovirus in the

world was not foreseen by any forecast.

At the same time, at the end of 2019, the NAANS-MEDIA agency predicted that in 2020

global markets could meet a new global collapse, which could be helped by a number of

factors, the elimination of which in the current conditions seemed extremely unlikely.

According to the forecast, “this new period of turbulence can overshadow the last two

crises, and therefore the likelihood that all markets and goods will be negatively affected

(even those that have recently been characterized by consistent growth without inflating a“

speculative bubble ”), is very high. "

By the end of 2019, the world economy had accumulated enough preconditions for the

beginning of a new big recession, including over-lending to households in the USA, “trade

wars”, a “bubble” in the real estate market, a negative / low interest rate policy set by the

European Central Bank and the Fed to maintaining stock market growth.



Thus, by the beginning of 2020, the world economy was "accelerating" as if due to the

presence of "doping", that is, its growth was not organic, but was unnatural.

From the point of view of analyzing the fundamental causes of the projected recession,

three basic crisis factors were identified - the monetary policy of world central banks, the

technical aspects of the movement of key indices directly on the charts and their

interconnectedness, as well as the cyclical nature of crises in the global economy.

If we pay attention to the peak values that reached the stock indices by the end of 2019

(the S & P500 wide market index, the industrial Dow Jones and the high-tech NASDAQ),

then the logical conclusion follows that after such a confident and almost unstoppable growth,

a large-scale correction towards the collapse has ripened.

Given the possible scale of the impending market decline, which, according to the forecast

of NAANS-MEDIA LLC, formed in 2019, could be expected in the coming months, quotes

of “black gold” were able to fall close to breakeven points of production of traditional

producers even without the influence of coronovirus. located near $ 10-20 / bbl, as it actually

happened in 2020.

An exceptional event occurred on April 20, 2020, when at the New York Mercantile

Exchange (NYMEX), the price of May futures for North American WTI oil initially fell to $ 0

per barrel, and then its quotes went negative - for the first time in history. Oil was minus $ 40

per barrel - that is, sellers of contracts paid extra to buyers. The collapse exceeded 300%.

Traded on the New York Stock Exchange, a fund called the United States Oil Fund

(Exchange Traded Fund United States Oil Fund), or ETF USO, shortly before the execution

date of the May WTI oil futures - owned, according to Bloomberg, 25% of all futures

contracts. It was this company, on the last day of trading this futures on April 20 that the USO

threw a huge number of contracts onto the market. But other market participants were in no

hurry to buy them, and futures prices began to decline. One by one, everyone began to get rid

of the falling asset - thus, its price fell to zero and became negative.

In this regard, the forecasting system, according to the authors, should take into account in

the model not only the forecasts of authorized departments and the largest consulting

agencies, banks, but also changes in stock indices, be adjusted taking into account changes in

the monetary policy of countries, and respond promptly to informational issues that may

affect for the future of oil markets.

2. DISCUSSION

Judging by the consolidated forecast data, the significant divergence in the projected estimates

of global demand and consumption and the domestic Russian production of oil, gas and oil

products motivates to develop forecast models flexibly responsive to changes of the global

and internal market situation.

The fundamental factors influencing the changes in the production and consumption of

Russia's liquid hydrocarbons include the following:

parameters of the tax manoeuvre in Russia and subsequent investment climate for the

development of oil and gas production, refinery and petrochemicals industry;

competition from other producer countries of hydrocarbon and oil and gas products;

declining demand for diesel fuel in Europe (the main importer of Russia's diesel fuel);

changing strategies of automotive giants;

MARPOL requirements to reduce sulphur content in marine fuels;

advance in gas motor fuel consumption;

changing global and Russian economic growth patterns;



expanding production and marketing of electric and hybrid vehicles;

developing infrastructure for fuel consumption:

sanctions burden (if any) and national strategies implemented to bring down reliance

on Russian energy resources;

pace of advances in import substitution technologies;

global oil and gas prices;

technological restrictions on acceptance and supplies of oil products, planned

maintenance and repairs; seasonality.

Next, the above factors are discussed in detail as appropriate.

2.1. Demand for diesel is falling in Europe

After signing the Kyoto protocol in 1997, Germany stepped to support then-unpopular diesel

vehicles in Europe by providing tax reliefs and preferential regimes. In the 2000s, such

vehicles accounted for more than a half of all sales in European countries until it emerged that

such engines were less than safe because of the high nitrogen oxide levels in the emissions.

Apart from the competition of electric vehicles, a potential decline in motor fuel

consumption may start in the late 2020s as a result of tougher environmental regulations. The

transportation sector delivers up to a quarter of atmospheric carbon dioxide emissions. Thus

cutdowns and further bans of sales and operation of vehicles powered by fuel combustion

engines will become reality at some point.

Over ten years, such radical policies would be withheld due to the inability of the global

automotive industry to produce the required amounts of components (primarily batteries), the

underdeveloped charging infrastructure and higher prices of electric vehicles, which is a

decisive factor for a wide audience of car owners.

2.2. Fiscal regime should drive industry development

Currently, investors face uncertainty in terms of the future fiscal regime in the country,

meanwhile, building investor confidence is an inevitable component to activate capital

accumulation and development of local production.

The "tax manoeuvre" in the oil industry consisting in simultaneously raising the base rate

of the mineral extraction tax and reduction of export duty for crude oil and rates on light oil

products started in September 2013.

The "tax manoeuvre" in the oil and gas industry, on the one hand, is meant to produce

maximum budget revenues. On the other hand, as a result, not a single new refinery has been

put to operation since 2013 (with a capacity of more than 1 million tonnes of oil per year).

The exception is the Novatek-Ust-Luga gas condensate complex commissioned in 2013

and complete in construction before the announcement of the tax manoeuvre. As a result of

the tax manoeuvre, Russia's export of oil supplies stand at 46% of the production volumes,

while the value added from distillation of Russian oil goes to the importing countries.

Budget policies can speed up economic dynamics both through macroeconomic

improvement and enhancement of tax structure and tax base stability.

In 2018, Federal Law No. 301-FZ of 03.08.2018 "On Amendments to the Second Part of

the Tax Code of the Russian Federation" was adopted, providing for base prices of motor

fuels and a mechanism of reimbursements payable to refineries, including a negative excise

and a damping mechanism component.



However, there is increasingly a discussion over making amendments to the adopted 301-

FZ and introducing a floating (flexible) rate of excise on oil products.

Steady technological cycles in refinery operations and investment climate improvement in

the industry would primarily require a balanced and stable taxation system in the long-term,

flexibly responsive to changes in the global pricing of oil and oil products.

Concerns arise over the gradual decline to zero of the customs duty for oil, which lends

support in sustaining operations at Russian refineries.

2.3. Changing strategies of the world's biggest manufacturers of electric vehicles

Major car manufacturers refer in their strategies to a considerable increase in the share of

electric vehicles in new car sales.

Consider next the plans of several carmaking giants in the production of electric vehicles:

Tesla Tesla Model 3 is declared the best selling car in the premium

segment in the USA. In 2017, the company sold 245.5 thousand

electric cars and 364 thousand in 2018. The 2019 estimate is up to

400 thousand electric cars.

Mercedes-Benz Mercedes-Benz will build six plants to produce electric cars in

Germany, France, the USA and China and establish a global chain

of mini-factories to produce batteries. The first electric versions of

all Mercedes-Benz models, including Smart, are expected by 2022.

Volvo

Volvo announced discontinuation of cars equipped with only

combustion engines after 2019 and a switch to producing

exclusively electric and plug-in hybrid vehicles. The company plans

to sell 1 million electric vehicles by 2025. According to Volvo, the

decision to withdraw from conventional vehicle production will

support progress toward this goal. From 2019 until 2021, Volvo,

which is controlled by China's Zhejiang Geely Holding Group, plans

to use its facilities in China, Europe and the USA to launch

production of five new models under the brands Volvo and Polestar,

including three pure electric vehicles. Volvo also plans a line of

gasoline-powered and diesel chargeable hybrids.

Jaguar Land Rover Jaguar Land Rover announced plans to make available electric

versions for approximately a half of its cars by 2020.

Volkswagen

Volkswagen claimed it intended to invest billions of euros in electric

vehicles and designing models with automated control.

Toyota

Toyota plans to create an electric car with a battery of new type

chargeable within minutes by 2022. The new electric vehicles by

Toyota will be manufactured in China.

Ford

The sustainable development report of Ford contains plans to

produce an electric crossover with a battery range of approximately

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480 km in 2020 and mass production of cars with electric drive and

engines powered by alternative fuels starting 2030.

BMW BMW has launched serial production of the i3 electric car. The full

production cycle of i3 uses 50% less energy and 70% less water

compared to the requirements of conventional car production.

Porsche Porsche enters a completely new electric era. A separate production

line was built for the Taycan electric vehicles in the company' s

production site in Zuffenhausen. The company plans to sell 25

thousand electric cars a year. The sedan will be available in mid-

2020, but orders are already open.

Audi Audi plans to supply its first cars equipped with electric engines as

early as the late 2020, with further plans for a series of electric sport

crossovers with state-of-the-art turbo motors.

However, the biggest bet for global carmakers is hybrids equipped with electric motors and

combustion engines consuming motor fuel.

The parameter determining the volume of consumption of oil products is the absolute

number of gasoline-powered and diesel vehicles and their average fuel consumption.

However, the development of transport infrastructure for electric cars is quite inert. This is

especially visible in Russia.

The expectations in Europe are for higher demand for electric power to support sales

growth in electric cars and hybrid cars amid declining imports of Russian diesel fuels.

2.4. MARPOL requirements to reduce sulphur content in fuel

One of the key changes for refineries in Russia is the compulsory reduction of sulphur levels

in marine fuels.

Starting in 2020, sulphur levels in fuel should be brought down from 3.5% to 0.5% by

filling low-sulphur fuel or installation of purifying scrubbers on watercraft.

The world's biggest refineries have modernised technological plants and adjusted

operations to increase the output of residual oil with low sulphur level (under 0.5%) and

marine gas oil (MGO) to prepare for even stricter standards of marine fuel applicable since

January 1, 2020.

The countries of the Customs Union including Russia must comply with the Technical

Regulation of the Customs Union. The applicable revision as of 2020 introduces restrictions

on production and transportation across the territory and water area of the Customs Union of

marine fuel unless it complies with the standard sulphur levels of 0.5%.

In Russia, two companies have officially announced production of low-sulphur fuel oil.

LUKOIL-Volgogradneftepererabotka launched production of low-sulphur fuel oil in

October 2019 (FUEL OIL BUNKER 0.5) in line with the MARPOL international convention.

The planned annual output is approximately 1 million tonnes.

RN Bunker PLC, the specialised subsidiary of Rosneft Oil Company in Russia's Far East,

started bunkering higher grade fuel RMLS 40. Its sulphur content is within 0.5% in line with

the MARPOL requirements.



A new trend in the bunker fuel market is LNG. Bunkering LNG will become a long-term

trend even if oil prices are low.

3. CONCLUSION

Therefore, the above factors influencing changes in production and consumption of Russian

liquid hydrocarbons should be included in the automated forecasting model.

Using machine learning technologies, the forecasting software "Oil big information

system" aggregates all historical data stored in the system with additional variables to develop

forecasts.

The software engages the following retrospective and forecast data:

Consensus forecast of energy

sector development in Russia

and the world

→ international and Russian development forecasts

for Russia and the world

→ structural change forecast in car production

according to the plans of car manufacturers

Macroeconomic (retrospective

and forecast)

→ stock indices

→ key rates of the ECB, Fed, Bank of England

(base, margin, deposits)

→ GDP

→ Inflation rate

→ Deflator indices

→ Consumer price indices

→ Payroll budget

→ Income growth rates

→ Employment in the economy

→ National currency rates

→ Oil, gas, oil and gas products, LNG

→ Tariffs of natural monopolies

RZD OJSC

Transneft OJSC

Gazprom OJSC

→ Tariffs for transshipment, discharge, filling by

terminals

→ Tanker freight rates

Production (retrospective and

forecast)

→ Oil production

→ Natural gas production

→ Refinery output

→ LNG production

→ Gas refinery production

→ Car production and sales

→ Demand for taxi services and public transport

capacity, etc.

→ Supplies of oil, gas, oil and gas products, LNG

in the domestic market with a breakdown by directions


for exports by directions


by different modes of transport (railway, pipeline, river,

marine, motor vehicles)



Factors of global pricing of oil

and gas

→ Information factors (reactions of politicians,

experts, market participants to news developments,

media publications, data on fuel and energy complex

investments, adoption of new technologies and

information on natural and climate events, including

information on cold and warm winters, on

environmental disasters)

→ Geopolitical factors (embargoes, sanctions,

restrictive and stimulating legislative acts at the national

level)

→ Economic and statistical factors

(macroeconomic indicators, global and country

development forecasts, analytical data, expert

appraisals)

→ Fundamental factors (oil and oil product

reserves, reserve capacities, change in production and

refinery volumes, change in demand and supply,

growth/decline of energy consumption)

Actual oil and gas prices respond to both fundamental factors of market balance and

geopolitical factors, news developments and economic and statistical reports.

Machine learning can be used in forecasting alongside production and macroeconomic

indicators to help include news input affecting pricing, demand and supply, seasonal factors,

repairs and maintenance, natural disasters, weather conditions and many other parameters.

Each factor is assigned its weight corresponding to a coefficient in the range of 0 to 1.

Factor adjustment depends on changes in market conditions.

The software allows one to detect patterns and include them in forecasting for individual

customers.

Below is an example of forecast calculations for gasoline production at Russian

enterprises for the period until 2036 based on integrated input accumulated in the software for

the above factors, including refinery upgrades.



Figure 6 Factors influencing oil and gas price dynamics (Safonova, 2016)

The value of the software is the input built-in statistical set and the constantly refined

mechanism to reduce excess noise levels from the plenty of factors integrated into the

software.

The forecasting software integrating multi-factor analysis can be used for investment

viability assessment in industry projects engaging consolidated data of the existing forecasts,

on the one hand, and demand factors, on the other hand.

As a conclusive remark, the existing forecasting methodologies produce significantly

diverging ranges of key indicators of global and national oil and gas industry development,

which creates uncertainties primarily with regard to investment viability of new innovation

projects.

There is no exaggeration of the importance of software products emphasising practical,

rather than theoretical, influences on the end result of forecasting.

The indicators included in the automated system can be used to create a forecast financial

model for any enterprise in the fuel and energy sector in three scenarios, namely: baseline,

conservative and best-case scenario.

Information

factors

Reactions of politicians

Reactions of experts

and market participants

Media

publications

Data on energy and fuel sector investments,

alternative energy advances

Input on adoption of new technology

Input on natural

conditions

Input on

environmental disasters

Geopolitical

factors

Embargoes

Sanctions

Restrictive or stimulating

legislation at the national

level

Economic and

statistical factors

Macro-

economic indicators

Global and industry

development forecasts

Analytical data

Expert

appraisals

Fundamental factors

Oil and oil product

reserves

Reserve capacities

Changing

production levels

Changing refinery

output

Demand and

supply changes

Growth/decline of

energy consumption



Figure 7 Example of a forecast for gasoline production at Russian enterprises for the period until 2036

powered by the "Oil big information system" software

Source: authors' analysis.

2.5. Digitalisation of forecasting

As mentioned in this paper, the automation of the forecasting process was rendered by us in a

model integrating digital technology (machine learning), multi-factor analysis and

identification of fluctuations (noise) exerting additional influence on the output.

Alongside, the coefficients measuring the degree of influence of factors over the forecast

output are included in the system.

However, expert engagement is vital as an instrument of proper planning and current

control of the output of machine processing and checking whether the role of each factor is

assessed properly. Also vital is support documents to confirm correct data input.

As an example of such document to be used to substantiate the input of adjustments and

additions, the authors use action plans. The functions of such plan are described in the

learning aid for executives and professionals by S. Kalendjyan, G. Borsh, D. Borsh, "Sistema

effektivnogo upravleniya: Upravlenie protsessami izmeneniya na predpriyatii" [System of

efficient management: Managing change processes at an enterprise] (Kalendjyan et al., 2019).

The value of such plan for applied use lies in that its results are registered as a continued

numbered series, which provides visibility for the team responsible for the forecast as to what

adjustments were made by it and what outcomes followed. Using the idea of control over an

action plan with regard to forecasting in the oil and gas industry, such plan can be rendered as

follows.



Table 7 Example of control function implementation in adjustments of coefficients of influence in

forecasting in the oil and gas industry and financial modelling

Indicators Initial coefficient

of influence in the

software complex

Aggregate

assessment of the

results of

adjustments (the

value of the adjusted

coefficient of

influence)

Decision on adjusting

the coefficients of

influence including

the reasons for

adjustments being

made

Consensus forecast of energy

sector development in Russia

and the world

Macroeconomic

(retrospective and forecast)


forecast)

Factors of global pricing of

oil and gas

The aggregate assessment of results includes expert assessments of professionals and

executives responsible for input of actual data and factors of influence, as well as for the

forecast output developed by the information system.

Table 8 Example of control function implementation in adjustments of coefficients of influence in

forecasting in the oil and gas industry

Indicators Aggregate

assessment

S M I L E A F

Consensus forecast of energy sector

development in Russia and the world

Macroeconomic (retrospective and

forecast)


forecast)

Factors of global pricing of oil and gas

S: expert responsible for adjustments of the software,

M: expert in macroeconomics,

I: expert in industry indicators (production, refinery, exports, domestic market),

L: expert in logistics (distribution by modes of transport and directions of shipments),

E: expert in external market conditions (assessment of changes in consumption of Russian

energy by importers),

A: analyst monitoring factors of information impact on the global energy markets,

F: expert in financial modelling for individual enterprises.

The above experts are responsible for correct input of actual parameters in the database

based on monthly/annual reports, for adjustment of the factors of influence and delivering

forecast values by activity types.

Each expert's contribution is included in the aggregate sheet of adjustment results for

further reference to check whether such adjustments are correct.



3. CONCLUSIONS

We proposed to produce balanced forecasts based on existing forecasts published by

authoritative specialised organisations and agencies, macroeconomic and production

indicators influencing global oil and gas pricing and to consider the level of influence over the

forecast output by applying control to adjustments of the input parameters.

The proposed hybrid forecasting system, on the one hand, allows one to include the

available institutional analysis of Russian energy sector development and, on the other hand,

to shape the range of expected change subject to a comprehensive set of factors and to make

adjustments in the model on an ongoing basis to consider the constantly evolving

macroeconomic, production and information outlook in the global energy sector.

The indicators included in the automated system can be used to create a forecast financial

model for any enterprise in the fuel and energy sector in three scenarios, namely: baseline,

conservative and best-case scenario.

KEYNOTES

[1] Even though the Forecast of the Ministry of Economic Development was published on

28.11.2018, the forecast of crude oil distillation growth of 0.9% disagrees with the actual

figure reaching 285 million tonnes in 2018, up 1.7% from the 2017 level

REFERENCES

[1] Decree No. 1725 of the Government of the Russian Federation of 29 December (2018)

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[2] Draft energy strategy of the russian federation until 2035, n.d. Retrieved from:

https://minenergo.gov.ru/node/1920

[3] Edition of LLC "NAANS-MEDIA" (2019) "Indicators of the Russian oil market" from

12.19.2019

[4] Forecast of Socioeconomic Development of the Russian Federation for the period until

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http://economy.gov.ru/material/directions/makroec/prognozy_socialno_ekonomicheskogo

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Moscow School of Management SKOLKOVO, 2019. Retrieved from:

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orecast_2019_Rus.pdf

[6] Kalendjyan S., Borsh G., Borsh D. (2019), Sistema effektivnogo upravleniya: Upravlenie

protsessami izmeneniya na predpriyatii [System of efficient management: Managing

change processes at an enterprise]. Moscow: Delo publishing house.

[7] Part.1 of the Tax Code of the RF "Tax Code of the Russian Federation (Part II)" as of

05.08.2000 No. 117-FZ (revision of 29.09.2019, as amended on 19.12.2019). Retrieved

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[8] Safonova T. Iu. (2016), Razrabotka napravlenii diversifikatsii neftyanykh kompanii

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Documents

RUSSIAN OIL AND GAS INDUSTRY DEVELOPMENT ......influence factors are adequate to deliver development forecasts for the fuel and energy industry. The method of comparative analysis