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March 2016

Issue 118

Emerging Europe
Oil and Gas
BMIs monthly market intelligence, trend analysis and forecasts for the oil and gas industry across Emerging Europe
EUROPE

ISSN: 1750-7723

CONTENTS

Even More Bearish On Central

Asian Oil Exporters
BMI View: In light of the extreme oil price weakness into 2016, the
macroeconomic and social stability outlook for Kazakhstan and Azerbaijan the biggest oil exporters in Central Asia has deteriorated
even further, prompting us to adopt an even more bearish outlook on
both. Nevertheless, the possibility of economic and/or banking sector
collapse in either remains limited due to the strong sovereign risk
profile in both countries.

Europe............................................................................................. 1
Even More Bearish On Central Asian Oil Exporters................................................... 1
CEE Risks/Rewards: Worsening Upstream, Minor Refining Gains............................... 3
CEE: Gas Over Oil, But Demand Growth Weak......................................................... 6

Turkey............................................................................................. 8
Gas Discoveries Highlight Strong Prospectivity......................................................... 8

Russia ............................................................................................. 9
Oil Production Peaked In 2015............................................................................... 9

Depreciatory Pressure Escalating

Exchange Rates, KZT/USD (LHS) & AZN/USD (RHS)

Source: Bloomberg

The macroeconomic and the social stability outlook of the two main oil
exporters in the Commonwealth of Independent States (CIS) region
Azerbaijan and Kazakhstan have significantly deteriorated in light of
the sizeable plunge in global oil prices in the beginning of 2016. Both
countries are heavily dependent on oil, which accounts for 95% of goods
exports, 75% of budget revenues and 40% of GDP in Azerbaijan, and for
80% of exports and more than half of public sector revenues in Kazakhstan.
Following signs in early January 2016 of further slowdown in Chinese
economic growth, Brent crude prices have declined to below USD30/bbl at
the time of writing, their lowest level in 13 years. This has prompted us to
aggressively cut our oil price outlook (we now forecast Brent crude to average USD42.5/bbl in 2016, from USD51/bbl previously). The extremely
weak outlook for oil prices, especially in H116, will further compound the
already elevated fiscal constraints for the two oil exporters, boding poorly
for the economic landscape in the coming months.
In light of our oil price forecast changes, we now expect the Azeri
manat to average AZN1.7/USD in both 2016 and 2017, from AZN1.5
previously. Likewise, we forecast more pronounced weakness for the
Kazakh tenge, and we expect it to average KZT347/USD in 2016 from

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Europe

Emerging Europe

KZT332/USD previously. As a result, we have downgraded our

forecast for real GDP growth for Azerbaijan to a contraction of
0.3% in 2016 from 1.4% previously, and for Kazakhstan to 1.0%
from 1.6% previously.

Oil & Gas

in riskier investments, in order to boost potential returns, making

the outlook for the vehicles even more precarious.
Inflation Eroding Living Standards
Consumer Price Index, % chg y-o-y

Fiscal Constraints Remain In Place

Brent Crude, AZN/bbl (top) & KZT/bbl (bottom)

Source: Respective Statistics Agencies

Austerity Needed Despite FX adjustment

Source: Bloomberg

FX Adjustment Can't Preserve Fiscal Buffers

While both Azerbaijan and Kazakhstan have made significant fiscal and external adjustments throughout 2015 to the new reality of
lower oil prices, the policy responses have been inconsistent and/
or delayed, exhausting rapidly reserves, with Azerbaijan likely to
fare worse than Kazakhstan. The Azeri authorities defended the
value of the manat for the majority of 2015, despite rising depreciatory pressure from declining oil prices, until mid-December
2015, when they shifted to a free-floating currency regime. The
delayed policy response saw the country's FX reserves dip by half
from USD13.8bn at the beginning of 2015 to USD6.2bn at the
end, while the rainy day sovereign wealth fund (SWF) State Oil
Fund of Azerbaijan (SOFAZ) diminished from USD37.1bn in
the beginning of 2015 to USD33.6bn at the end.
In contrast, the Kazakh authorities shifted to a free-floating
exchange rate regime much sooner than their Azeri counterparts
in August 2015, following a previous devaluation in February
2014 which helped preserve fiscal buffers to a larger extent than
in Azerbaijan. As a result, Kazakh FX reserves stand at USD28.1bn
as of December 2015, down from just USD29bn at the beginning
of 2015. However, Kazakhstan's SWF has registered sizeable
declines to USD64.2bn in December 2015, having fallen by
16% in 18 months. In light of both countries' declining SWFs,
both leaderships have signalled willingness to invest fund assets

While being a necessary pressure valve, the FX adjustment will not

be sufficient to relieve pressure on the budget. In Azerbaijan, oil
trades at AZN56.7/bbl at the time of writing, significantly below the
average price of AZN85.2/bbl in 2013 and AZN77.9/bbl in 2014. In
Kazakh tenge terms, oil trades at KZT11106/bbl, similarly much below the average prices in previous years. This, alongside the reduced
fiscal buffers, has ramped up budget pressure for both governments,
prompting the authorities to embark on a highly conservative fiscal
trajectory in Azerbaijan's case a three-year austerity programme
announced in December 2015, and in Kazakhstan in a very tight
2016 budget plan. Despite the fiscal belt-tightening, we nevertheless
forecast both countries to shift into modest budget deficits in 2016,
following years of registering surpluses.

Social Stability Outlook Deteriorating

Austerity will compound the negative impact on households from
rising imported inflation stemming from the FX adjustment. In our
view, Azerbaijan is poised for a more turbulent period in the coming
months than Kazakhstan. Public protests across Azerbaijan against
the manat devaluation and rising inflation have already started to
take place, most prominently in a series of public clashes with riot
police in cities around the capital Baku in mid-January. We expect
the social stability outlook to continue to deteriorate in the coming
months, with the authorities likely to ramp up repressive measures,
as evidenced in the deployment of military trucks in Siyazan in
mid-January to suppress the riots.

FX Convertibility Restrictions Bode Poorly

Further darkening the macroeconomic outlook in Azerbaijan has
been the latest move by the authorities to ward off the escalation of
depreciatory pressure on the manat by restricting FX convertibility
at FX exchange offices. The Azeri banking sector runs a sizeable
short open FX position due to the high level of FX-denominated
deposits at 70% as of H115 making the sector vulnerable to
rising deposit withdrawals and USD purchases in the wake of the
December devaluation. As a result, while the restriction on FX
convertibility will cushion the banking sector from an excessive
rise in the value of its liabilities, it will have a negative impact on
the economy. The capital controls will further erode business and

www.oilandgasinsight.com

Europe

Emerging Europe

consumer confidence, and although they are measures designed to

stabilise the currency, they could potentially backfire, undermining further confidence in the currency. This, in turn, could ramp up
further depreciatory pressure on the unit.

Banking Sector Remains Vulnerable

In Azerbaijan, the capital controls will be insufficient to cushion the
negative impact on the banking sector and credit growth stemming
from the manat devaluation. The debt servicing costs of FX borrowers have significantly risen, jeopardising their ability to service
their debts, and threatening to worsen further banks' asset quality.
Non-performing loans (NPLs) are already elevated at 12.7% of gross
loans as of end-2014, and their share will continue to increase, raising loan-loss provisioning, and tightening credit conditions. Another
point of pressure will be reduced capital ratios due to the boosted
value of risk-weighted assets stemming from the AZN devaluation.
The Kazakh banking sector has likewise come under pressure
from the FX adjustment in terms of widening open short FX position,
reduced capital ratios, and deteriorating asset quality. We believe the
Kazakh banking sector is a less vulnerable position than its Azeri
counterpart. While NPLs remain elevated at 9.2% of total loans as of
September 2015, the level of FX-denominated loans remains much
lower at a quarter of total loans, meaning the impact of rising FX
debt servicing will have a smaller impact on aggregate in Kazakhstan
than Azerbaijan. The level of dollarisation in Kazakhstan is smaller,
with USD deposits at 52% of total, in contrast to Azerbaijan at 70%.
This means that the imposition of restrictions on FX convertibility is
less likely in Kazakhstan; however, we do not rule such possibility.

Oil & Gas

CEE Risks/Rewards: Worsening

Upstream, Minor Refining Gains
BMI View: The CEE region ranks as the least favourable oil and
gas investment region in our index, limited by heavy state influence,
poor infrastructure and a weak demand outlook. East of Caspian
countries with high resource and production volumes dominate the
upstream index despite Kazakhstan's downgrading this quarter,
while fuels demand profiles in Turkey and Czech Republic support
a top downstream score.
Key themes that emerge from BMI's Oil & Gas Risk/Reward Index
(RRI) for the Central and Eastern Europe (CEE) region include:
Poland Alone As Standout Market
CEE Countries Plotted By Upstream Risk/Reward Score

But Sovereign Profiles Remain Solid

While the economic outlook for both countries has significantly
deteriorated, and while the banking sectors in both are poised for
a period of losses and contracting loan growth, we reiterate that
the possibility of a banking sector crisis and or economic collapse
remains limited. The main reason is that both sovereigns remain in
a strong position to extend aid to their respective banking sectors, if
needed. Net sovereign external debt (defined as gross government
external debt less FX reserves and other debt claims on foreigners)
stands at -60.3% of GDP in Azerbaijan, and at -38.1% in Kazakhstan as of end-2014, making them the biggest net creditors relative
to GDP in the region ('-' indicates the government is a net external
creditor). The banking sectors in both remain relatively small, with
total assets at 54% in Kazakhstan, and 41% in Azerbaijan. In the
case that banks fail to meet the minimum prudential capital adequacy
ratios, we expect the governments to extend a form of regulatory
forbearance similar to Russia, following the sharp devaluation of
the rouble at end-2014. In the case of liquidity squeeze, we expect
the central bank to continue extending currency swap arrangements,
especially to bolster local currency liquidity.

Note: Higher score = lower risk. Source: BMI

The CEE region continues to underperform globally, remaining below Africa in Q216 in our regional Oil & Gas RRI.
Overall there has been a fall in the CEE upstream score that
has been partially offset by a marginal rise in the downstream
score. Compared to last quarter, the average Upstream RRI
score for the region fell to 43.2 from 43.6, but the Downstream increased from 38.4 to 38.6. These two have offset
each other to maintain the regional average at the same level
as last quarter.
The worsening of the upstream score is reflective of the low
oil price environment dampening E&P prospects.
Low oil prices have bolstered the oil demand growth projections, albeit mildly, for CEE consumers such as Hungary,
Czech Republic and Bulgaria. This is reflected in the higher
Downstream RRI score this quarter, with the regional average rising from 38.4 to 38.6.
The oil and gas consumption boost however should not

CEE: HIGH RISK, LOW REWARD

Upstream RRI

Downstream RRI

Overall RRI

Developed States

49.8

51.4

50.6

Middle East

55.6

41.0

48.3

Asia

47.4

48.2

47.8

Latin America

46.1

42.0

44.0

Africa

48.1

35.5

41.8

CEE

43.2

38.6

40.9

Note: Scores out of 100. Higher scores = lower risks. Source: BMI

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Europe

Emerging Europe

detract from the fact that the downstream sector in CEE

countries is the second worst performing globally, with
ageing and inefficient facilities, fuel subsidies and currency
depreciation weighing on the score.
Upstream developments remain polarised, with resourcerich Russia and the Caspian countries maintaining or increasing output over the next 10 years, and Eastern European
countries becoming more dependent on imports.
Sanctions To Bite By 2020
CIS States Oil Production (000b/d)

f = BMI forecast. Source: National sources, BMI

Poland remains top of our RRI,supported by conventional

gas production growth and a positive fuels demand outlook.
Kazakhstan remains in second place despite a reduction in
its overall score. The fall is mainly due to a weaker upstream
outlook as the expected output from the Kashagan field was
downgraded in our forecasts.
Hungary's overall score received a boost with an upgrading
of the downstream index. This is primarily thanks to a strong
demand outlook for refined fuels in our forecast period.
Russia continues to underperform falling down to fifth posi-

Oil & Gas

tion. The fall is due to a poor upstream outlook, with weak

growth prospects in both oil and gas production despite rich
reserves. Ukraine, Croatia and Bulgaria remain bottom of
our index, held back by poor infrastructure, high levels of
corruption and a weak economic outlook.

Upstream: China Still The Target Market

The Caspian countries largely perform well in our Upstream RRI due
to strong below-ground potential and a positive production growth
trajectory. Kazakhstan remains at the top of our upstream regional
table due to its large oil and gas reserves and its relatively immature
state of development. Azerbaijan is placed third due to its strong gas
production outlook with gas sales to Turkey and Europe increasing
from 2019. Turkmenistan, Uzbekistan and Kazakhstan have all improved their upstream score due to a ramp-up of gas exports to China.
Despite the strong reward scores, risks still remain high due to
poor above-ground environments. Uzbekistan, Turkmenistan and
Kazakhstan rank alongside Russia and Ukraine in terms of risk.
High levels of state intervention, restrictive licensing and limited
export outlets are some of the issues holding back more substantial
upstream progress in the region. This has failed to deter state-led
Chinese investment, though with growing dependency on energy
from the region, especially from Turkmenistan, we expect Chinese
investment in these countries to slow over the coming years.
Poland is the only country within the low risk/high reward
window. The country is having success with conventional gas developments and is forecast to see steady production growth over the
coming years. Poland's low risk profile is its main advantage here,
with comparatively low levels of state influence, good infrastructure
and a stable long-term policy outlook.
Countries with a similar low risk profile and upside to production
could also improve their score over the coming quarters and join
Poland. In particular we highlight Romania, where a final investment
decision on the Domino gas development would significantly improve the upstream production outlook. We also highlight Albania,
where Shell and Petromanas are progressing onshore oil develop-

CEEUPSTREAM, DOWNSTREAM AND OVERALL RISK/REWARD INDEX

Upstream R/R Index

Downstream R/R Index

Oil & Gas R/R Index

Rank

Poland

52.2

47.3

49.8

Kazakhstan

62.6

34.8

48.7

Turkmenistan

50.7

40.3

45.5

Turkey

39.4

51.2

45.3

Russia

46.7

42.6

44.7

Czech Republic

37.6

47.8

42.7

Romania

44.3

40.9

42.6

Azerbaijan

53.1

28.5

40.8

Hungary

34.0

45.9

40.0

19

Slovakia

40.1

36.6

38.3

10

Albania

40.5

34.1

37.3

11

Uzbekistan

37.9

35.2

36.6

12

Slovenia

34.3

37.8

36.0

13

Ukraine

38.4

33.2

35.8

14

Croatia

39.3

32.2

35.8

15

Bulgaria

40.4

29.5

34.9

16

Average

43.2

38.6

40.9

Note: Scores out of 100. Higher scores = lower risks. Source: BMI

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Europe

Emerging Europe

ments in Blocks 2 and 3, with plans to spud the Shpirag-3 well in

Q216, potentially boosting output in the coming years. Exploration
in the Bulgarian Black Sea over the coming quarters could also boost
the longer-term outlook.
Russia continues to underperform, given that its holds the largest hydrocarbon reserves in the world. Heavy state influence in
the upstream is a key weakness for Russia's struggling upstream
position. Lower oil prices are weighing on government revenues,
driving changes to tax policy, in turn weakening company revenues
and investment strength. EU and US sanctions restricting access to
finance and oil technologies are also limiting medium-term growth
potential and the country's risk/reward score.

Oil & Gas

limited the potential boost from lower oil prices. Turkey is forecast
to see the largest downstream capacity expansion in CEE, through
SOCAR's 214,000b/d STAR refinery at Izmir. We forecast this to
be the only newbuild refinery in Europe (excluding the Caspian and
Russia) over the next five years.
Cheaper feedstock has supported ailing refineries in the CEE
over much of 2015, though it will only offer temporary respite to the
less efficient facilities. Growing refined fuels supply from the US,
Middle East and Asia, where cheaper feedstock and economies of
scale boost margins, will squeeze out less efficient refiners. Lower
complexity CEE facilities will be at risk.
Huge Capacity, Weak Market

Turkey Tops The List

CEE Refining Capacity 2015 & 2024 (000b/d)

CEE Countries Plotted By Downstream Risk/Reward Scores

f = BMI forecast. Source: National sources, EIA, BMI

Note: Higher score = lower risk. Source: BMI

Downstream: Turkish STAR The Bright Spot

Turkey maintains its lead in our CEE Downstream RRI, though its
score has fallen slightly this quarter due to a weaker fuels demand
outlook. The depreciation of the lira against foreign currencies has

We note that a number of countries dominant in the upstream

segment perform poorly in the downstream. Many of these ex-Soviet
states have been slow to modernise their refining sectors. The state
remains dominant in much of the downstream segment in Uzbekistan, Azerbaijan, Turkmenistan and Kazakhstan. Fuel subsidies,
relatively small fuels markets and limited export infrastructure in

CEE DOWNSTREAM RISK/REWARD INDEX

Turkey

Downstream Industry
Rewards

Downstream Country Rewards

Downstream
Rewards

Downstream
Industry Risks

Downstream
Country Risks

Downstream
Risks

Downstream R/R
Index

36.7

64.2

43.6

80.0

52.6

69.0

51.2

Czech Republic

23.3

52.0

30.5

100.0

70.2

88.1

47.8

Poland

34.4

44.0

36.8

75.0

67.1

71.8

47.3

Hungary

27.8

38.0

30.3

95.0

63.1

82.3

45.9

Russia

46.7

50.0

47.5

20.0

48.1

31.2

42.6

Romania

20.0

49.0

27.3

85.0

54.7

72.9

40.9

Turkmenistan

43.3

28.0

39.5

40.0

45.7

42.3

40.3

Slovenia

16.7

34.0

21.0

85.0

64.8

76.9

37.8

Slovakia

12.2

38.0

18.7

85.0

68.5

78.4

36.6

Uzbekistan

27.8

38.0

30.3

40.0

56.2

46.5

35.2

Kazakhstan

37.8

28.0

35.3

20.0

54.2

33.7

34.8

Albania

23.3

24.0

23.5

70.0

41.7

58.7

34.1

Ukraine

24.4

30.0

25.8

60.0

36.3

50.5

33.2

Croatia

20.0

32.0

23.0

55.0

51.6

53.6

32.2

Bulgaria

12.2

34.0

17.7

60.0

52.6

57.1

29.5

Azerbaijan

24.4

28.0

25.3

20.0

60.0

36.0

28.5

Average

26.9

38.2

29.8

61.9

55.5

59.3

38.6

Note: Scores out of 100. Higher scores = lower risks. Source: BMI

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Europe

Emerging Europe

these countries make private investment unattractive. As a result,

the Caspian countries underperform in our Downstream RRI.

CEE: Gas Over Oil, But Demand

Growth Weak
BMI View: Weak prices will deflate the CEE oil production outlook, while challenges with emerging market economies will hinder
demand growth for both oil and gas. This dynamic will see the
energy-importing Central European markets benefit, while Russia
and the Caspian states will struggle. Chinese demand for natural
gas will dictate the potential for growth.

The littoral states of the Caspian are the other main oil producers
in the region; combined, they produce around 20.0% of CEE oil.
Over our forecast period from 2015-2024, we only see two CEE
countries increasing oil output: Kazakhstan and Turkmenistan.
That said, with a high dependency on exports to China and limited export options due to the geographical position, production
growth will be tame.
The 270,000 barrels per day (b/d) Kashagan development in
Kazakhstan will be key to supporting falling output, rather than
driving substantial growth. The increase in Turkmenistan oil
production will meet domestic consumption growth and enable
exports to regional markets
EM Demand Growth Momentum Slows
CEE Oil Consumption (000b/d)

To highlight the key themes that will unfold in BMI's Central and
Eastern Europe (CEE) oil & gas forecasts, we have compared the
region through the following key indicators:

Oil & Gas

Oil Production
Oil Consumption
Refining Capacity
Gas Production
Gas Consumption
CEE Production To Struggle From 2020
Major CEE Producers Oil Production (000b/d)

e/f = BMI estimate/forecast. Source: National statistics agencies, EIA, BMI

Oil Consumption: Weak EM Growth

f = BMI forecast. Source: National statistical agencies, EIA, BMI

Oil Production: Output Growth Stalling

A weaker rouble has allowed Russian oil companies to maintain
capital expenditure despite the fall in oil prices. This has also focused investment on maximising output from existing assets and gas
condensate fields, driving production growth in 2015 and cementing
Russia's dominant position among CEE oil producers. However, over
the 10-year forecast period from 2015-2024 we expect restricted
access to technology and debt markets due to sanctions to cause oil
production to dwindle from 2016.

The impact of weak oil prices is stunting government revenues and

deflating currency values in Russia and the Caspian states. High
inflation and weak economic growth will restrict disposable income
and pressure fuels consumption growth among the countries with
the highest potential to add new demand. Russia and the countries
to the east of the Caspian remain heavily dependent on commodity
exports and are increasingly reliant on China.
Some of the strongest demand growth will come from Central
European countries, particularly those that have benefited from
lower oil prices. We highlight Poland and Hungary, which have
both seen a much improved macroeconomic outlook and are due to
see stronger fuels demand growth than previously forecast. Nonetheless, compared to major consumers such as Russia and Turkey,
new demand volumes from Central Europe will be relatively small.
We forecast an increase in oil consumption in the CEE region
from 2016-2025, though average y-o-y fuels demand growth will
be just 1.2% over our forecast period. This will add less than 1mn
b/d of demand over the next 10 years.

CENTRAL ASIA-CHINA GAS PIPELINE EXPANSIONS

Operational Date

Capacity (bcm)

Gas Supply

Line A

2009

15

Turkmenistan Amu Darya

Line B

2010

15

Turkmenistan Turkmengaz

Line C

2014

25

Turkmenistan 10bcm; Uzbekistan 10bcm; Kazakhstan 5bcm

Line D

2020

30

Turkmenistan Galkynysh

Source: CNPC

www.oilandgasinsight.com

Europe

Emerging Europe

Modernisation Over Capacity Growth

The refining sector in the CEE region is generally of low complexity,
particularly in the former Soviet countries. While some countries
are able to benefit from domestic feedstocks, the region is less
competitive with the more advanced facilities in Europe and the US,
and larger, newer facilities in the Middle East and Asia. Changes
in Eastern European refining centres will come as facilities either
downsize capacity or modernise as they attempt to compete. Key to
modernisation projects will be deeper refining of residual fuels and
more flexibility in product slates. All Russian refineries will be required to produce Euro-V standard fuels by mid-2016, while further
improvements in Eastern Europe will improve refining efficiency.
From 2016 to 2025, we only forecast a net increase in crude oil
refinery capacity in Turkey, with small additions in Russia, Kazakhstan and Uzbekistan. Capacity growth in the latter three countries
will come from expansions of existing refineries. Turkey will be one
of the only countries to build a greenfield refinery in the region. The

Oil & Gas

SOCAR -led STAR refinery has secured its financing needs and is
due to be operational by March 2018. The refinery is specifically
targeting the domestic market for diesel, kerosene and high-end
petroleum products which are currently imported into Turkey.

Gas Ramp-Up Depends On China's Hunger

The CEE gas production forecast is very positive, driven by significant increases in output from Russia and the Caspian under contract
with China. Combined, the CEE region is set to produce 15.4% more
gas in 2024 than in 2015; Caspian countries will produce nearly
42.0% more gas.
Russia is by far the largest gas producer in the region. We expect
steady growth in exports as lower gas prices pull more demand
from Europe alongside increasing pipeline and LNG deliveries to
China from 2020.
Turkmenistan will provide the most significant gas production
growth in the CEE region, also driven by exports to China. The
country is undertaking major developments at the Galkynysh and

CENTRAL & EASTERN EUROPE OIL & GAS PRODUCTION & CONSUMPTION, REFINING CAPACITY & TRADE

2013

2014

2015f

2016f

2017f

2018f

2019f

2020f

2021f

2022f

2023f

2024f

Emerging Europe oil

production, 000b/d

13,769.3

14,289.3

14,285.1

14,346.9

14,612.0

14,860.8

14,863.6

14,833.8

14,775.9

14,840.9

14,802.0

14,766.4

Emerging Europe oil

production, % y-o-y

1.5

3.8

0.0

0.4

1.8

1.7

0.0

-0.2

-0.4

0.4

-0.3

-0.2

Emerging Europe oil

consumption, 000b/d

6,808.4

6,763.3

6,597.1

6,594.2

6,641.7

6,734.8

6,846.9

6,967.1

7,068.9

7,167.2

7,268.0

7,364.7

Emerging Europe oil

consumption, 000b/d,
% y-o-y

2.6

-0.7

-2.5

0.0

0.7

1.4

1.7

1.8

1.5

1.4

1.4

1.3

Emerging Europe oil

net exports, 000b/d

6,960.9

7,526.0

7,688.0

7,752.8

7,970.3

8,126.1

8,016.8

7,866.7

7,707.0

7,673.7

7,534.0

7,401.7

Emerging Europe oil

net exports, 000b/d,
% y-o-y

0.6

8.1

2.2

0.8

2.8

2.0

-1.3

-1.9

-2.0

-0.4

-1.8

-1.8

Emerging Europe
oil refinery capacity,
000b/d

11,125.5

11,080.9

11,080.9

11,203.4

11,203.4

11,452.6

11,452.6

11,452.6

11,452.6

11,452.6

11,452.6

11,452.6

Emerging Europe
oil refinery capacity,
000b/d, % y-o-y

5.3

-0.4

0.0

1.1

0.0

2.2

0.0

0.0

0.0

0.0

0.0

0.0

Emerging Europe gas

production, bcm

866.8

839.8

854.5

869.6

882.9

892.2

915.7

944.1

964.1

971.8

976.2

979.6

Emerging Europe gas

production, bcm, %
y-o-y

1.3

-3.1

1.7

1.8

1.5

1.1

2.6

3.1

2.1

0.8

0.5

0.3

Emerging Europe gas

consumption, bcm

747.0

726.8

725.4

730.7

736.3

742.7

752.0

760.8

769.0

776.8

784.5

792.4

Emerging Europe gas

consumption, bcm, %
y-o-y

3.1

-2.7

-0.2

0.7

0.8

0.9

1.3

1.2

1.1

1.0

1.0

1.0

Emerging Europe gas

net exports, bcm

119.8

113.0

129.1

138.9

146.6

149.5

163.7

183.2

195.1

195.0

191.7

187.2

Emerging Europe gas

net exports, bcm, %
y-o-y

-8.7

-5.7

14.2

7.6

5.5

2.0

9.5

11.9

6.5

0.0

-1.7

-2.3

Emerging Europe LNG

net exports, bcm

6.8

5.1

3.0

2.1

2.3

6.8

10.7

14.3

19.2

23.1

25.1

27.0

Emerging Europe LNG

net exports, bcm, %
y-o-y

72.2

-25.9

-41.0

-30.1

9.6

197.4

56.7

34.2

34.3

20.2

8.4

7.8

f = BMI forecast. Source: National sources, BMI, EIA

www.oilandgasinsight.com

Turkey

Emerging Europe

Bagtyyarlyk fields with the aim of sending up to 65bcm of gas to

China from 2020. Uzbekistan is also planning on ramping up gas
exports to China, targeting delivery of 25bcm in 2016, up from
10bcm in 2014. Kazakhstan is also due to cash in on China's gas
needs by increasing exports over the coming years. That said, we
see risks in China's ability to accept and use such large volumes of
gas over the coming five years, given weak uptake by industry and
the cheaper alternative of coal.

Oil & Gas

China) impacting economic growth in Kazakhstan, Turkmenistan

and Uzbekistan. All three depend on Russia and China for the bulk
of their international trade. The Caspian region holds among the best
gas consumption growth potential in the region, though risks to this
outlook are increasingly to the downside over the next 10 years.
Limited Gas Demand Growth
CEE Natural Gas Consumption (bcm)

Upgrades Not New Capacity

CEE Refining Capacities (000b/d)

e/f = BMI estimate/forecast. Source: National statistics agencies, EIA, BMI

e/f = BMI estimate/forecast. Source: National sources, EIA, BMI

From 2020, we note limited new opportunities for Caspian gas

exports. We do not expect China to increase gas imports from these
countries above the volumes already agreed, given the country's
strategy of diversification to maximise supply security. Currently
Turkmenistan supplies around 80.0% of Chinese pipeline gas imports. We expect the Caspian countries will have to develop new
export routes, possibly to Europe, to continue growth.
China Central To Production Growth
Major CEE Gas Production Growth Countries (bcm)

Turkey will see stronger gas demand driven by the residential,

industrial and power sectors. Demand in EU countries will predominantly remain flat over the next 10 years as energy efficiency
in the economies improves. We are expecting demand in Ukraine
to fall as it attempts to limit its dependence on Russian gas supply
by reducing gas consumption.
Over our 10-year outlook, we forecast gas consumption growth of
0.9%. Total demand in the region will rise by about 68bcm by 2024,
though with over half of this expected in Turkmenistan, Kazakhstan
and Uzbekistan, we see widening downside risks.

TURKEY

Gas Discoveries Highlight

Strong Prospectivity
BMI View: The positive exploration results in the Thrace Basin
show good prospectivity and has led us to revise up our gas
production forecast, with the potential of further gas discoveries
presenting upside risk.

e/f = BMI estimate/forecast. Source: National sources, EIA, BMI

Gas production from Azerbaijan is set for a boost with phase II

of the Shah Deniz project, planned to export 16bcm of new gas to
Turkey and Central Europe from 2019/20. While we see a decline in
gas production in the majority of Eastern European markets, we see
upside in Romania with the Domino discovery expected to significantly change the country's production profile from as soon as 2020.

Gas Consumption: Demand Falters

Similar to the refined fuels outlook, the CEE gas consumption
story remains weak given faltering economic growth in Russia (and

Valeura Energy has confirmed a natural gas discovery in its first

exploration well Bati Gurgen-1 drilled in its Banarli licence. The
Banarli licence is situated in the Thrace Basin which is Turkey's main
gas-producing region. Valeura Energy already has an established
presence in Turkey's north west region, with producing wells spread
across its 20 onshore operated licences. This offers the possibility
for lower-cost and fast-track development of new discoveries, tying
into existing infrastructure.
Two wells have been drilled in the Banarli licence, both showing
encouraging results. The Bati Gurgen-1 exploration well produced at
0.096 million cubic metres per day (Mcm/d), giving it the potential
to add an additional 0.034 billion cubic metres (bcm) to Turkey's
gas production. Bati Gurgen-1 will give a small boost to Turkey's
2016 gas production, raising it from 0.45bcm originally forecast to
0.48bcm an increase of 6.7%. We estimate that production from
the well will commence at the end of January 2016 once the tie-in

www.oilandgasinsight.com

Russia

Emerging Europe

pipeline to the dehydration facility at the Gurgen-1 well is completed.

The Yayli-1 exploration well also encountered gas, with additional well testing planned to complete the drilling programme,
confirming pressure and additional reservoir information. Once
appraisal is complete, the expectation is that the Yayli-1 well will
tie into the Bati Gurgen-1 infrastructure, giving it a ready export
route at a reduced cost compared to a standalone development. A
successful completion of the drilling programme and subsequent
tie-in will provide a further small uptick in domestic gas production.

Oil & Gas

RUSSIA

Oil Production Peaked In 2015

BMI View: Russian oil production will fall from 2016, after averaging a post-Soviet high in 2015. Challenges to maintaining oil production at maturing assets in Western Siberia will counterbalance
production from expected new oilfield developments.

Turkey's Gas Import Dependance

Smaller Domestic-Focused
Companies Gain Ground

Natural Gas Net Exports (bcm)

Russia Crude & Condensate Production & y-o-y % change, 2015

e/f = BMI estimate/ forecast. Source: BMI, EIA

Valeura Energy has applied for a further four licences in the

Thrace Basin, as it continues to invest in the region, highlighting
its prospectivity. We currently expect Turkey's natural gas reserves
and production to decline throughout our forecast period, with
production expected to fall from 0.48bcm in 2016 to an estimated
0.37bcm by 2025. Further gas discoveries in the Thrace Basin
would help reverse this trend.
While the discoveries are small, the recent success by Valeura
Energy will encourage further investment from Valeura in the region
and could draw in new players. The increased interest shown by
Valeura in Turkey is also a strong indication that the New Petroleum
Law, passed in June 2013, has been successful in creating a more
appealing regulatory environment. This is important as encouraging
greater domestic gas production is a central part of Turkey's attempt
to diversify its supplies and become less import-dependent.

Source: CDU TEK

Russian crude oil and condensate production averaged 10.716mn

barrels per day (b/d) over 2015, according to the Russian Department of Energy. Record post-Soviet production was achieved despite
lower oil prices over 2015 and pressure from US and EU sanctions
on the oil sector.
A key factor behind the increase was the depreciation of the
rouble against the dollar, which supported income from oil exports
despite the fall in crude oil prices. As a result, capital expenditure into domestic developments in rouble terms was largely
sustained over 2015.
Russia Oil Production Peaking In 2015
Russia Oil, NGL & Other Liquid Production ('000b/d)

f = BMI forecast. Source: Russian Department of Energy, BMI

The main beneficiaries have been the smaller domestic producers. Rosneft and Lukoil, Russia's two largest oil producers, and
those which have more significant international positions both
saw their Russian oil production fall in 2015. Smaller domesticfocused firms, particularly Bashneft and Tatneft, experienced
strong increases in oil output.

www.oilandgasinsight.com

Russia

Emerging Europe

Oil & Gas

The smaller companies, which predominantly operate within

Russian borders, have increased production through investment into
new assets in non-mature regions, such as the Timan-Pechora, Samara and Orenburg areas. Both Rosneft and Lukoil have significant
positions in Western Siberia, which, while being Russia's central oil
production area, is suffering from natural decline.
Western Siberia is experiencing decline rates of around 3%-4%
a year. Lukoil estimates production from its Western Siberian assets fell around 6.1% in 2015, while Rosneft saw a 3.3% fall. This
indicates that US and EU sanctions are having an impact on the
Russian oil sector by restricting access to the technologies required
to maximise recovery rates at mature fields.
An increase in horizontal drilling has improved oil output in
mature areas over 2015, though without more significant wide scale
application further upside is somewhat limited (see 'Horizontal Drilling Poses Upside Risk To Production', November 13 2015). Lack of
access to thermal, gas and chemical improved recovery technologies
will see Western Siberian production continue to decline, despite
the relatively low recovery of in-place oil.
We forecast natural decline rates at maturing Russian assets to
have a greater impact on production over the coming years, counterbalancing production from major new oilfield developments to
support increased exports to China. Over the 2016-2018 period,
Rosneft is planning on launching some 350,000b/d of new supply from projects in the Krasnoyarsk area, though we forecast oil
production to fall over this time as Russian companies struggle to
mitigate decline at mature fields.

Analysts: Marina Petroleka, Christopher Haines,

Emma Richards, Mara Roberts Duque, Peter Lee,
Charles Swabey
Sub-Editor: Himanshu Bhandari
Subscriptions Manager: Yen Ly
Production: Fauzia Borah Isahaque
Copy Deadline: 19 January 2016

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