Chart of the Week: Can Russia Stay #1

Siberia’s western oil fields have been a mainstay of Russia’s economic growth for decades, but the world’s largest producer of oil is now looking elsewhere in its country to replenish its stagnating supplies. Western Siberia’s oil fields have historically proven to be fertile hunting grounds for Russian oil companies, producing nearly 70 percent of the country’s exported oil.

But according to a recent report from Merrill Lynch, most of Western Siberia's oil fields are considered brownfields—regions where roughly 75 percent of fields have been exploited. The firm says oil and gas firms must now consider the “big picture” to maintain long-term sustainable growth of their natural resources. East Siberia is home to the country’s best greenfield prospects—sites that remained untouched—and are Russia’s “next big hope,” Merrill Lynch says.

Merrill Lynch analysts say East Siberia has remained untouched by development due to its “harsh climate, remote location and lack of infrastructure.” But with noticeable declines on the western front, the Russian government is encouraging exploration in this region and others, including: East Siberia, the Baltic Sea and the northern fields of Vola-Urals and Timan-Pechora. These locations are expected to play a large part in Russia’s long-term promise to supply Europe and Asia with oil and gas.

The Russian government relies heavily on oil exports for tax revenue from oil and gas companies, which currently account for more than 50 percent of the consolidated budget. Recently, the Russian government has reversed its burdensome tax code and now offers tax incentives to “spur production, sustain output and coax more production out of stagnating Russian fields,” Reuters says.

One of Russia’s largest state-owned oil companies, Rosneft, is largely benefiting from these tax breaks to fund and explore new greenfields projects in East Siberia. With tax incentives in hand, the company is using innovative technology and new drilling techniques to dig deeper wells in cold climates, to unlock estimated reserves of three billion barrels of oil and 180 billion cubic meters of gas. Rosneft reported recovering nearly 92 million barrels of crude oil in East Siberia last year, according to the report.

CSI analysts say pairing these types of tax incentives with new discoveries will become vital to sustaining Russian’s oil output in the future. While the region still has a ways to go to compete with its western counterpart, Merrill Lynch predicts the region could account for 80 percent of growth and 15 percent of total oil output by 2018.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of June 30, 2011: Rosneft.