Russia’s oil sector has shown a surprising resilience to low oil prices and western sanctions over the past two years. The country’s output repeatedly hit new record highs despite various negative outlooks.
This surprising pattern could well be repeated both this year and next should certain projects overcome delays and greenfields ramp up output.
Independent research group Vygon Consulting, in its May study, said oil production in Russia is likely to continue growing not only this year — as was forecast by many market observers — but also next year.
On top of this, the consultancy sees Russian crude production hitting the 11.3 million b/d level next year. If so, it will get close to Russia’s all-time high, recorded in 1987. This is well above other most optimistic estimates.
A general consensus sees Russia’s crude production continuing to grow this year by around 100,000 b/d or even slightly above this figure. The growth is supported by investments made in previous years.
Next year, however, output is expected to remain flat or even drop by around the same 100,000 b/d, as greenfields no longer compensate for growing natural decline at mature fields in West Siberia. This view is shared by many market experts both in Russia and abroad, although forecasted figures do differ somewhat.
The International Energy Agency, for example, has warned that while Russia’s oil resource base is weakening, the commissioning of new fields is likely to be delayed in the coming years due to capex constraints and rising fiscal pressures, making it increasingly challenging for oil producers to maintain crude output.
Vygon Consulting, however, believes that several new projects that are scheduled for commission both this and next year are unlikely to be delayed as they are ready to launch and key capital investments have already been committed to them.
These projects include the Filanovskogo field in the Caspian Sea and the Messoyakha field in northern Siberia, set to come online by the end of this year and a number of new fields expected to start in 2017.
In addition, already commissioned greenfields, including in the Arctic, could increase output to become drivers of crude production growth next year.
As a result, the consultancy estimates, crude production from greenfields is likely to jump to nearly 1.5 million b/d, or 85%, in 2017, from its 2015 level, which would fully compensate for the natural decline elsewhere.
Indeed, this outlook is much higher than the level of natural decline at old fields in Russia, with different estimates putting output at between 100,000 b/d and 400,000 b/d in 2015.
The problem is that crude production in West Siberia is falling by around 3.5-4% a year, despite the sharp increase in drilling and wider use of enhanced oil recovery technologies seen last year. If those operations are reduced due to companies’ financial constraints, the natural decline could accelerate drastically.
So far, however, production drilling — including the drilling of horizontal wells — is still on the rise as oil companies’ operations are supported by flexible taxation and the forex rate of ruble to dollar, mitigating cuts in oil prices.
But there is the risk that Russia’s authorities could opt to increase the tax burden on oil companies to resolve budget problems.
And while at present governmental officials have said there are no plans to raise these taxes, a different approach might prevail when the government considers how to meet the 2017 budget in the autumn.
If the tax burden is increased, the outlook for Russia’s crude production could be quite different from that of current forecasts.
By Nadia Rodova, Managing Editor
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
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