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Crude Economics
Russia’s Energy Outlook Keeps Getting Dimmer

Moscow’s budget relies heavily on oil and gas revenues, so it’s no surprise that it’s been hit particularly hard by the price of crude plunging to a six year low. But for state-owned oil company Rosneft, a bear market isn’t the only challenge: Western sanctions have also undercut its ability to explore newer, unconventional oil reserves in Siberia and the Arctic. Rosneft put a brave face on its predicament this spring when it announced that it was looking to secure Chinese financing for some of its new projects, but now its chairman, Igor Sechin, is publicly admitting that those plans have been put on hold. The FT reports on Sechin’s statement that, instead, “We decided . . . to amend our business plan in the direction of increasing production at existing fields.”

This is a bigger deal than it might at first seem. While massive, Russia’s existing fields are stagnating as operators run the Red Queen’s race—working harder and harder just to maintain production as the most productive plays are used up. Sechin’s strategy of focusing on boosting production in these fields will be easier said than done, but more importantly it’s a short-term solution that will expose Russia to some very ugly problems in the coming decades.

Investing in new fields (like Siberian shale) is vital for Moscow’s energy future. Rosneft’s abandonment—or maybe, more accurately put, tabling—of those kinds of new projects is understandable, considering the chilling effect sanctions have had on access to the technologies necessary to unlock those plays. And, like every oil company, Rosneft is having to cut capital expenditures now that crude is fetching less than half the price it was just one year ago. But this change in tack is going to have big implications for Moscow’s energy security years down the road.

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  • Andrew Allison

    Perhaps Rosneft has noticed that US producers are bringing old well back to life rather than drilling new ones, presumeably because it’s more cost effective.

    • GS

      A circus monkey in the human-like clothes is still a monkey, Andrew Allison. And the same applies to a parrot which learns to swear like a human. From them noticing that the others are doing something to them actually doing it – and doing it well! – there is quite a distance. Probably, a parsec or two.

  • Jacksonian_Libertarian

    70% of Rosneft is owned by the Russian Government Monopoly. This means that Rosneft is totally insulated from the free market, and therefore from the “Feedback of Competition” which provides both the information and motivation which forces continuous improvements in Quality, Service, and Price in the free market. Rosneft isn’t going to improve and get better as the article assumes, but rather stagnate and decay as do all monopolies.

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