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Gloom and Crude
Moscow Puts Brave Face on Grim Oil Outlook

Russia produced more crude last month than at any other time in the post-Soviet era, but its medium- and especially long-term energy outlook borders on terrifying for the Kremlin. In today’s low-price environment, higher-risk explorative projects are among the first to get axed. That’s a major problem for Russia, whose existing fields are already maturing and whose newer projects are already beleaguered by the depressive effects of Western sanctions. But as Bloomberg reports, Russia’s deputy energy minister is hoping to increase output at existing fields to offset the lack of new projects coming online in the coming years:

“We’ve got a safety cushion until 2035,” Deputy Energy Minister Kirill Molodtsov said in an interview in Moscow. “The potential for output growth at oil fields already in operation is higher than in unexplored territories.” […]

Exploration drilling is first in line when companies trim spending, according to Molodtsov. Adding wells at existing fields or using chemicals or fracturing to push out more oil provide a quicker return than tapping new territories, he said, estimating steady annual output of roughly 525 million metric tons (about 10.5 million barrels daily) through 2035 even in a conservative scenario.

But that’s almost certainly an overly sanguine expectation. Alexei Texler, a different Russian deputy energy minister, told reporters that the Kremlin was expecting that a “[p]ossible reduction may come in 2017, with a potential decline of up to 10 million tonnes”, the equivalent of a drop of 200,000 barrels per day. The International Energy Agency doesn’t think Russia can continue to squeeze these recent record-levels of oil from its existing fields for much longer, either.

Russia’s domestic economy and in large part its clout on the global stage depends on its oil and gas sales, which makes any question of flagging oil production an economic, energy, and national security concern all at once. The country’s dim prospects for keeping crude flowing in a bearish market and under Western sanctions are one of Putin’s biggest problems—the sort of thing that would keep one up at night.

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  • Re

    The next few years will be hard for Russia,indeed, even without sanctions the economy is expected to grow very slowly from 2017 on, a kind of stagflation that will slowly erode Russians’ standards of living.

  • Angel Martin

    Putin is not acting as if he expects low oil prices to continue for very long. Neither is Iran, actually.

    Maybe they know something that we don’t…

  • http://winterings.net/ Alex K.

    On the other hand, 200,000 bpd is only 2% of Russia’s output of more than 10 million bpd: Texler is essentially saying that in a pessimistic scenario, production would be roughly the same in 2017 as in 2012 or 2013. Hardly a disaster. Obviously, underinvestment will eventually lead to production declines but there are no clear signs yet that Russian companies have dramatically cut down on upstream investment in real terms. If it’s true that Putin tends to be a tactician rather than a long-term strategist, he won’t lose his sleep over a hypothetical output crash in 2019. He could be thinking, “by that time, the 2018 election will be over and, who knows, the oil price might as well recover.”

    • PKCasimir

      The problem is oil at less than $100 a barrel, not the 200,000 bpd decline. Russia’s budget cannot be anywhere near balanced at current prices and Russia is cut off from Western credit. China won’t lend Russia any money.Putin’s military build-up and wars cost money. Money which Russia doesn’t have. Putin maybe a cunning tactician but his knowledge of financing is rudimentary at best. He will burn though Russia’s reserves and he will bankrupt the country As far as the Russian oil industry is concerned, it needs western technology to maintain current production and it doesn’t have access to it.

      • http://winterings.net/ Alex K.

        Agreed, Putin’s wars make it difficult to impossible to keep the budget deficit within 2-3% of the GDP. If the military buildup is scaled back, however, balancing the budget will be feasible thanks to the weak ruble.

        As far as the Russian oil industry is concerned, it needs western technology to maintain current production and it doesn’t have access to it.

        “Does not have access to it” is a gross simplification. Russia does not have the technology to develop deepwater offshore fields, not only in the Arctic but in the moderate climates as well. However with oil at $40-50/bbl, it can be argued that most new offshore development makes little sense. As for onshore fields – 95% of Russia’s output – there has been large-scale technology transfer from the West in the past 20 years and the EU/US sanctions have not stopped it since they do not apply to conventional onshore oil and gas.

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