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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