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Crude Economics
Russia’s Rosneft Runs the Red Queen’s Race

Squeezed between declining productivity in its biggest oil fields and falling crude prices, Russia’s largest state-owned oil company Rosneft is neglecting its medium- and long-term prospects while ramping up its short-term operations in order to keep its output up. The FT reports:

With the enormous west Siberian fields developed in Soviet times in decline, Russia needs to invest ever more just to keep oil production steady. Rosneft’s sharp increase in drilling at Yuganskneftegaz came as output at the unit fell 3.2 per cent last year. Rosneft said in December it could increase capital expenditure by one-third this year in rouble terms compared with 2015, just to keep production stable.

Russian companies “are on a treadmill”, says Ronald Smith, analyst at Citi. “The bigger you are the faster you have to run just to keep production flat.”

This latest downturn in oil prices couldn’t come at a worse time for Russia, whose biggest oil fields are maturing and declining in output. Cheap oil means Russian oil companies are earning less money for their efforts, and while they’re being forced to increase drilling activities in already established projects, they’re being forced to cut capital expenditures on the exploration of new plays. The New York Times reports:

“The situation is very serious,” Mikhail I. Krutikhin, an energy analyst at the consultancy RusEnergy, said in a telephone interview. He estimates thatRussia’s oil production, now at a post-Soviet record high of 10.8 million barrels a day, will peak at some point next year and begin a long-term decline.

“The only question is the slant of this line,” he said. “The oil companies are not investing at all in exploration of new deposits because profits on these projects will only come in 10 years. Nobody will invest in these projects.”

Hydrocarbon production is the cornerstone of the Russian economy, which makes any threat to its oil or gas industries a top priority. Unfortunately for the Kremlin, there’s no easy solution here, and the current strategy of mortgaging future oil production to stay afloat in today’s bearish market looks to be merely delaying the inevitable.

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