Russian oil output increases in 2022 amid unprecedented Western sanctions: What’s next?

The longer-term outlook for Russian oil production is uncertain. The IEA’s World Energy Outlook 2022 postulates a 2 million b/d drop for Russian oil production by 2030 in their STEPs scenario. However, this view ignores factors that have driven Russian oil production to date and an evaluation of how these might change in the future. Two main factors should be taken into consideration: first, that in the past twenty years, Russian oil companies have achieved very good results in managing the decline rates of the so-called “old” oil in Russia, and secondly, that during the past decade most of “new” oil additions to output were not from offshore or from tight oil formations but from onshore fields on the northern and north-eastern periphery of the developed oil provinces in Western Siberia. These projects are logistically more challenging and expensive but otherwise are conventional and do not require state-of-the-art technological solutions and, in this sense, are not critically dependent on Western technologies and expertise.

It is generally a consensus view that oil output in Western Siberia will decline, sooner or later, imposing pressure on Russia to prevent an overall decline in the national oil output. But the timing for the onset of the decline matters a great deal. If a higher and longer production plateau relative to the currently assumed numbers can be maintained, the total production profile for Russia needs to be re-evaluated.

Another easy assumption that many analysts seem to be making is that Western service companies have been indispensable for the Russian oil industry and that their exodus in 2022 is going to result in drastic drop of output. While some equipment and some exclusive software might not be available to the Russian service providers in the near term, there are substitutes, probably less efficient but nevertheless capable of delivering decent results.

It seems to be an exaggeration to think that the decline of legacy fields in Russia would force the Russian companies to undertake extremely expensive operations (e.g. in the Arctic offshore) to compensate the missing volumes. There are brownfield opportunities onshore with higher but generally moderate costs that could be used as part of the bridge strategy. The Vostok Oil project is mistaken for a principally next level project with regards to its complexity and difficulty. In fact, the challenge for this project is that it requires the creation of substantial new infrastructure in what is essentially a periphery region to Russia’s current upstream activities. In terms of below ground risks, it is not a project that requires next generation technologies.

Most of negative outlooks for future Russia’s oil production make a reservation that the output decline is likely to occur in the absence of accommodating fiscal policies by Russian regulators. There is always a conflict between the industry and tax collectors. At the same time, the Russian government has demonstrated time and again that while it hates to leave potential tax revenue on the table, it is at the same time ready to extend a helping hand to the sector at the time of trouble. The solutions (tax exemptions) have been ad hoc for most of the time; recently, with the expansion of Additional Profits Tax (APT) regime to the wider collection of assets, they finally seem to be becoming more systemic.

By: Vitaly Yermakov