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The Biggest Threat To Russia’s Arctic Oil Ambitions

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The collapse of the Soviet Union was a geopolitical victory for the United States and a disaster for Russia which suffered politically, economically, and socially. Although citizens enjoyed more individual freedoms, the quality of life decreased substantially as state institutions collapsed and basic services disappeared. In the early 2000s, Moscow started exerting more influence over its mining sector which increased the state’s income substantially.

The production of raw materials from Russia’s rich soil of which oil is by far the most important has provided the resources for the modernization of the society. Therefore, Moscow must maintain a steady supply of exports and revenue. According to a government strategy document cited by Kommersant, it is likely that the pre-pandemic level of oil production won’t be matched.

Russia’s oil industry was able to reach a post-Cold War record in 2019 when the sector produced 11.3 mbpd which is approximately 560 million tonnes. Production has decreased substantially due to the Covid-19 pandemic. Nevertheless, Russia’s free-floating exchange rate helped cushion the negative effects of decreased sales because oil deals are usually executed in dollars.

Before the pandemic, a third of the government’s revenues came from energy exports. This number increases to 40 percent when tax income from other sectors such as minerals is included. Therefore, significant resources are being spent for Russia to remain an energy superpower well into the 21st century.

According to the strategy document, Russia’s oil production will grow after the pandemic to 11.1 mbpd in 2030 which is short 200,000 barrels of its record of 2019. After which it will gradually decrease to 9.4 mbpd in 2035. In the most likely scenario in which prices and demand are high, production could increase to 12.8 mbpd in 2030.

The longevity of the Russian oil industry’s history means that easy-to-extract and therefore cheap to produce oil fields are usually depleted. Ever since the discovery of the first oil field in the Caucasus, Russia’s oil sector has been moving further north and deeper into Siberia for new resources. Most untapped fields currently are in the Arctic which is relatively expensive to develop due to the harsh climate. Still, the region could contain 16 percent of the world’s yet-to-be-discovered oil, according to the U.S. Geological Survey.

Moscow has put high hopes on the development of its Arctic region. In its quest for energy dominance, companies are given significant tax exemptions to lower costs and lure the right business people to the north. Energy giant Rosneft, for example, has announced the massive Vostok project that will create 130,000 jobs and allow access to around five billion tonnes of oil. Rosneft intends to produce 30 million tonnes by 2024 and eventually 100 million by the end of the decade from this project alone.

A major threat to Russia’s position is the energy transition and the electrification of societies. This could offset the demand for fossil fuel products. Although hydrogen is slowly creeping into Moscow’s strategy, the bulk of the Russian energy industry’s efforts remains with fossil fuels. According to Dmitry Loukashov, VTB Capital’s deputy head of oil and gas research, “While international oil [majors] are falling over themselves in their business transformation potential to become ‘clean,’ Russians are unlikely to compete with them in this renewables drive.”

However, the energy transition is also an opportunity for the Russian fossil fuel industry. Western IOCs such as Shell and BP are gradually increasing their investments in carbon-neutral technologies and slowly decreasing oil and gas expenditure. This means that even in a situation where demand is decreasing, Russia could maintain its share and position as an energy superpower.

According to Rystad Energy, the pandemic has drastically changed the outlook for oil. Previously it was expected that demand would peak around 2030 with 106 mbpd. Rystad, however, now predicts that demand will plateau around 102 mbpd in 2028 and rapidly decrease to 62 mbpd in 2050.

Russian energy companies have been increasing their presence in regions where demand will remain growing for the foreseeable future such as Asia and Africa. Although developed countries will likely decarbonize, the rest of the world won’t any time soon. Therefore, expect Russia to at least maintain its position in the near future.

By Vanand Meliksetian for Oilprice.com



2 Comments on "The Biggest Threat To Russia’s Arctic Oil Ambitions"

  1. makati1 on Sat, 24th Apr 2021 5:13 pm 

    “Developed” countries are already going into the shitter with huge debt. They will de-carbonize by downsizing their consumption due to lack of buying power, not desire.

    The developing countries, will continue to grow and burn FFs. So be it. That is the future, no matter how many retarded Grettas they use.

  2. Cloggie on Sun, 25th Apr 2021 1:56 am 

    The collapse of the Soviet Union was a geopolitical victory for the United States and a disaster for Russia which suffered politically, economically, and socially. Although citizens enjoyed more individual freedoms, the quality of life decreased substantially as state institutions collapsed and basic services disappeared.

    It was a brief economic and geopolitical disaster indeed, but necessary and in the end a liberation of a worthless economic system. Today, Russia is at 30k/capita PPP, which is 30% higher than China and higher than Bulgaria or Northern Ireland.

    A major threat to Russia’s position is the energy transition and the electrification of societies. This could offset the demand for fossil fuel products.

    Not really. The world will need all the fossil fuel it can get in order to enable the energy transition in the coming 3 decades. Expect prices for fossil fuel to increase and the Russian income to rise accordingly. Russia will be fine and in the end apply the energy transition to itself, when the prices for renewable energy and storage will be low and paid for by mostly Europe.

    According to Rystad Energy, the pandemic has drastically changed the outlook for oil. Previously it was expected that demand would peak around 2030 with 106 mbpd. Rystad, however, now predicts that demand will plateau around 102 mbpd in 2028 and rapidly decrease to 62 mbpd in 2050.

    Exactly. And guess where most of that oil will come from?

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