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Page added on October 9, 2018

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The Russian Oil Decline


Oil Supply Tailspin

I have previously explained the breakdown of global crude oil production. As the date for renewal of US sanctions against Iran approaches (November 4), the market presumes there will be constriction on the supply side moving forward.

Supply is driven less by aggregate production and more by how much volume actually makes it into the global market. It’s exports, not straight lifting figures, that tell the real story. That story is now all about supply side constraints resulting in higher crude oil prices.

Continuing export declines from Venezuela, Libya, and Nigeria will combine with some significant declines from Iran. I have already explained how the first three nations will provide some 1.9 million barrels a day (mbd) in lost export volume before the end of the year, while the Iranian decline would result in a further 1.4 mbd from mid-summer figures.

That 3.3 mbd total now appears to be low. Accelerating dives in exports from Venezuela will be greater than anticipated. Sources at the Venezuelan state oil company PDVSA confirmed earlier this month that they expected production to decline to about a third of what it had been less than two years ago. That figure will now cascade further to the south.

That production has imploded and is now unravelling down to about 1.2 mbd. New projections say it may be less than 1 mbd by the end of the year. That would cut exports by at least 1.5 mbd since mid-2016 figures and about 1 mbd this year alone.

Meanwhile, the Libyan civil war is likely to cut daily exports by about 850,000 barrels. All told, before the real impact of Iranian sanctions next month, the market stands to lose at least 1.9 mbd.

In addition, the Iranian picture is looking even more stark. My initial estimates for how much will be cut in exports from Teheran appears to have been too low. Exports in September total 1.8 mbd, down from 2.3 mbd in July. I now project that the daily total will be 875,000 by early December.

That totals from just these few sources a net loss of over 3.3 mbd from the global oil supply. Putting this in perspective, there exists about 2.8 mbd of readily available excess capacity in OPEC. Over 60% of that is Saudi.

Now we are not in a “peak oil” frenzy. There is plenty of excess capacity available to non-OPEC producers. The world is hardly running out of oil. But the amount available for quick injection into the market is another matter.

Riyadh may add additional volumes to the supply side, but they also have a vested interest in keeping the price of crude high. Aside from Saudi reserves available for a rapid move into global trade, there are two other primary options.

Plenty of Oil, Not Enough Pipe

The first is the US. American production has been intensifying and is likely to catapult America into the role as the leading producing nation by 2020. There is additional largess that can be easily tapped by a fully operating drilling and transport infrastructure. The amount of shale and tight oil available is considerable.

However, there is also a dual inhibitor limiting how much of those increases can genuinely influence the price. On the one hand, pipeline bottlenecking is impacting the ability to transport additional extraction from the giant Permian Basin in West Texas and Eastern New Mexico. This is the primary source of added volume to move into the global market, where prices are determined.

Expansions of that transit system are in the works, and sources keep telling me about the rising use of rail cars to move volume. But the bottom line is this. The main pipeline expansions required to move the oil won’t be in place for some two years. Patch work approaches, such as using rail lines, will not bring much additional volume to translate into exports.

That leads us to the other inhibitor. More than 3 mbd are now exported from the US, with the clear majority of that volume using ports on the Gulf of Mexico. Those facilities, along with the feeder lines and storage sites that accompany them, are nearing maximum capacity.

There as well, plans are afoot to expand that capacity, with much of the new port capacity moving down coast to Corpus Christi from Houston and the Channel. Yet, once again, this will not be on line for several years.

Russia – New Swing Producer or Doomed to Decline?

That leaves us with Russia. Moscow has increased exports as production has grown to more than 12 mbd. Contacts at both state oil company Rosneft and the state transport monopoly Transneft have been floating the contention that Russia is becoming the worldwide swing producer. For decades, the assumption has been that Saudi Arabia occupied that role – offsetting the meeting of international demand with OPEC aggregate supply; as such, preserving the balance in the market.

Rosneft has said it could increase production further, adding to the export flow should the travails in Venezuela and Iran further constrict available crude. Yet that belies information emerging from other quarters.

Put directly, unless there is a rapid change, even present levels of production will not be maintainable in the near future.

Russian extraction levels remain dependent on the traditional Western Siberian Basin. This is a very mature drilling location. Reservoirs have further been significantly damaged with a widening amount of oil slipping beyond commercial extraction due to multi-decade “creaming” practices.

This latter dynamic refers to taking off the easily available oil, accentuated by indifferent usage of secondary recovery, followed by premature capping of wells without sufficient allowance for reproduction later.

By 2016, internal reports at Minenergo (the Russian Ministry of Energy) had warned about a Western Siberia rapid decline curve amounting to a loss of some 8.5% in volume by 2022. Some of this is already underway. One of the reports, labeled such a precipitous decline an неизбежность (neizbezhnost, “inevitability”).

Easier Said Than Done

To offset this, four alternatives are being pursued. These involve moving operations: (1) north of the Arctic Circle; (2) out onto the continental shelf; (3) into Eastern Siberia; and (4) to strata below the current pay zones in Western Siberia.

All of these approaches are inordinately expensive. There is some promise that major reserves are present in Eastern Siberia. But all basic infrastructure (roads, transit, communications, power, supply routes, pipelines, etc.) need to be built virtually from scratch over thousands of miles. If the development on the Yamal Peninsula in north central Siberia is any indication, these expenses will have huge excess runovers beyond initial estimates.

All four targets also require technology and expertise Moscow does not currently have, and a market price for oil higher than current levels to recoup the added costs. The existing US sanctions against Russia have certainly not helped.

This was the primary reason Rosneft entered into a joint contract with ExxonMobil. It is essential that the company have access to outside technology and expertise. Much of the possible onshore additional crude is

The Russian Oil Decline heavy oil, quite difficult to extract and move.

Of primary concern, virtually all of the reservoirs thought to be located below the mature Western Siberian deposits are heavy oil. The only economic production is using steam-assisted gravity drainage (SAGD) drilling. SAGD involves running parallel lines. A lower line has steam pumped through it, warming the oil above. The upper line then “harvests” the heated oil through perforations.

Unfortunately, when applied in Siberia, SAGD collapses the tundra thereby destroying the wells. The Rosneft-Exxon agreement provided for a Rosneft minority interest in 22 Exxon projects outside Russia. It is hardly a surprise that every one of them was a heavy oil operation.

That Rosneft-Exxon accord has been a casualty of the US sanctions against Moscow. Rosneft has belatedly moved to secure joint venture agreements with European majors such as France’s Total, but the effectiveness of these alternatives is unknown.

There is an additional factor to consider. Even if the reserves are there and can be tapped, much of what has been identified in the Arctic, the shelf, and Eastern Siberia are primarily natural gas, not crude oil. Additionally, even in those cases where oil is the primary target, the condition of associated natural gas pressure is likely to determine the amount of oil extracted.

Now there are caveats in all of this, as my Rosneft and Minenergo contacts have maintained. We may have an opportunity to discuss this and other matters in a meeting being scheduled shortly to take place in Nicosia, Cyprus.

I’ll let you know what transpires. Nonetheless, Russia remains under greater production pressure than the Kremlin is letting on.


8 Comments on "The Russian Oil Decline"

  1. dissident on Tue, 9th Oct 2018 10:46 pm 

    Same BS predictions as in 2006. Face it, you just don’t know Russia’s URR. Several years ago it was popular to claim that Russia had only 60 billion barrels in reserves. That is the same as Kuwait. Yet for all the yapping, it is not Saudi Arabia that is producing an additional 2 million barrels per day.

    BTW, Bazhenov deposits do not require tar sands recovery techniques. They require fracking.

  2. print baby print on Wed, 10th Oct 2018 12:34 am 

    I think the situation is unsustainable . BAU is finished, someone in Washington has realized that. So it is batter to deal with Iranian missile threat now while still we can.

  3. Brent Georgeson on Wed, 10th Oct 2018 1:08 am 

    Yep everything is good and well here dissident Italy is not collapsing at all so nothing to worry about.

    My question to peakoil unbelievers is when will you say we have a problem? When the life expectancy declines in America for five years in a row? When they opiate crisis kills 5,000 people a day? When debt levels reach so high that paper currency is worth less than toilet paper? You just let me know when you will take this seriously.

  4. print baby print on Wed, 10th Oct 2018 6:35 am 

    Good question brent

  5. shortonoil on Wed, 10th Oct 2018 7:10 am 

    Over the last 4 years world production has increased on average by 0.37% per year. If there is any spare capacity it sure isn’t showing up at the well head. A lot of the claimed spare capacity is PR. The Saudi’s claim to spare capacity is based on hypothetical production from Manifa; which for the last 70 years has been unmarketable oil, and is still unmarketable oil. Its vanadium content is too high to be used by any refinery in the world except for the one the Saudi’s had specifically constructed to process it. World oil production is now on a plateau that will not last for long. The collapse of one more Giant will take it over the edge, and they are all getting very, very old. They are now all using tertiary extraction methods to keep the oil flowing. They are down to the last few percent of URR.

  6. The last drop on Wed, 10th Oct 2018 8:17 am 

    WELCOME back Shortonoil…Sure, you wrote that same line as well couple of years ago, if my memory serves me right. Seems a few more tricks up their sleeve to keep the can kicking along. We may be here 10 years from now writing and reading the same, at least in the King of the Mountain nations…not the Shithole countries.
    Anyhoot glad youre back posting…doesn’t bother me at all you welched on that bet.
    Fck them good. Bunch of know-it-all Aholes posting here…not like yourself.
    Can’t wait for that book your writing gets done. Better hurry or like you said it might not have an ending….because it all over.
    This place is so entertaining.

  7. print baby print on Wed, 10th Oct 2018 9:35 am 

    Good to have you back shortonoil

  8. Anonymous on Thu, 11th Oct 2018 8:18 pm 

    1. Very pompous and wordy style in the article. Nominalizations and long words when not needed.

    2. Lack of any NUMBERS or charts or other ANALYSIS.

    3. Very long introduction talking about the US, when the topic is Russia.

    4. US oil is scheduled to grow much faster than Russian oil. 1MM bopd/year or more from the US.

    5. Decline of Russia has been a peak oil meme for a decade now and instead it has slowly increased. I once posted over 15 times that Ron Patterson had predicted Russian decline over the years.

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