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The outlook for Russian oil output in a post-Crimea world

Public Policy

Could economic sanctions finally halt Russia’s crude production growth?

In June last year, I wrote a blog post for The Barrel making much of the fact that Russia is the world’s biggest oil producer and has been for quite a while.

Its output has consistently ranked above that of Saudi Arabia in the past few years and production has continued to rise in recent months, averaging some 10.53 million b/d in February this year.

There is no sign of output starting a material decline — like those seen in a number of the world’s more mature producing regions such as the UK, Norway and Denmark — and Russia keeps finding new ways to pump more oil whether it be through improved technology or tapping new, under-explored regions like East Siberia.

So while the geology and the technology keep on bringing in the barrels, what factors are there that could hamper Moscow’s ability to achieve continued production growth?

Well, the most obvious factor that could come into play now, given Russia’s widely reported actions in Crimea, is the potential imposition of economic sanctions against Moscow by the international community, the US and the European Union in particular.

Already, billions of dollars have left Russia as investors fear a deterioration in the state of the Russian economy. Estimates put the flight of capital from Russia in the first three months of 2014 at as high as $70 billion, more than the amount that was withdrawn from the country in the whole of 2013.

US President Barack Obama and UK Prime Minister David Cameron both said today that sanctions targeting Russia’s energy sector would be considered, without going into detail on any specific measures.

Speculation is rife over what any future US or EU sanctions might look like though. A ban on the purchase of Russian oil and gas seems unlikely given how dependent Europe is on Russian energy, at least for the time being.

But measures could be imposed that would make it harder for countries to pay for their Russian energy. This proved an effective tactic for Washington in 2012 when it introduced a wide-reaching sanctions regime against Iran.

One key element was that Iran’s remaining oil buyers — China, Japan, South Korea, India, Turkey and Taiwan — had to come up with inventive solutions to pay Iran for the crude they bought.

So making it harder for Russia to get its hands on its much-needed petrodollars would certainly be something to consider.

Another measure imposed on Iran was a ban on energy investment in the country. A similar move against Russia might have something of an effect on Moscow’s ability to maintain production at current levels in the future.

It’s hard to imagine many of the big western oil majors with JVs in Russian exploration moving to pile in the cash while the crisis over Crimea remains heightened and the threat of economic sanctions real. We’re talking about some of the biggest names in oil here, the likes of ExxonMobil, Shell, Chevron, Eni and Statoil.

Companies are remaining tight-lipped about their plans, but Platts understands that there are concerns.

One of the major fears is that Russia could react to any economic sanctions by seizing western assets in Russia — oil and gas fields, rigs, licenses. One CEO I spoke with said this was his biggest concern.

But could sanctions against Russia’s energy sector translate into a meaningful reduction in oil output?

It is unlikely in the near term. The Russian oil majors are well financed and have the backing of the state, so the oil should continue to flow unabated. Even if European and US buyers face restrictions in the future, Russia would likely find plenty of markets happy to take its crude. For example, Rosneft CEO Igor Sechin was in New Delhi this week discussing sending regular volumes of crude to India.

China, Japan and South Korea would also likely take increased volumes from Russia. China, in fact, has signed up for a big rise in the Russian barrels it buys.

It would be telling if any future international sanctions against Russia made any kind of attempt at reducing the global buying power of Russian crude. The tactic was used against Tehran when the US threatened to bar any country that did not reduce its crude imports from Iran from the US financial system.

The ball, it seems, is in Russia’s court. It has denied any intention to expand beyond Crimea.

For now, there is no danger to Moscow’s main revenue generator. It has been plagued for years by the persistent assumption that its oil production has plateaued and is set for decline. Almost every year since output first broke through the 10 million b/d mark in 2010, analysts have said that production has peaked and that decline would be the order of the day.

Moscow has kept on proving the doom-mongers wrong, but now maybe it is facing arguably its greatest threat to date: international isolation, economic stagnation and the prospect of sanctions that would disrupt its most powerful political weapon, its oil and gas.


19 Comments on "The outlook for Russian oil output in a post-Crimea world"

  1. DC on Wed, 26th Mar 2014 7:06 pm 

    Post Crimea world ROFL! Is that what we live in now? Haha. Still, got to love Lame-stream Media, the best propaganda money can buy….

  2. Northwest Resident on Wed, 26th Mar 2014 8:30 pm 

    That’s right, DC — we’re all living in the post-Crimea world. Also, totally ignored by the MSM, I’m currently living in the post “had to get out of bed and go to work world” — a tragedy unfolding on an almost daily basis, every bit as relevant as the post-Crimea world now being reported on. Where is the MSM when you need them!

  3. Davey on Wed, 26th Mar 2014 9:13 pm 

    Sorry, NR, everyday here on the farm is a personal utopia. I live like there is no tomorrow because there may not be a tomorrow.

  4. ronpatterson on Wed, 26th Mar 2014 9:27 pm 

    I have been following Russian production on their very own web site “CDU TEK”,
    According to Russia’s own figures they peaked in November 2013 and have been down every month since. Down very little but down nevertheless. They are currently producing about 150 to 200 thousand barrels per day below their November average.

    So to claim that “There is no sign of output starting a material decline” is just not accurate. They have plateaued at best but it looks more like the beginning of a slow decline.

  5. rockman on Wed, 26th Mar 2014 11:57 pm 

    But Ron didn’t they just get a boost in production? Oh…wait…that’s Crimea’s oil. LOL.

  6. Makati1 on Thu, 27th Mar 2014 12:24 am 

    Anyone who thinks that any sanctions by the US is going to make a difference in oil sales is wrong wrong. China will buy all that they can get and so will India, and others are lining up as we type.

    Especially if they can buy it with their own currency and not dollars. Think about that. This is just driving the death of the dollar ever closer.

  7. Davy, Hermann, MO on Thu, 27th Mar 2014 12:52 am 

    China is in a debt unwind and will most likely need far less oil in the coming year. India is in an economic crisis especially with its currency so this will limit India’s oil demand and will create reluctance of oil exporters to trade with India. There is little circumstances of India and or China using their currency to buy oil nor is there much expectation of these countries bypassing the so called Petrodollar in the near future. There has been much talk but until the US dollar is supplemented by one or more currencies in a new reserve currency arrangement the economics of not using the petrodollar.

  8. Peter on Thu, 27th Mar 2014 1:14 am 

    The Russian oil / gas industry is a “running on a treadmill” industry anyhow, isnt it. They get taxed at a rate of $60 or so a barrel, they sell some to Ukaine (and dont get paid for it), they sell some to the US (or to others) and get uselss $US in return, and they sell to other customers that may decide in the future that they dont want to pay for it due to restrictions.

    At $700 million a day in export earnings (and you have to wonder what dodgy stuff they get in return), which equates to approx. $4.66 per capita, they may as well leave it in the ground. Instead of burning oil to project his military muscle on the world, Putin would screw it more by shutting the oil industry down.

  9. Arthur on Thu, 27th Mar 2014 5:28 am 

    Post-Crimean world is good. There are growing signs that Germany is going to say Nein again, like they did in 2003/Iraq, and refuse to shoot themselves in the foot. And again the US won’t be able to force the Germans. It is even likely that the US this time will skip the ‘freedom fries’ and ‘cheese-eating surrender monkeys’ rethoric.

  10. Davy, Hermann, MO on Thu, 27th Mar 2014 10:34 am 

    Arthur said – Post-Crimean world is good. There are growing signs that Germany is going to say Nein again, like they did in 2003/Iraq, and refuse to shoot themselves in the foot. And again the US won’t be able to force the Germans. It is even likely that the US this time will skip the ‘freedom fries’ and ‘cheese-eating surrender monkeys’ rethoric.

    Geez Arthur, friggin settle and chill, this whole Crimea thing will blow over and be a non-event. The boring global politicians who every day become more irrelevant needed to make headlines. Don’t you know they learned things from Hollywood? When your ratings drop to historic lows you have a crisis event and stir everyone up and lift your dismal ratings. This is especially true of Putin who is starting to grey and loose his hair. His macho image is looking a bit dated. He really needs a hair transplant and some plastic surgery on that less than manly body that he sports to boost his tough guy image. This is just for consumption and you bought into it. It reminds me of the “religious folks here in the US that become so excited about an end of the world date. They make a big deal about it then it is over and they end up in a depression. Arthur, we don’t want that to happen because we need your entertainment.

  11. Davy, Hermann, MO on Thu, 27th Mar 2014 10:45 am 

    Makati, here is something you should read on China:

  12. Arthur on Thu, 27th Mar 2014 11:16 am 

    Davy, I hope you are right about the Ukrainian situation blowing over, but I am not so sure. Civil war situations like in Yugoslavia, Iraq and Syria do occur and can easily be repeated in the Ukraine. The country is now thoroughly torn apart, with no politicians in sight with enough stature of bringing the two parts together again. The only institution that perhaps is being able to pacify the joint is the army… and bring it back into Russian orbit. But… The ‘Natzis’ in the West now smelled their chance of a Ukrainian state of their own, all the way to the Russian border, treating the Russians in the Ukraine like the Turks used to do with the Kurds. The Russians in the east feel emboldened by the success and determination of Wlad in the Crimea and will develop a similar attitude. All it takes is a well-placed car bomb, a few snipers (Ukrainians, Blackwater, whoever) to set the country irreversible on fire.

    The problem is far from solved.

  13. DC on Thu, 27th Mar 2014 11:27 am 

    I will say one thing, for both you and NW Davy, you really like to beat that, “Oh, this ukraine thing is a big trivial show for the masses” routine. Easy for you to say, since there is no downside for an amerikan, still living in the bubble far from the front lines. I wonder if you would so dismissive of things if China and Russia were trying to arrange to put tactical nuclear missiles, ‘missle interceptors’ and troops on the mexican border? Yea Im 100% sure you wouldn’t mind something like that one bit. I bet during the Cuban Missile Crisis, you probably blew that off too, as, just the ‘media overreacting to boost their neilson ratings.


  14. Makati1 on Thu, 27th Mar 2014 11:30 am 

    Davy, Zerohedge is a financial pimp site and is more feel good articles to keep the sucker … er… investors from cashing out and putting what is left of their money under the mattress. Of course China is having troubles. What country isn’t today? It only points to the fast approaching collapse of the system and a reboot to something without dollars needed for international trade.

    I read Zero daily as well as 30 odd other sites of many persuasions. That is how I get a more rounded picture of current events. Stereo is much better than mono.

  15. Davy, Hermann, MO on Thu, 27th Mar 2014 11:58 am 

    Arthur you may be right and I was being sarcastic and dryly humorous. I hope this does not spill out into something worse for all of us. My thoughts are all sides will seek calm due to the economic dangers neither side can afford now. I imagine Ukraine will respond to the US and Europe if they call for restraint. Ukraine can hardly go it alone and will self-destruct without outside help.

    Makati and DC, get a grip, at some point you have to read other points of view besides your narrow ideological propagandist views. All your sources are anti-American and are reflected in your one-sided comments. “And” DC how do you know what I want? You don’t know me for Adam. You act like you know everything about Americans but in reality are just a blow hard anti American on every single issue. If you were in a court situation you would be disqualified as a juror by being biased.

  16. Arthur on Thu, 27th Mar 2014 1:18 pm 

    I imagine Ukraine will respond to the US and Europe if they call for restraint.

    The US en EU are going to be the last parties calling for restraint. They organized the mess in the first place by exploiting EuroMaidan, as they found yet another angle of attack against the Moscow-Beijing alliance.

    The West is the new USSR.

    Why? Because the joint is run by exactly the same people who ran the USSR between 1917-193x

    The West(ern elite) is looking for world empire and nothing is going to stop them until somebody puts up serious resistance.

    That resistance now has arrived: Putin, China, Islam and increasingly European nationalists and American constitutionalists.

    That’s too much resistance. The Washington lead NWO grand strategy is going to fail, just like the USSR failed in it’s objective to conquer the world with their shabby Bolshevism.

    The counter vision, opposing the NWO is the multi-polar world order, predictably accepted by everyone, except Washington.

    Within that emerging multipolar world order, greatly enabled by the ‘peak-oil situation’, putting globalism in the reverse gear, two poles are going to be dominant:

    1) European world: EU, North-America, Russia (“white Christian”)
    2) Han-Chinese world

    Within the first ‘pole’, North-America probably will return to the pre-1941 mode of ‘America First’, very independent, inward looking, libertarianish, constitutionalist, only loosely coupled to Europe and ‘concentrate on drinking whiskey’.lol (©Davy).

    The EU will form a necessary alliance with Russia to keep China in check in order to keep the Russians in control over Siberia (raw materials). Anything else would be geopolitical naiveté.

  17. Davey on Thu, 27th Mar 2014 1:24 pm 

    Good thoughts Arthur and definitely worth study not that I agree with all of it except fully with the whiskey part…ha think of those large moonshine stills called ethenol plants

  18. Pops on Thu, 27th Mar 2014 6:07 pm 

    I think it would be a mistake to think a lack of profits and investment capital that is causing the major IOCs to start divesting, and some other NOCs production to slide – Mexico, Venezuela, etc, will not affect Russia.

  19. Pops on Thu, 27th Mar 2014 6:07 pm 

    … Actually the increase in Russian production was the main reason we didn’t peak in the oughts …

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