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Russia Continues To Post Record Oil Production

Raising oil production during a supply glut and low prices can be like refusing to stop scratching a persistent itch: Instead of alleviating the condition, it can just make it worse.

That’s already become evident in the case of OPEC and, specifically, Saudi Arabia, the group’s largest producer, which not only has refused to lower production in an effort to stabilize prices, but also has abandoned a self-imposed output ceilings altogether, at least for the foreseeable future. The pain is shared by all and even the Saudis are being forced to tighten their belts.

Now another prodigious producer, non-OPEC Russia, appears to be following the cartel’s lead. The Energy Ministry said Saturday that the country’s oil output reached record post-Soviet levels in December, in part because a devaluation of the ruble has made production more affordable, and in part to defy OPEC’s demand that all producers, both in and outside the cartel, work together to cut yield.

Related: Leaving 2015 Behind, Will 2016 See Oil Rebound?

Russian production of oil and gas condensate increased to an average of 10.83 million barrels per day in December, compared with 10.78 million barrels per day in November, the ministry reported. For all of 2015, output was up to 10.73 million barrels today, compared with average 2014 production levels of 10.58 million barrels per day.

Many observers had expected Russia to reduce energy production during the past year to help rally prices in the midst of its current economic problems. For one thing, Moscow’s budget has been strained because oil revenues account for about 40 percent of its revenue.

And the country’s economy as a whole has been hurt by sanctions imposed by the United States and the European Union because of Moscow’s long involvement in the conflict in neighboring Ukraine. These sanctions have deprived Russia of the Western financing and technology it needs to streamline energy extraction.

Related: Peak Oil Production Is Still Years Away

Energy Minister Alexander Novak said in an interview published Dec. 22 in the Russian daily business newspaper Kommersant that the country’s investments made in recent years have been contributing to 2015’s increased production and are likely to continue to do so in the coming year. But he said output could begin to wane if Moscow needs to raise money by increasing taxes on its energy industry.

Russia’s rise in oil production evidently has come as a surprise to the Energy Ministry, which had expected a decline in output during 2015 as the amount of recoverable fuel in older oilfields in western Siberia began to deplete. These fields account for more than half of Russia’s overall oil production, and output from the country’s largest oil companies did indeed decline.

Related: Russia To Help Iran Reboot Oil Industry

That drop, though, was offset by increased production from smaller oil companies, including Bashneft, which ramped up production. And the state gas company Gazprom also raised output of oil, mostly in the form of gas condensate, by 5.3 percent in 2015.

Yet as oil production continued to grow, Russian gas output began to decline. Russia’s overall gas production was down by 1 percent to 635 billion cubic meters, its lowest level since 2009, Energy Ministry data showed.

Gazprom has been confronting growing competition from Russian rivals, as well as lower sales to former Soviet states. They once got virtually all their gas from Gazprom, but lately have looked for alternative sources, at least in part because of interrupted service to Ukraine during the past decade.

By Andy Tully of Oilprice.com

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