Last year, against all odds, Russia managed to grow its oil output despite being hit with tough sanctions, a plethora of oilfield service companies exiting the country as well as the refusal by western countries to buy its crude for the most part.
Indeed, Energy Intelligence reports that in 2022, Russia’s crude and condensate production increased 2%, with oil production clocking in at 10.73 million b/d, above Russia's ministry for economic development forecast of 10.33 million b/d.
Russia managed to pull off this feat mainly by offering huge discounts to buyers like China and India, with Bloomberg's oil strategist Julian Lee reporting that the two were receiving discounts of $33.28 per barrel, or about 40% to international Brent crude prices oil at the time.
But Moscow cannot continue defying the odds indefinitely. BP Plc (NYSE: BP) has predicted that the country’s output is likely to take a big hit over the long-term, with production declining 25%-42% by 2035. BP says that Russia's oil output could decrease from 12 million barrels per day in 2019 to 7-9 million bpd in 2035 thanks to the curtailment of new promising projects, limited access to foreign technologies as well as a high rate of reduction in existing operating assets.
In contrast, BP says that OPEC will become even more dominant as the years roll on, with the cartel’s share in global production increasing to 45%-65% by 2050 from just over 30% currently. Bad news for the bulls: BP remains bearish about the long-term prospects for oil, saying demand for oil is likely to plateau over the next 10 years and then decline to 70-80 million bpd by 2050.
Bleak Future For Russia
That said, Russia might still be able to avoid a sharp decline in production because many of the assets of oil companies that exited the country were abandoned or sold to local management teams who retained critical expertise.
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Bloomberg had earlier reported that Russia sharply increased its diesel exports before the European Union sanctions on crude oil kicked off in February. Fuel shipments from Russia's ports in the Baltic and Black Sea were set to increase to 2.68 million tonnes in January, good for 8% month-on-month increase from December’s volume and the highest export rate since January 2020.
The European Union will ban Russian oil product imports by Feb. 5. This follows a ban on Russian crude that took effect in December.
Exports of Russia's flagship Urals crude blend from the Baltic Sea ports are, however, expected to fall to around 5 million tonnes from 6 million tonnes in November, thanks to an EU embargo on Russian oil and a Western price cap, according to Reuters calculations. Some estimates have predicted it could fall as low as 4.7 million tonnes.
The $60 per barrel price cap introduced by the European Union, G7 nations and Australia allows non-EU countries to import seaborne Russian crude oil, but prohibits shipping, insurance and reinsurance companies from handling cargoes of Russian crude unless it is sold for under $60.
Traders have reported to Reuters that Russia is struggling to fully redirect Urals exports from Europe to other markets such as China and India India and is also having a hard time finding enough suitable vessels.
Russia’s problems have been compounded by a shortage of non-western tonnage, moderate demand for the grade in Asia, especially in China and a weak export economy. Indeed, Reuters has reported that Russia’s pipeline monopoly Transneft has been unable to fill some of the available loading slots due to a lack of bids from producers while other slots were postponed or canceled. Only China, India, Bulgaria and Turkey are currently willing to buy Urals with the blend now being sold to export markets at below overall production cost including local levies.
Widening Budget Deficit
Back in December, Russia's Finance Minister Anton Siluanov said that the country’s budget deficit in 2023 might exceed the expected 2% of GDP as the oil price cap takes a hit on export income. That marked the first time a Russian official has acknowledged that the $60 per barrel price cap imposed on Russia by Europe and G7 nations will negatively impact its economy. Siluanov said that the country will be forced to tap debt markets to bridge the deficit. Russia is projected to have used over 2 trillion roubles ($29 billion) from the National Wealth Fund (NWF) in 2022 as total spending exceeded 30 trillion roubles above the initial budget.
Russia’s economy is expected to contract in the current year, with Central Bank governor Elvira Nabiullina citing “worsening trade conditions” as a key reason. Russia’s cash flows are expected to weaken considerably in 2023 as oil and gas sales to Europe plunge. Ukraine’s Ministry of Economy says it expects that the EU embargo on Russian oil and petroleum products should cut Russia’s profits by at least 50%.
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"We expect the collapse of profits from oil and gas exports to be at more than 50%, precisely because of the introduction of the EU embargo on oil and petroleum products and the introduction of price restrictions. Oil and gas account for 60% and 40% of federal budget revenues. We expect that Russia's revenues will fall below the critical level of $40 billion per quarter," Yuliya Svyrydenko, First Deputy Prime Minister and Minister of Economy of Ukraine has said. She has expressed hope that plunging profits will make it more difficult for Russia to continue waging an expansive war.
Meanwhile, the Russian rouble has finally caved in, slumping past 70 per U.S. dollar to a more than seven-month low courtesy of plunging crude prices as well as fears that sanctions on Russian oil could hit the country's export revenue, Reuters reports. Russian equities have also taken a hit, with the dollar-denominated RTS index finishing in the red last year.
By Alex Kimani for Oilprice.com
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1- Despite sanctions, bans and price caps. Russia’s achievements in 2022 were truly impressive. It had a current account surplus of $228 bn, a trade balance surplus of $290 bn, an average of 7.8 million barrels a day (mbd) of crude oil and petroleum products exports or 98% of pre-Ukraine level of 8.0 mbd, an oil production exceeding 11.0 mbd and an economy in far better shape than the United States’ and the EU economies.
2- There is no justification whatsoever for Russia’s budget to contract in 2023 as the budget is based on $40 a barrel which is 50% lower than current Brent crude price. If oil prices fall in 2023, then Russia and all OPEC+ producers will get less revenues. However, I hasten to add that oil prices are projected to rise further in 2023 with Brent breaking through $90 during the first or the second quarter of this year and possibly touching $100 during 2023.
3- And while Russia offers preferential prices to its loyal customers, Bloomberg’s claim that Russia is offering a discount of $33.28 a barrel is unsubstantiated as nobody except Russia is privy to the offered discounts.
4- BP’s claim that Russian crude oil output could decrease to 7.9 mbd by 2035 is as false as its CEO’s Bernard Looney’s claim in 2020 that peak oil demand is now behind us. He was forced in 2021 to retract his false claim saying peak oil will arrive in 2030. The notion of peak oil demand is a myth. Demand for oil will continue to grow well into the future albeit at a slightly decelerated rate until an alternative to oil is developed which is unthinkable in the next 100 years or until global proven reserves are completely depleted completely which is very unlikely.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert