Russia, the world’s third-largest oil producer, has long been an unknown when it comes to the OPEC+ production agreement which caps the petroleum output of participants to support higher prices. It was Moscow’s spat with Saudi Arabia over production quotas in early 2020 which, combined with the emergence of the COVID-19 pandemic, caused crude oil prices to plunge into negative territory for the first time ever. The North American benchmark West Texas Intermediate plunged to minus $37.63 per barrel before recovering, while Brent did not enter negative territory the international benchmark, plunged to an intraday low of less than $15 per barrel. During that time Moscow, Riyadh and other OPEC+ signatories were finally able to agree on production quotas. However, Moscow’s economic ambitions remain a threat to the agreement’s firmness, particularly with Washington threatening further sanctions. With OPEC gradually expanding production quotas set out in the agreement confirmed at the 19th ministerial meeting, there is considerable speculation as to how much global petroleum supply will expand and how that will affect crude oil prices. A key point of conjecture is whether Russia can grow its crude oil output as planned and allowed by its OPEC+ quota, with it speculated that the world’s third-largest oil producer is operating at or near capacity. For December 2021 Russia, according to the Ministry of Energy, pumped an average of 10.903 million barrels of crude oil and gas condensate daily. That number was marginally lower than the 10.906 million barrels produced per day for November 2021 but an impressive 8.4% higher compared to the same period a year earlier.
Government data shows that total annual oil and gas condensate production during 2021 averaged 10.5 million barrels per day, which is over 2% higher than a year earlier. It is anticipated that Russia’s crude oil output will expand further during 2022. The energy ministry predicts that forecast average annual daily crude oil output will climb to between 10.84 million and 11.05 million barrels, which is a 3% to 5% increase over 2021.
Despite concerns that Russia’s petroleum industry reaching production capacity Deputy Prime Minister Alexander Novak, in October 2021, claimed there is ample room to expand crude oil output. Novak, who is the Kremlin’s key negotiator with OPEC, claimed Russia possesses sufficient spare capacity to ramp up production to over 11 million barrels per day. To support this assertion the deputy prime minister cited earlier production records where Russia was pumping up to 11.4 million barrels daily, in February 2020, before the COVID-19 pandemic hit forcing operational shut-ins. While some analysts believe this is not achievable, industry consultancy Rystad Energy, in an August 2021 press release, predicted that Russia’s petroleum production during July 2022 will hit a new record. Rystad is tipping that the world’s third-largest oil producer will pump 11.6 million barrels per day during that month which, if achieved, represents a notable 11% increase compared to the same month in 2021. The consultancy went on to forecast that the world’s third-largest oil producer’s output will continue growing, peaking at 12.2 million barrels per day by mid-2023.
Regardless of those optimistic predictions, there are signs that Russia could struggle to lift petroleum production as predicted. The primary elements governing Moscow’s planned increase in crude oil output are Russia’s OPEC+ quota, external factors such as climate and whether the petroleum industry has spare productive capacity. Under the OPEC+ agreement, which was confirmed at the July 2021 19th Ministerial Meeting, Russia is permitted to pump up to 11 million barrels of crude oil daily until the end of April 2022. For May 2022, the quota will increase to 11.5 million barrels of crude oil per day. Energy consultancy Platts Analytics, in a December 2021 statement, indicated that Russia can produce the volume permitted by the OPEC+ agreement.
Nevertheless, there are several headwinds that can impact Russia’s planned expansion of its petroleum production. One notable risk is the impact of extreme winters on Russia’s hydrocarbon sector, which is an ongoing threat to industry operations and the ability to expand petroleum output. Current harsh subzero temperatures are hampering petroleum operations forcing wells to be shut-in and reducing pipeline flows. That will impact Russia’s January 2022 crude oil production volumes, meaning the country may not achieve the target set by Novak who in a TASS article stated the country would pump 10.1 million barrels of crude oil daily for the month. This has sparked speculation among industry analysts that Russia will not meet its January 2022 OPEC+ production quota of 10.122 million barrels per day. There is also the potential for the coronavirus to sharply impact industry operations with COVID-19 cases soaring since the emergence of the Omicron variant. Russia is ranked sixth globally by COVID-19 cases and fourth for deaths. Pandemic related supply chain breakdowns and the threat of further lockdowns are weighing on the planned ramp-up of industry activity to support the projected production growth. U.S and European Union sanctions against Russia, in response to among other incidents the invasion of the Crimea and Eastern Ukraine, are also a major risk that may impact plans to grow petroleum production. The sanctions targeting various individuals, commercial entities and vessels, including the Nord Stream 2 natural gas pipeline, prevent access to U.S. capital as well as technology to be used in hydrocarbon exploration and field development.
Furthermore, recent investment in developing greenfield and brownfield petroleum projects will not be enough to bolster Russia’s crude oil output. Analysts are concerned that rising oilfield depletion rates will more than offset the volume of new production coming online as various projects are completed and online. The U.S. Energy Information Administration went as far as to state that the development of greenfield projects in Russia may be unable to boost production much higher than the 10.9 million barrels pumped during December 2021. This, according to the EIA, is because the additional barrels those operations will add, when operations come online, are offset by declining output from mature oilfields, particularly in Siberia.
There are growing doubts as to whether Russia can grow petroleum production to the volumes forecast by Moscow and pump the amount of crude oil allowed by the OPEC+ agreement. This is despite some industry experts including Rystad and Platts Analytics predicting that Russian petroleum production will hit a new record by July 2022 and continue rising into 2023. The headwinds faced by Russia’s oil industry could derail those plans. A combination of extreme climate, rising depletion rates in mature Siberian oilfields and U.S. sanctions potentially blocking access to industry investment as well as technology is weighing on the development of hydrocarbon projects. If Russia is unable to grow its oil production at the rate predicted and allowed by its OPEC+ quota, with the country permitted to pump 11.5 million barrels per day as of May 2022, then global supply will not expand as expected. This is because not only are there questions about whether Russia‘s petroleum industry is reaching capacity but if OPEC can lift crude oil output as planned during 2022. If supply does not grow, crude oil prices will remain high further underpinning the inflationary threat which has emerged and possesses the potential to derail the global post-pandemic economic recovery.
By Matthew Smith for Oilprice.com
More Top Reads From Oilprice.com:
Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located… More