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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The Key Swing Producer Behind The OPEC+ Deal

Russia continues to be the key partner of OPEC and its largest producer Saudi Arabia in managing the oil market. For a second production cut deal in a row, Moscow joined the cartel’s cuts, taking the lion’s share of the cuts intended for the non-OPEC members of the pact.

For a second production cut in row, Russia will be gradually reducing output and could reach its share of cuts by the end of the first quarter, its Energy Minister Alexander Novak said this week.

Russia’s oil production will be cut from the October baseline, which was a new post-Soviet record high of 11.41 million bpd. Between May and October this year, Russia had reversed its entire 300,000-bpd cut that was pledged as part of the initial deal and added even more on top of that, as Moscow, Saudi Arabia, the UAE, and Kuwait pumped more oil to offset what was expected to be a steep drop in Iranian oil supply due to the U.S. sanctions.

The production cuts may have postponed plans of some Russian oil companies to boost output, but the reductions and ramp-up in a few months have shown Russia’s capability to play the role of a key global swing producer, second only to Saudi Arabia, according to analysts at S&P Global Platts.

“Russia’s rapid production growth from May through October demonstrated its ability to be a key swing producer, at a level below that of Saudi Arabia but as high as any other country in the world,” S&P Global Platts Analytics’ Paul Sheldon says.

While several of the non-OPEC nations will largely rely on natural decline—take Mexico for example—Russia will be purposefully cutting 228,000 bpd between January and June 2019, more than half of non-OPEC’s 400,000-bpd total reduction pledge.

Although the new OPEC+ production cut deal is currently for a six-month period with an option to review in April, and it’s not certain how long these cuts will actually last, Russia’s production could continue to surprise on the upside after the cuts expire, Platts Analytics says, contrary to the gloomy scenarios proposed by the International Energy Agency (IEA) and Russia’s own energy ministry.

Russia’s oil production could peak as early as in 2021 due to high taxes and costs, provided there are no benefits for exploration or tax incentives introduced, Novak said in September this year. By 2021, Russia’s oil production will rise to 570 million tons, which, without more benefits and lower taxes, could be the peak oil production, Novak warned. Related: Interest Rate Hike Hits Oil Hard

If current production trends continue, and if Russia doesn’t do anything to further stimulate oil exploration and new field development, after 2021, production may start to fall and reach just 310 million tons by 2035, that is, Russia’s oil production could drop by 44 percent by then, according to the energy minister.

Due to the OPEC+ production cuts, Russia’s crude oil production in 2019 could be lower than originally planned—at 552 million tons, or 11.085 million bpd, Novak said this week.

According to Novak, plans for next year were for Russia’s oil production to stand at 555 million tons-556 million tons, or 11.145 million bpd-11.165 million bpd, but a lot will depend on Russia’s oil production policy after the first half of 2019.

The IEA, for its part, sees a possible decline after 2020, “if Russian companies are unable to secure the technology and financing necessary for the next generation of projects and the government fails to offer more extensive tax breaks to encourage investment.”

Yet, Platts Analytics’ Sheldon begs to differ:

“We take any doomsday scenarios with a grain of salt. Betting on any decline in Russian production has been a losing proposition since 1999.” Related: Major LNG Shortage Increasingly Likely

Russia’s huge reserves, growing technological capabilities of domestic companies, and an eventual removal of the Western sanctions could also help Russian oil production “at some point down the road,” Sheldon says. According to Platts Analytics, Russia’s oil production will be in the 11.3 million bpd-11.4 million bpd range between 2027 and 2040.

To stimulate production and development of oil fields, Russia is also overhauling its complex taxation system for the oil industry—currently some of the most burdensome oil taxes in the world. Moscow will test in 2019 a new profit-based tax for several types of oil fields, including such in the key Western Siberian region, which is expected to ease the tax burden and at the same time encourage field development.

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh G Salameh on December 23 2018 said:
    Russia and Saudi Arabia account for 27% of global oil production, 27% of global oil exports and 22% of the world’s proven oil reserves according to the 2018 OPEC Annual Statistical Bulletin and the 2018 BP Statistical Review of World Energy. They are the two countries in the world capable of flooding or starving the global oil markets. Moreover, Russia is emerging as the swing producer.

    One can’t but notice the pivotal role Russia has been playing in OPEC decisions and its growing influence in the global oil market. If not for Russia’s efforts and agreement to cut 228,000 barrels a day (b/d) from its production, there might not have been a new production cut agreement in the OPEC meeting on the 6th of December in Vienna. In effect, Russia’s influence on OPEC decisions is now far bigger than the overwhelming majority of OPEC members. Its collaboration with Saudi Arabia is influencing the global oil market but this sometimes goes contrary to the interests of the OPEC members as was the case when they jointly added 650,000 b/d to the global oil supplies in June against the wishes of the overwhelming majority of OPEC members.

    The cooperation between Russia and Saudi Arabia was motivated by their determination to bolster oil prices as both countries suffered badly from the declining oil prices. However, with the huge diversification of the Russian economy ordered by President Putin in the aftermath of the US sanctions on his country after the annexation of the Crimea, Russia can now live with an oil price of $40 a barrel or less compared to $106 for Saudi Arabia.

    Still, the Russian-Saudi partnership is a tactical one used by President Putin to enhance his country’s influence over the global oil market. Besides driving a wedge between Saudi Arabia and the United States, Russian-Saudi cooperation has positively impacted mutual investments and access to energy resources. Saudi oil minister Khalid Al Falih has said that his country could buy 30% of Russian gas company Novatek’s next big LNG project Arctic-2. The project is estimated to cost $21 billion with a planned start-up date of the first line in 2022-2023.

    Russia is the world’s largest oil producer currently producing 11.41 million barrels a day (mbd). Due to the OPEC+ production cuts, Russia’s crude oil production in 2019 could be 11.085 mbd.

    And despite gloomy scenarios by the International Energy Agency (IEA), Russia could still be producing 11.45 mbd by 2021. And with the new reserves in the Russian Arctic, Russia could raise its production to 12.5 mbd by 2025.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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