While there has been no love-loss between the U.S. and Russia in recent years, news coming out of Moscow yesterday was sure to cheer the most ardent Russian naysayers in both Washington and especially the U.S. energy patch.
A Russian government official, according to a Bloomberg report, asking to not be named since the information hasn’t been made public yet, said on Thursday that the country’s oil production increased to a new post-Soviet high and is fluctuating between 1.54 million and 1.55 million tons a day, driven mostly by state-run energy firm Rosneft.
Those numbers equal between 11.29 million and 11.36 million barrels per day (bpd) of output, bypassing a previous record set in October 2016, just a few months before Russian agreed to participate with a Saudi-led OPEC to reign in an over supplied global oil market and prop prices back up from multi-year lows.
News about Russia’s increased oil output comes a few days before the next meeting between OPEC and non-OPEC producers in Algiers where the informal group of producers will discuss their next step amid the variety of challenges facing current global oil markets as well as make a decision whether or not to extend their cooperation into next year - a safe bet would be that the game is still afoot and that cooperation will be extended
Top of the agenda at Algiers is sure to include talk about fresh U.S. sanctions that will hit Iran’s energy sector on November 4, and continued problems with Venezuela’s output and uncertainty going forward over Nigerian and Iraqi production. The meeting also comes amid worries that increased trade war moves by Washington against China and counter tariff moves by Beijing will eventually hurt economic growth and dampen global demand for crude oil.
Trump’s global oil markets playbook
There are also some prominent takeaways from yesterday’s disclosure. For starters, Moscow has played perfectly, perhaps unwittingly, into President Trump’s playbook of drumming up support for more oil production as crucial mid-term Congressional elections near on November 6, just two days after fresh sanctions will hit Iran. Related: Iran Starts Air Force Drills Near The World’s Crucial Oil Chokepoint
Republican Congressional hopefuls as well as incumbents need oil prices to remain below the psychologically important $80 per barrel price point in order to help keep gasoline prices from increasing more but also to avoid criticism from Democrats that Trump’s Iran policy is hurting voters’ pocketbook.
So far, Republicans can try to ride the coattails of a Trump initiated strong economy, stellar stock market performance, despite multi-year high stock valuations, and low unemployment, but historically higher gasoline prices can play a heavy toll on incumbents seeking re-election. For those old enough to remember the waning days of the Carter Administration, that lesson is still clear.
This week Trump has already taken to Twitter (again) to lambaste OPEC for higher oil prices, in what must appear a dismal déjà vu nightmare for the Saudis who have to balance the appearance of too much concession to Trump over oil prices and the desire to have support for higher oil prices to still offset several years of budget deficits incurred during the roil in global oil markets from late 2014 to early 2017.
It’s a balancing act that has caused the Kingdom to lose face with its fellow OPEC members, and has particularly drawn ire (even ridicule) from Iran, its fellow OPEC producer and arch-rival for geopolitical hegemony in the Middle East.
Trump, for his part, is also using Twitter as a way to appear to voters that he is in their corner and doing everything he can to put downward pressure on higher oil prices, and consequently higher gas prices at the pump. However, at the end of the day higher gas prices may not only hurt Republican chances in November but also spiral out of control for Trump as a large segment of voters magnify their disapproval of the president. In essence, voter angst over gas prices could spill over to the 2020 presidential election season.
Headwinds for Russian oil production
However, U.S. politics aside, there is another take-away from yesterday’s Russian oil output disclose. Russia’s high oil output numbers may not last, something major oil producers that use oil revenue as a major source of government funding dread talking about.
Russian Energy Minister Alexander Novak said on Tuesday that Russia is only three years away from maximizing oil extraction output before costs and taxes drive down production.
“We expect about 553 million [metric] tons of oil production in 2018. We will reach a peak of 570 million tons in 2021,” Russian news agency Interfax quoted Novak as saying Tuesday.
Almost half of current capacity could be lost in less than two decades, Novak said, with levels expected to drop to 310 million tons by 2035. Current reserves stood at 29.7 billion metric tons of oil as of early 2017, he estimated.
Without stimulating oil production, Novak warned Moscow’s budget risks losing 3.3 trillion rubles ($46.2 billion) in taxes and 1.3 trillion rubles ($19.4 billion) in investments beginning in 2022. “This is the inevitable result of increased production costs and excessively high taxes in West Siberian oil fields,” he said. Related: Iran: We Won’t Let OPEC Boost Production
Moscow, for its part, has changed the minerals extraction tax and the export taxes on hydrocarbons several times over the past couple years. Some of most recent changes and proposals for upcoming changes have generally been in favor of raising the taxes paid by oil and natural gas companies.
Reports claim that as much as 50 percent, possibly more, of Russia’s federal budget is derived from oil and gas revenue. However, Moscow disputes the higher figures, claiming that only about one-third of its budget is derived from its oil and gas exports.
Late last year, Moscow sough to put an end to its addiction to oil revenue by passing a fiscal rule that provides, among other items, greater predictability to medium-term budgeting where a portion of the oil and gas revenue the federal government can spend in a given year will be determined by a fixed oil price benchmark.
By Tim Daiss for Oilprice.com
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Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic, but it needs sophisticated Western technology and services to actually extract it. ExxonMobil’s withdrawal from its joint venture with the Russian oil giant Rosneft in the Arctic under pressure from US sanctions has not deterred Rosneft from drilling in the area using home-grown technology.
The Russian Arctic could add more than 1.5 million barrels of oil a day (mbd) to Russia’s current oil production of 11.2 mbd thus consolidating Russia’s position as the top oil producer in the world well into the future.
The projected increase in oil production from the Russian Arctic will more than offset any decline in Russian oil production in coming years from existing maturing oilfields. Moreover, improving oil extracting technology and rising oil prices in the future will enable Russia to continue producing from these maturing oilfields for many years to come thus mitigating the impact of rising costs of production from these fields.
Russia’s budget’s dependence on the oil and gas export revenues has declined from 68% at the time of the oil price crash in 2014 to less than 48% now as a result of extensive diversification programme of the Russian economy. This meant that the Russian economy could now live with an oil price of $40 a barrel or less forever
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London