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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Russia's Oil Output Is Plummeting, And It May Never Recover

  • Russia’s oil output is plummeting, and the decline is expected to worsen in May.
  • OPEC recently warned that markets could see the loss of more than 7 million barrels per day of Russian oil and other liquids exports.
  • With many global producers constrained in their capacity to boost production fast, oil prices are likely to remain elevated for the foreseeable future.

Russian oil production is falling. In March, it shed half a million bpd, which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month. These barrels may not be returning to the market any time soon. As the European Union targeted a barrage of sanctions on Moscow, oil was excluded as a direct target but financial and maritime sanctions affected the industry. Now, the EU is proposing a full oil embargo, save for a handful of member states too dependent on Russian oil to comply, and this will mean a further loss of barrels at a time when the global oil market is already stretched thin.

"We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions," the secretary-general of OPEC, Mohammed Barkindo, told the European Union last month.

This does not appear to have made any lasting impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo. Meanwhile, alternative suppliers would struggle to fill the void left by Russian oil.

Russia expects it could lose some 17% of its pre-war oil production this year, Reuters reported last month, citing a document from the country’s economy ministry. The report noted this would be the biggest production drop since the 1990s—a tumultuous time for Russia following the breakup of the Soviet Union.

That would be close to 2 million bpd—a figure similar to Looney’s forecast and also to a forecast made by Rystad Energy about lost Russian oil production between 2021 and 2030. If the Rystad projections are right, the fallout from the EU oil embargo would be limited and most Russian production will simply be redirected as it already is. If, however, production declines more, this could see international prices spike much higher.

When European buyers started refusing to accept Russian oil cargoes, those cargoes had to return home to be stored somewhere. According to local reports, however, storage space is limited, and this has probably forced the idling of some wells, which if idled, can see their ability to produce in the future affected. 

Related: Upstream Oil Industry To See Highest Profits Ever In 2022

But there is also danger ahead for Russia’s future production. This may also not materialize as previously planned because of the exit of Big Oil majors from the country, Dan Dicker, host of The Energy Word, told Yahoo Finance earlier this week. Their exit, combined with financial sanctions on Russian banks, will make developing new resources in eastern Siberia more challenging.

Meanwhile, OPEC is producing less, rather than more, oil, and U.S. producers are under fire from legislators for alleged profiteering from the oil price rally and struggling with shortages of materials, equipment, and workforce.

U.S. oil production will rise by only 800,000 bpd this year, according to the Energy Information Administration’s latest Short-Term Energy Outlook. That’s not good news for America’s European partners. It’s not good news for Americans, either, because it means prices will likely remain high.

Except for OPEC and the United States, there are few producers large enough to spare oil for Europe, if any. Brazil is expanding its oil production but its total stands at around 3 million bpd, which is what the EU was importing from Russia before the war in Ukraine began. That leaves the Central Asian producers, who are parties to the OPEC+ agreement and firmly within the Russian sphere of influence, too.

What all this means is that with the loss of 2 million bpd of Russian production, a lot of the world is in for prolonged oil price pain, which means all-price pain as well. The beneficiaries are China and India, who are buying Russian crude at a discount, with no logical reason for them to stop, despite threats from Washington. But Russia’s oil production could still fall by more than 2 million bpd.

“Europe’s dependence on Russian energy has been a deliberate and decades-long and mutually beneficial relationship. In this early phase of sanctions and embargoes, Russia will benefit as higher prices mean tax revenues are significantly higher than in recent years,” said Daria Melnik, senior analyst at Rystad Energy.

“Pivoting exports to Asia will take time and massive infrastructure investments that in the medium term will see Russia’s production and revenues drop precipitously,” she added.

With most producers constrained in their capacity to boost production fast, should this scenario play out, oil could become a lot more expensive with little in the way of downside pressure, including electric vehicles. Electric vehicles are about to experience a shortage of batteries and still higher prices. There are some really interesting times ahead.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mika Pajula on May 05 2022 said:
    I'm always wondering these assumptions that Russia is so dependant western technology in oil drilling. Soviet union was producing oil a lot without western technology. In addition, Russia has very advanced high tech sector in many areas, nuclear power, space science, machine building, etc. Russians were first in space. Still I read always this same mantra about lack of technology. My honest opinion is that there is a way when there is a will. Now, the will has found. It may take couple of years, but I can guarantee that drilling a hole is not more complicated than to space exploration or nuclear power plant.
    Second problem, funding? If everything is produced domestically funding scheme changes quite drastically. Internal debt is very different thing when compared to external debt. I see these as a challenge not an obstacle. In short term these will slow down development but in midterm to long term russian oil industry becomes more powerful.
  • Mamdouh Salameh on May 05 2022 said:
    The author of this article like many of her contributing colleagues to oilprice.com starts with an unsubstantiated claim and before she has finished writing her article, this claim would have morphed into a fact and conclusions based on it reached.

    Where is the proof? BP’s CEO, Bernard Looney’s claim that Russian oil production shed half a million barrels a day (mbd) which by the end of April reached a full 1 mbd is a plain lie and is no more than sour grapes for BP being forced by Western sanctions to divest of its almost 20% stake in Russia’s oil giant Rosneft. This will cost BP $25 bn loss according to the Wall Street Journal. BP’s stake in Rosneft was its most lucrative investment in the world.

    Moreover, Reuters’ claim that Russia expects it could lose some 17% of its pre-war oil production this year citing a document from the country’s economy ministry is a plain lie. Will the Russian Oil Ministry allow Reuters to see such a document in the first place especially at this tense time between the West and Russia? And if such a document does exist, why doesn’t Reuter publish it so as to prove its claim? My guess is that such a document only exists in Reuter fake news.

    Rystad Energy’s claim that Russian oil production is estimated to drop by 2.0 mbd by 2030 is unsubstantiated. Where is the proof? In fact, Russia’s oil production is projected to add 1.5 mbd by 2024/2025 from Rosneft’s highly successful operations in the Arctic.

    OPEC’s Secretary-General Mohammed Barkindo is absolutely wrong to claim that we could see a loss of more than 7 mbd of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions. Even if the EU bans Russian oil imports, Russia will still be exporting some 4-5 mbd to China, India and other countries in the Asia-Pacific region.

    Moreover, the author’s assertion that when European buyers started refusing to accept Russian oil cargoes, those cargoes had to return home to be stored somewhere. This is the type of a claim that starts as an unsubstantiated claim then morphs into a fact in which a conclusion is then based. There is neither any evidence of customers shunning Russian oil nor returned Russian cargos. It is simply a plain lie. If that was the case, we would have seen Brent crude oil price already headed toward $130-$140 a barrel.

    Furthermore, Russia neither needs Western technology nor Western investments. It has both. The exodus of Western oil companies is a blessing in disguise for Russia because it will acquire all their investments at rock-bottom prices since they can’t transfer their investments to non-Russian companies or entities.

    There is not one single oil producer in the world or a group of producers including OPEC+, US shale oil or Brazil that can replace 8.0 mbd of Russian oil and petroleum products or even half of this volume now in in the next 10 years.

    OPEC+ hardly has a spare capacity while US shale is a spent force unable to raise its production by 200,000-300,000 barrels a day (b/d) with Brazil hardly able to maintain oil self-sufficiency.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Lonnie Griffis on May 06 2022 said:
    Russia's oil industry was collapsing as the old Soviet Union collapsed. It was only saved by an infusion of Western capital and technology. The Russian's paid the West and the Western companies back by nationalizing their holdings, stealing their technology, and abusing their trust. Now, Russia's oil production is failing once again, and is in need of assistance. Only a fool would trust the Russians again after what they did the last time, so they are just going to have to face the music of their own choice.
  • Suqi Madiqi on May 08 2022 said:
    Private sector workers are pushed a lot harder than public sector workers by virtue of their purposes. Private sectors exist to make money, public sectors are supposed to serve the public but end up serving the public service employees (think of the special parking places for judges and the absence of this for walmart managers). My point is that the exodus of money seeking oil companies from russia and the oil companies expertise (read money invested) versus the russian govt companies, it seems very plausible production will plummet.

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