Russian oil production has been falling since its invasion of Ukraine. Russia’s crude producers are struggling to place all their oil on the market—especially the European one—and domestic refinery throughput is also slumping amid lower demand. Despite this, rising oil and gas prices have resulted in record-high oil and gas revenues for Russia.
The biggest Russian oil producer, Rosneft, is also the biggest loser in the decline of oil production as it runs into difficulties with selling all its oil abroad and increasing crude processing at home, according to industry data and data from the Russian Energy Ministry calculated by Bloomberg.
Rosneft—led by a long-time ally of Vladimir Putin’s, Igor Sechin—is suffering from a combination of lower exports, lower refinery runs domestically, and the exodus of Western oil firms from joint projects in Russia following Putin’s invasion of Ukraine.
Russia claims that it has started restoring output lost in the past two months and that it is finding a home for its oil away from Europe.
Yet, analysts reckon that Russia’s oil production could lose 3 million barrels per day (bpd) in the second half of 2022, and its production is set to be impacted for years by the sanctions its largest market—Europe—is imposing. Some wells that have been shut down since the invasion of Ukraine at the end of February may never return to produce oil again, permanently eroding some of Russia’s spare production capacity, analysts say.
In the middle of May, Russia’s oil production was 830,000 bpd lower than it was in February. Rosneft—the top producer and the top refiner in Russia—accounted for 560,000 bpd of this drop, data from the energy ministry compiled and calculated by Bloomberg showed.
Moreover, the share of Rosneft’s idled wells jumped from 17% of all wells at the start of the year to as much as 30% in April. Idled wells at Rosneft’s unit Bashneft accounted for 55% of all Bashneft wells in April, per industry data Bloomberg has seen.
Rosneft’s refinery throughput also slumped—by an estimated 28% in early May compared to before the war in Ukraine.
“The main factor driving production trends across Russian companies is their ability to sell oil for export and to increase processing inside the country,” Daria Melnik, senior analyst at Rystad Energy, told Bloomberg.
Then there is the Sakhalin-1 project—which Exxon decided to quit in the early days of the invasion and in which Rosneft is a partner. Production at Sakhalin-1 is down by a massive 71% compared to pre-war levels, per data compiled by Bloomberg.
Since the war started, Rosneft has had trouble finding buyers for cargo containing millions of barrels of spot crude, as Europe shuns Russian oil while China and India are not enough to absorb all the oil unwanted in the West.
Russia’s crude oil production is estimated to have plunged by almost 9 percent in April to average just 9.16 million bpd, more than 1 million below the country’s quota in the OPEC+ deal.
The International Energy Agency (IEA) estimates that Russia already shut in nearly 1 million bpd in April.
“Following a supply decline of nearly 1 mb/d in April, losses could expand to around 3 mb/d during the second half of the year,” the IEA said.
So far, Russian oil exports have largely held up. Still, as of May 15, the major international trading houses had to halt all transactions with state-controlled Rosneft, Gazprom Neft, and Transneft under the EU sanctions imposed on Russia.
That’s not even considering the effect of an EU embargo on Russian oil. Signals are emerging that after weeks of negotiations, the EU could be close to reaching some sort of compromise with holdout Hungary on imposing a ban.
Russia, for its part, says it had increased oil production in May by 200,000-300,000 bpd after a large decline in output and refining in April, and dismisses any suggestions that there is a crisis in its oil industry.
“We are in constant contact with our oil and gas companies and we do not see any serious problems that would indicate that our industry is in some kind of crisis,” Russian Deputy Prime Minister Alexander Novak said via news agency TASS.
“Yes, we received a certain shock that allowed us to find new balance points and enter new export opportunities, including redirecting energy resources to new markets, creating new supply chains,” Novak added.
Russia is boosting exports to India and China, but analysts doubt the Asian market would be able to absorb all the 4 million bpd of oil Russia was sending to Europe before the war.
“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,” Rystad Energy’s Melnik said earlier this month.
Crude production could start recovering in the middle of 2023 if the Russian economy manages to get over the sanctions and create additional domestic demand for oil, Rystad Energy noted.
“However, many shut-in wells may not come back into production, meaning that some Russian spare capacity will be destroyed,” the energy intelligence firm says.
By Tsvetana Paraskova for Oilprice.com
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