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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 Inevitable Decline Of Russia’s Oil Industry

  • As the European Union prepares to place an embargo of some sort on Russian oil imports, Russia will be unable to redirect most of that oil elsewhere.
  • Pivoting to Asia will require massive infrastructure investments that would cause Russia’s production and revenue to plunge.
  • In the meantime, a lack of storage in Russia would mean the country will have to reduce production.

Russia’s oil production is already falling and will continue dropping in the coming months and years as Moscow will not be able to redirect to China and India all the volumes it is losing in the West.   As the European Union tries to work out the details of a proposed full embargo on Russian oil imports by the end of the year - by potentially exempting Hungary and Slovakia for two years from complying with a ban - buyers in Europe and major international traders are increasingly shunning Russian oil.   

Western sanctions on banking transfers and the expected EU embargo have forced Russia to reduce oil production. Russia simply doesn’t have enough storage, and its willing customers in emerging Asia are not expected to offset the drop in deliveries to Europe fully. 

Sanctions and embargoes over Putin’s war in Ukraine will cripple Russian oil production for years to come. Restrictions, combined with the lack of access to Western technology to pump harder-to-recover oil and enhance production from maturing wells will hit Russia’s oil industry not only in the near term but also in the long term, analysts say. Many wells may never be revived to pump crude again, they add. 

In the early days of the Russian invasion of Ukraine, Standard Chartered said that Russia would have to shut in some of its oil production as it would be unable to sell all the volumes displaced from European markets to other regions. According to Standard Chartered, “We expect continuing consumer reluctance to buy from Russia and shortages of capital, equipment and technology to continue to depress Russian output over at least the next three years.” 

Two months later, the Western pressure over Russia’s oil industry has escalated to deliberations on how to enforce an EU embargo, with Hungary a major holdout to a ban as of early Monday. 

Most analysts believe that the EU will reach some kind of a compromise on the embargo. Still, even if a ban is to come into force in several months, EU member states will be looking at ways to replace as much Russian oil as possible, to stop being beholden to Putin for a large part of their energy supply. 

With the West on an irreversible path to part with its dependence on Russian energy, Russia’s oil production is set for years of decline, analysts say. China and India, which haven’t shied away from buying heavily discounted Russian crude, will not be able to offset all the losses from the West. Moreover, it would take Russia years to redirect more oil flows to emerging Asia, considering the major shift in trade and tanker routes necessary to ship its crude to the East. 

“An EU embargo on Russian energy would surely cripple the Russian oil and gas industry because Russia would struggle to find alternative buyers for all of its energy and would end up shutting in production — ultimately crimping revenues which its economy is so reliant upon,” Matt Smith, lead oil analyst at Kpler, told Insider’s Phil Rosen

Related: JPMorgan Slashes Demand Outlook Amid Soaring Oil Prices

Russia itself has admitted that its oil production could drop by 17 percent this year due to the sanctions, TASS news agency reported, citing Finance Minister Anton Siluanov. In April alone, oil production fell by 9 percent from March. 

Current supply losses from Russia at around 1 million barrels per day (bpd) could double this month, BP’s chief executive Bernard Looney told CNBC last week.  

According to Mike Muller, head of Asia at Vitol Group, “There is an increase in backing in of supply from Russia,” the executive at the world’s largest independent oil trader told a Gulf Intelligence podcast on Sunday. Losses will mount starting as early as next week, he says.

“We’re virtually on top of that date where the international banking system just cannot make payments to Russian entities work,” Muller told the Gulf Intelligence webinar. “EU sanctions prohibit a whole number of things from May 15,” he added. 

Major international traders have already said they would either cut or phase out purchases of Russia’s crude in the coming weeks. Vitol itself plans to wind down its activities involving Russian crude oil by the end of this year, Bloomberg reported last month, citing a spokesman for the company.  

Even though Russia is currently capitalizing on high revenues with the high oil and gas prices, its oil industry could be in for a terminal decline and lose 2 million bpd of production by 2030 compared to 2021, Rystad Energy said earlier this month. 

“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,” says Daria Melnik, senior analyst at Rystad Energy. 

“The situation will be aggravated by a lack of investments and foreign technologies, which will lead to lower drilling activity. Russia is, as a result, not expected to return to pre-conflict production levels even by 2026,” the energy intelligence firm said. 

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Steven Conn on May 09 2022 said:
    Demand for natural gas, oil, and coal is at an all time high. Scenarios outlined in the article are only some of the possibilities. Russia has already begun to reorient its oil and gas exports to Asia about a decade ago and now we see ESPO pipeline, Yamal LNG, Power of Siberia I, Blue Stream and Turkish Stream. In 2022 India and China - the two largest and fastest growing energy markets - are buying increased quantities of Russian energy. Beyond them is the other growing Asia - Turkey, Indonesia, Pakistan, Vietnam. One must also keep in mind that EU energy prices will rise further if in time it manages to replace Russian energy with imports from other sources. How competitive will the EU be against the rising economies of the East supported with more affordable Russian energy?
  • Mamdouh Salameh on May 10 2022 said:
    The author of this article like some of her contributing colleagues tends to repeat the same unsubstantiated claims if not plain untruths thinking that by repeating them day in day out would make them truths. But the realities in the markets give the lie to her claims. Examples abound.

    1- The author claims that buyers in Europe and major international traders are increasingly shunning Russian oil. This is a plain lie. If that was true, we would have seen Brent crude by now headed toward $140-$150 a barrel.

    2- The second unsubstantiated claim is that Western sanctions on banking transfers and the expected EU embargo have forced Russia to reduce oil production. This is another plain lie. In fact, Russia’s crude oil production is on the rise in May according to Alexander Novak, Russia’s Deputy Prime Minister. Russia’s April’s OPEC+ production quota was set at 10.436 million barrels a day (mbd) but its production in May is averaging 10.28 mbd, a miniscule 1.5% short of its quota.

    3- The third unsubstantiated claim is that Western sanctions will cripple Russian oil production for years to come. As a matter of fact, Western sanctions are hurting the economies of those imposing them more than hurting Russia’s economy. The Russian economy is raking in cash from rising coal, gas and coal prices.

    4- A fourth unsubstantiated claim is that lack of access to Western technology will hit Russia’s oil industry not only in the near term but also in the long term. This is another plain lie. Russia neither needs Western technology nor Western financing. It has its own homegrown state-of-the-art oil technology and the finances to boot. The development of the huge Russian Arctic oil and gas reserves is a case in point. Russia will be adding 1.5 mbd to its oil production by 2024/2025.

    5- The author quoted Standard Chartered making another unsubstantiated claim that Russia would have to shut some of its oil production as it would be unable to sell all the volumes displaced from European markets to other regions years. Nothing is further from the truth. Russia has been selling large volumes of its oil to China and India. In fact, China announced yesterday that its imports of Russian oil are already on the rise while India just announced two days ago that it bought 5.131 mbd.

    6- The author has quoted Rystad Energy claiming that the Russian oil industry could be in for a terminal decline and lose 2.0 mbd of production by 2030 compared to 2021. This isn’t going to happen now or in 100 years with the Arctic having proven reserves of oil sufficient to last more than 100 years. Moreover, I wouldn’t trust a word from Rystad Energy. They are known for their excessive hype of US shale oil potential and production. They were proven wrong then and they will be proven wrong again vis-à-vis Russia.

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

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