Quantifying Crude in Russia Proves Complicated: At the Wellhead

5 minutes, 26 seconds Read

As global oil markets remain heavily oversupplied, Russia’s crude production has shown surprisingly strong growth from the start of 2015. This has sparked concerns its extra barrels could put additional pressure on prices when expected new volumes from other parts of the world, including Iran, flow to the market.

But as with many things in the modern oil world, production and export forecasts can be a fool’s errand as the situation is constantly changing and difficult-to-find Russian data makes it that much more of a challenge to be accurate.

However, because the estimates can have domestic and international ramifications, interpreting the numbers is essential.

Based on a 1.2% production growth rate in the first five months of the year, Russian authorities have revised up their full-year forecast, and now estimate the output to add over 60,000 b/d, or 0.6%, to last year’s 10.6 million b/d.

Production growth, however, has come mainly due to a hike in gas condensate production rather than crude output, deputy energy minister Kirill Molodtsov commented last week.

Russia traditionally includes gas condensate output into the country’s overall liquids production but just a small portion of its output — including those volumes produced at two offshore Sakhalin PSA projects — is added to the crude mix.

The crude oil/condensate balance is important as the bulk of condensate output is processed domestically to make petrochemicals or other oil products. This means increased production may not necessarily result in greater exports of crude oil from Russia.

Gas condensate export volumes, meanwhile, remain small and accounted for just over 1 million mt, or nearly 5% of total production last year, according to the scant data available on this segment.

In the first quarter, gas condensate output jumped 18% year on year to 7.86 million mt due to the launch of new production facilities in West Siberia, primarily by Novatek and Gazprom Neft. Nonetheless, it remains insignificant, accounting for just 5% of the country’s total liquids output.

Thus, even if gas condensate production would continue growing through the rest of the year, it is unlikely to compensate for an estimated 3%-5% natural decline at old oil fields in West Siberia. Russia’s main oil province accounts for around 60% of the country’s total liquids output.

At the same time, the decrease in West Siberian production may still not impact exports as the energy ministry expects some small- or medium-sized inefficient refining facilities to shut down as a result of recent tax changes introduced in January.

This could result in same 100,000 b/d-200,000 b/d being redirected from domestic refining to international markets, the energy ministry estimated.

During the first months of the year, however, operations at those refineries remained rather stable, while the country’s overall refining throughput reduced by a marginal 0.4%, or 20,000 b/d.

Counting condensate as crude oil or closing refineries to squeeze more exports shows the delicate balance the Russian crude sector is trying to maintain, but it does not mask the underlying issue that keeps getting worse: depletion of crude reserves in the country’s main oil province, West Siberia.

Crude production from mature West Siberian fields, particularly those owned by Russia’s biggest oil producer Rosneft, continues to decline and an increase in output from its new oil projects, including in other Russian oil provinces, is no longer compensating for the fall. As a result, Rosneft’s liquids production dropped 0.9% year on year to 4.03 million b/d in January-May.

Rosneft is the only major oil producer in the country whose production continues to decrease, despite a significant hike in drilling operations at the start of the year. But it accounts for nearly 40% of the country’s total output and its production results are having a major impact on the overall operations in Russia.

Despite sanctions that restrict Russia’s access to western financial markets, oil producers had benefited from a stronger dollar on their exports while using a weak ruble to pay for ruble-denominated investments. This, coupled with a flexible tax regime, allowed producers in the beginning of the year to invest enough to increase production.

The effect of these factors is diminishing now, however, as the country’s overall drilling operations growth has slowed from 15% over January-April to just 9% for the first five months of the year. It has continued to reduce in June and if the trend persists it is likely to reach zero soon, according to some market sources.

As Russian producers are expected to continue reducing their investments further in the year, maintaining the country’s crude output will become more of a hurdle, and even a sizable growth in condensate production is unlikely to help mitigate the downward risks.

Request a free trial of Oilgram News

Oilgram News brings fast-breaking global petroleum and gas news to your desktop every day. Our extensive global network of correspondents report on supply and demand trends, corporate news, government actions, exploration, technology, and much more.


Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *