The Golden Age of Russian Oil Nears an End

Preface.  One huge factor in Russia’s future oil decline not mentioned below is how incredibly corrupt and inefficient Russia’s oil and gas companies are, as Rachel Maddow describes in her book “Blowout”. A few quotes:

The Russian oil and gas industry Putin controlled was known for its “tumbledown” machinery and technological deficiencies, coasting on the assets inherited from the Soviet Union. Virtually all of Russian oil comes from fields that were already known in Soviet times. There have been very few new discoveries that are producing today. The drama of this situation is that the inheritance is now starting to run down. What’s left is offshore arctic and tight shale, both difficult and expensive to get.

Russia isn’t capable of doing offshore drilling operations in the frozen north, with little in the way of useful drilling rigs or equipment of any kind–not even basics like subsea wellheads. In 2012, having made Russia’s economy and its power in the world almost entirely dependent on oil and gas, Putin faced a serious conundrum: his ability to maintain Russia’s place as an “energy superpower” depended almost entirely on availing himself of the expertise and technology of major Western oil companies, because Russian oil companies were gangster economy creations, and not one of them was technically or even financially competent.

Gazprom wasn’t able to keep up with all the new European demand, because its production capabilities sucked. The company hadn’t invested in new technologies, because as a state-sanctioned monopoly propped up by the Russian government and therefore free from competition, it really hadn’t needed to. Dig deep enough in the company accounting ledgers and you’d find that Gazprom lost about $40 billion a year to corruption and waste. That’s a loss nearly equal to its annual profits.

Gazprom lost money in other ways, buying a TV station for example. Why? Well, why not? Gazprom was better understood not as an energy company but as a big battering ram President Putin used to get stuff he wanted. So inefficient, money-bleeding, crappy Gazprom owned a television station and a bunch of other media properties, but only because Putin had arranged it in order to silence one of the few remaining critical voices in the Russian press. Vladimir used his security forces to arrest and to intimidate the critic who owned the media company, and then he used Gazprom as the piggy bank to buy the company at a steep jailhouse discount. Independent television journalism in Russia was thus dealt another blow, and Putin would instead have another reliable mouthpiece for the Kremlin’s party line.

Nord Stream was a pipeline project that was built from both sides at once—from Russia and from Germany. Same pipeline, same materials, same building standards. But the Russian side of the construction project (led by the Rotenberg brothers of St. Petersburg, and remember them) cost three times as much, per mile of pipeline, as the German side did. That money was not going into the pension and health fund of the Russian pipe fitters’ union; it went into the pockets of Putin and his pals. The founder of Grant’s Interest Rate Observer, James Grant, sized up Gazprom and rated it, simply, “the worst managed company on the planet.”

Putin had been gangstering up the Russian oil industry for years. Eschewing competition that might encourage innovation and meritocratic success, Putin instead just smashed and grabbed any homegrown enterprises that proved resourceful or entrepreneurial or attractive to legitimate investors-goodbye, Yukos. He harassed foreign interlopers, too.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer, Barriers to Making Algal Biofuels, and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Collapse Chronicles, Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report

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Stratfor. 2020. The Golden Age of Russian Oil Nears an End.

Highlights

  • In the next 10-20 years, Russian oil will become more expensive as extraction from less accessible basins becomes necessary to maintain current export levels.
  • Internal inefficiencies within Russia’s oil sector, as well as the remote locations of remaining reserves and potential shifts in future oil demand, add up to a murky future for the country’s energy-reliant economy.
  • Moscow may adjust its budget to ensure plummeting oil prices don’t cut into its government spending, but proper economic diversification away from energy remains a complex and unlikely process.
  • Russia prices will continue to rise as total output becomes more reliant on difficult extraction further away from population centers (Moscow, for example, is closer to London than it is to the oil reserves locked underneath East Siberia).

Russia’s easily accessible oil reserves have long been the cornerstone of its economy. But these conventional fields are depleting, leading to the need to invest and expand into more untapped sources. This transformation will not be easy or cheap, as various factors have led to a poorly optimized oil sector that’s ill-equipped to soften the blow of rising costs. The key to maintaining a strong energy market, and securing the capital needed to develop new and expensive fields, will instead rest on whether Moscow can secure its foothold in China’s increasingly oil-hungry market. In any case, Russia may have little choice but to accept that its glory days of oil dominance and high profit margins are nearing an end.

Russia’s days of cheap and easy-to-access oil are numbered. As active reserves shrink, energy producers will eventually be forced to shift extraction to lower-margin, higher-cost areas.  These compounding hardships will not be limited to the oil industry, however, as the coupling of energy rents and government expenditure will radiate the damage throughout Russian society.

In the mid-2000s, West Siberian conventional fields revitalized the Russian economy, producing vast sums of low-cost oil at a time of rapidly rising global demand. But 15 years on, many of these fields have since plateaued or begun to decline. New fields have the potential to largely offset this decline, but developing these areas come with higher upfront costs and will also eventually progress to a stage of declining production sometime in the 2030s.

To maintain supply, Russian oil producers will thus be forced to explore new avenues of “unconventional” production in the years ahead, generally situated in the following two categories:

  1. Hard-to-recover reserves in the Caspian, Black and White sea regions, as well as deep drilling in the Arctic (currently curbed by sanctions) and East Siberian fields. Accessing these reserves, however, require considerable upfront investment or hefty tax incentives.
  2. Shale reserves are perhaps more prevalent in Russia than anywhere in the world, with key areas being the Bazhenov and Domanik formations. But Russia’s lack of tools to efficiently extract the resource due to sanctions, combined with poor inter-industry competition, has led to a measly output of 15,000 barrels of tight oil per day at a steep price tag.

Russia is pessimistic about its future.  In a draft of its 2035 Energy Strategy, the best case scenario has oil production remaining unchanged, with pessimistic reports projecting a 12-40 percent plunge in production. 

Shale oil is already three times as expensive as conventional oil. 

Failure to Optimize Production

Russia’s current energy sector is also ill-equipped to soften the blow of rising costs due to the following key factors:

  • Russia’s inefficient and poorly integrated refinery network has led to higher demand from key markets for bulk crude in lieu of more profitable finished products. For environmental and efficiency reasons, Europe prefers to refine oil exports themselves. But the continental market’s preference for Russian crude instead of finished products has likely strained the longevity of West Siberian fields. In recent years, Russia has exported crude volumes on par with Saudi Arabia, despite possessing a third as many known reserves in less accessible basins. The inability to lengthen this supply has expedited the need to enter harder-to-access areas. While neither Russia’s style of export or price-taking has been too pernicious when production is cheap, rising costs will magnify these weaknesses.
  • A lack of globally respected financial institutions has robbed Russia of the economic alpha gained from national marketplaces, exacerbating its reliance on Brent pricing and dollar-denominated oil.
  • International sanctions have prevented the sale of advanced oil extraction equipment (99% which Russia imports), limiting Russia’s ability to take full advantage of offshore reserves or shale deposits. While backdoors to sanctions exist, Russia remains intensely reliant on international support to prop up advanced extraction. Western restrictions will thus continue to hamper Russia’s ability to crack the true potential of its remaining assets.
  • The lack of competition in Russia’s oligopoly oil market has edged out small-scale innovation: Large producers have already licensed nearly all (95.7%) of the country’s proven reserves, and 88 percent of its estimated reserves.
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3 Responses to The Golden Age of Russian Oil Nears an End

  1. Kevin M. says:

    Back in 2012 it was projected that some time in 2030 Saudi Arabia may stop exporting.

    I think short of some scientific and engineering miracles we have about 10 years to get things figured out before it’s too late. If we wait too long we won’t have the time, energy, and resources to get things set up. We need to get as much stable “clean” energy on the grid as possible, for example hydro. Prepare our cities to use less energy possibilities include bike lanes, mass transit, passive heating and cooling, density, deurbanization, and turning most of the suburbs back into small farms. Restore the lands using industrial agriculture and encourage smaller farmsteads using permaculture. If we do these things now the US could probably ride an energy decline down without it being a complete disaster.

    And even if we do find a cheap, clean, abundant way to power our society none of the things mentioned above are bad for society. Dams have other benefits besides electrical generation such as some flood control and water storage for drought. Permaculture principles done right create beautiful places that can be quite good for wildlife.

    https://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9523903/Saudis-may-run-out-of-oil-to-export-by-2030.html

    • VFatalis says:

      There’s not much room to build extra hydro, but you’re probably aware of that.
      In principle, I agree that we must reduce our energy consumption and encourage permaculture.
      But let’s be honest, only a tiny portion of people are willing to make such changes, while the demise of our civilization is already there…
      Prepare for the crash…

  2. Kevin M. says:

    Stable is a relative term here as well I realize hydro isn’t always generating but if it’s 8 or 9 months out of the year peaking in the off season for farming then that could probably work.