The Inevitable Decline Of Russia’s Oil Industry

·4 min read

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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