When Russia announced last week that it would cut oil production by half a million barrels a day in retaliation against Western sanctions, there was skepticism about whether it was really doing so by choice.
(Bloomberg) — When Russia announced last week that it would cut oil production by half a million barrels a day in retaliation against Western sanctions, there was skepticism about whether it was really doing so by choice.
Russia is entangled in a tightening web of economic restrictions, from prohibitions on exports of technology to the country to a recent European Union ban on most imports of its oil. As far as the West is concerned, Moscow is buckling under the weight of sanctions.
“It wasn’t voluntary, it was forced on them,” Kadri Simson, EU Commissioner for Energy, said in an interview in Cairo. “They don’t have the ability to keep up the production volumes because they don’t have access to necessary technology.”
Yet data from within Russia tells a different story.
Russian companies did the most drilling at their oil fields in more than a decade last year, with little sign that international sanctions or the departure of some major Western firms directly harmed so-called upstream operations. This helps to explain how the country’s oil production rebounded in the second half of 2022 even as further restrictions were imposed on its exports.
“The industry largely continues working just like before,” said Vitaly Mikhalchuk, head of the research center at Business Solutions and Technologies, formerly the Russian unit of consultant Deloitte & Touche LLP. “Russia has been able to retain most oil-service competencies, assets and technologies.”
Since President Vladimir Putin’s decision to invade Ukraine almost a year ago, Russia’s oil industry has undergone the most dramatic change in political circumstances since the collapse of the Soviet Union.
Western majors including BP Plc, Shell Plc and Exxon Mobil Corp. walked away from multibillion dollar investments in the country. Some of the major international service providers followed them. Europe also introduced “comprehensive exports restriction on equipment, technology and services for the energy industry in Russia.”
Yet Russian oil rigs drilled a total depth of more than 28,000 kilometers last year, the highest in over a decade, according to industry data seen by Bloomberg. The total number of wells started rose nearly 7% to above 7,800, with most key oil companies beating their results of the previous year, the data show.
Several factors have helped Russia keep its oil industry ticking over.
First, top international providers accounted for only 15% of the country’s total oil-services segment in 2021, according to data from Vygon Consulting. The in-house units of domestic producers such as Rosneft PJSC, Surgutneftegas PJSC and Gazprom Group make up the bulk of the market, the data showed. Those companies didn’t respond to requests for comment.
“Russian companies attract foreign contractors if they need high-tech services and equipment” as well as advanced software, a report of the Moscow-based consultant said. But such things aren’t generally needed to keep the oil flowing from established fields.
Second, some of the most significant western oil-service providers didn’t leave the country. SLB and Weatherford International Plc continue Russian operations, with some limitations.
SLB Chief Executive Officer Olivier Le Peuch said in July that his company’s unique corporate structure gives it flexibility to work in Russia while fully complying with US and EU sanctions. The company didn’t respond to a request for comment from Bloomberg.
Weatherford said last year that it had halted “any new investments or deploying new technology in Russia,” but its most recent quarterly report still lists the nation among the regions where it operates. The oil-services provider declined to comment on its Russian operations in response to a request by Bloomberg.
Third, the two oil-service giants that did depart Russia — Halliburton Co. and Baker Hughes Co. — sold off their in-country businesses to the local management. This allowed the units to retain personnel and expertise, according to Victor Katona, a crude analyst at Kpler.
BurService, the successor of Halliburton in Russia didn’t respond to written requests for comments. OFS Technologies, formerly the Russian unit of Baker Hughes, could not provide an immediate comment.
The main issue for Russia’s domestic oil industry has been obtaining western high-tech equipment, according to BST. Yet “these problems are resolved thanks to imports through intermediaries in friendly states or by finding alternative suppliers in China,” said Mikhalchuk.
Since hitting a post-invasion low of 10.05 million barrels a day in April, Russian oil production rebounded to around 10.9 million barrels a day at the end of 2022 and stayed close to that level in January.
While the upstream impact of sanctions has been limited, Russia’s oil industry faces other challenges. The country doesn’t have the capacity to store oil on a large scale, so if companies can’t sell what they produce because of Western restrictions the system can quickly become backed up.
That’s what happened in the weeks immediately after the invasion of Ukraine last year, when a buyers strike swelled crude inventories to such an extent that the country was forced to cut output by about 500,000 barrels a day.
There’s no evidence that the Dec. 5 EU ban on crude imports has caused comparable problems, with Russian production holding steady in the two months since then. It’s still early to be assessing the full impact of Europe’s Feb. 5 prohibition on buying Russia’s refined fuels including diesel — for which it was the largest market.
Processing rates at Russian refineries in the first 8 days of February were about 2% above January levels, at just over 5.8 million barrels a day, according to industry data seen by Bloomberg. Spare capacity in the country’s oil inventories was above 25 million barrels as of Feb. 10, compared with 20 million barrels last year when it was forced to cut production.
Long-Term Impact
While western technology sanctions probably won’t have a short-term impact on Russia’s upstream oil industry, the effects may be visible in the long term, said Swapnil Babele, Vice-President at Rystad Energy A/S.
“Performance of some oil services may decline, while losses and risks will be growing,” according to BST’s Mikhalchuk. “A deficit of technologies for development of offshore and some hard-to-recover reserves may become a problem.”
After Moscow’s seizure of Ukraine’s Crimea Peninsula in 2014, an international ban was brought in on providing services for oil projects in Russia’s shale formations, Arctic and deep water. Those measures stymied Rosneft’s plans to tap offshore fields in the northerly Kara Sea.
But since then, Russian companies have shown they can develop in-house expertise some of those areas, according to Kpler’s Katona. Gazprom Neft PJSC actually increased its drilling in a major shale formation in West Siberia last year, he said.
Even if technology sanctions restrict activity in more challenging reservoirs, right now Russia has enough traditional reserves to keep the oil flowing. Assuming output were to remain close to current levels, by 2027 just 3% of it would depend on technologies the country has difficulty accessing now, Mikhalchuk said.
“Russian production could be maintained around current output levels for at least four to five years” on a technical basis, Katona said.
–With assistance from Salma El Wardany and Paul Wallace.
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