Last year, against all odds, Russia managed to increase its oil production despite harsh sanctions, a plethora of oil service companies leaving the country as well as the refusal of Western countries to buy its crude for the most part.
Indeed, Energy Intelligence reports that in 2022, Russian crude and condensate production increased by 2%, with oil production reaching 10.73 million bpd, above forecasts by the Russian Ministry of Economic Development. of 10.33 million bpd.
Russia has achieved this feat mainly by offering huge discounts to buyers like China and India, with Bloomberg oil strategist Julian Lee reporting that the two were receiving rebates of $33.28 a barrel, about 40% above international Brent crude oil prices at the time.
But Moscow cannot go on defying the odds forever. BP S.A. (NYSE: BP) predicted that the country’s production should take a big hit term, with production down 25% to 42% by 2035. BP says Russia’s oil production could drop from 12 million barrels per day in 2019 to 7-9 million bpd in 2035 thanks to reduction of promising new projects, limited access to foreign technologies as well as a high rate of reduction of existing operating assets.
By contrast, BP says OPEC will become even more dominant over time, with the cartel’s share of global production rising from 45-65% by 2050 to just over 30% now. Bad news for bulls: BP remains bearish on the long-term outlook for oil, saying oil demand is expected to plateau over the next 10 years and then decline to 70-80 million bpd by 2050.
Dark future for Russia
That said, Russia may still be able to avoid a sharp drop in production as many of the assets of the oil companies that left the country have been abandoned or sold to local management teams who has retained a critical expertise.
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Bloomberg previously reported that Russia strongly increased its diesel exports ahead of the start of European Union crude oil sanctions in February. Fuel shipments from Russia’s Baltic and Black Sea ports are expected to increase to 2.68 million tonnes in January, representing an 8% increase month-on-month from December volume and the highest export rate since January 2020.
The European Union will ban imports of Russian petroleum products by February 5. This follows a ban on Russian crude that went into effect in December.
Exports of Russia’s flagship Urals crude oil blend from Baltic Sea ports are, however, expected to fall to about 5 million tons 6 million tonnes in November, thanks to an EU embargo on Russian oil and a cap on Western prices, according to Reuters calculations. Some estimates have predicted that it could fall as low as 4.7 million tons.
The price cap of $60 per barrel introduced by the European Union, G7 countries and Australia allows non-EU countries to import Russian crude oil transported by sea, but prohibits companies from transportation, insurance and reinsurance to handle shipments of Russian crude unless it is sold for less than $60.
Traders told Reuters that Russia was struggling to fully redirect Urals exports from Europe to other markets such as China and India and was also struggling to find enough suitable vessels.
Russia’s problems were compounded by a shortage of non-Western tonnage, subdued demand for the grade in Asia, particularly China, and a weak export economy. Indeed, Reuters reported that Russia’s pipeline monopoly Transneft was unable to fill some of the available loading slots due to a lack of offers from producers while other slots were postponed or cancelled. Only China, India, Bulgaria and Turkey are currently willing to buy from the Urals, with the blend now being sold in export markets at less than the overall cost of production, including local levies.
Widening budget deficit
In December, Russian Finance Minister Anton Siluanov said that the country’s budget deficit in 2023 could exceed the 2% of GDP expected as the peak in oil prices weighs on export revenues. It was the first time a Russian official had acknowledged that the $60-a-barrel cap imposed on Russia by Europe and the G7 countries would have a negative impact on its economy. Siluanov said the country would be forced to tap debt markets to fill the gap. Russia is expected to have used more than 2 trillion rubles ($29 billion) from the National Wealth Fund (NWF) in 2022, with total spending exceeding 30 trillion rubles above the original budget.
Russia’s economy is expected to contract in the current year, with Central Bank Governor Elvira Nabiullina citing “deteriorating trading conditions” as the main reason. Russia’s cash flow is expected to weaken significantly in 2023 as oil and gas sales to Europe plummet. Ukrainian Economy Ministry says it expects EU embargo on Russian oil and petroleum products cut Russia’s profits by at least 50%.
“We expect the collapse of oil and gas export profits to be more than 50%, precisely because of the introduction of the EU embargo on oil and petroleum products and the introduction of price restrictions. Oil and gas represent 60% and 40% of federal budget revenues. We expect Russia’s revenue to fall below the critical level of $40 billion per quartersaid Yuliya Svyrydenko, Ukraine’s first deputy prime minister and economy minister. She expressed hope that falling profits will make it harder for Russia to continue waging an expansive war.
Meanwhile, the Russian ruble finally gave in, falling from 70 to the U.S. dollar to a low in more than seven months due to falling crude prices as well as fears that Russian oil sanctions could affect the country’s export earnings, reports Reuters . Russian stocks also took a hit, with the dollar-denominated RTS index finishing in the red last year.
By Alex Kimani for Oilprice.com
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