Russia’s oil output still has opportunities to grow

However, the country needs to overcome a number of obstacles to increasing production

Russia’s oil output still has opportunities to grow Photo: AndreyIGOSHEV

Higher efficiency, more persistent government regulation and intensive competition may help the Russian oil industry further increase its production capacity. Although some analysts foresee an upcoming decline in Russia's oil production, such critical forecasts were not justified in the past.

Russian oil output may continue to grow quite significantly if the country chooses to embrace modern principles of state regulation and opens its oil and gas industry to foreign competition, says Oilprice.com citing The Jamestown Foundation. In September, Russia's domestic oil production reached a new historic peak of 11,36 million bpd. According to Vagit Alekperov, CEO of Lukoil, the current output levels cannot be sustained, as Russia has already reached the limit of its oil production capacity. However, speaking at Russian Energy Week on 3 October, Minister of Energy Aleksandr Novak strongly disagreed with the head of Russia's largest private oil producer.

Suggestions that the Russian oil output had already peaked were made many times in the past. Nonetheless, last month's rate was more than 10% higher than the consensus forecast for 2020, which stood at 10,2 million bpd until recently. Furthermore, Russia's oil output can continue to grow in the future if several conditions are rectified, believe the authors of the article. They assume that output figures in the former Soviet space depend strongly on the presence of Western technology in the domestic industry and upon the governments' efforts to explore new oil fields in order to substitute old and overexploited ones. For example, Kazakhstan and Azerbaijan have raised their production threefold compared to 1989-1990.

Speaking at Russian Energy Week, Minister of Energy Aleksandr Novak stated that Russia hadn't yet reached the limit of its oil production capacity. Photo: kremlin.ru

Russian oil production levels are also constrained by low efficiency of the domestic extraction industry. Russian oil companies currently produce only 28–33% of oil from their wells, while the average result for British producers amounts to 42–43%. The authors believe that the government's policies, which do not place strict regulations on recovery at existing deposits, may be the reason for such low rates. In case that Russian companies increase the recovery rates to the average level of their European counterparts, the country would be able to raise its daily output up to 800,000 barrels, at least theoretically.

In addition, the authors point out that a lack of competition in the Russian energy market is holding the output back. At the moment, less than 300 oil and gas companies are operating in Russia, and 12 of them provide more than 90% of overall output. For comparison, the United States has over 9,000 oil and gas enterprises, with 54% of US oil and 85% of US natural gas produced by small independent firms. Russian state-owned companies also enjoy special preferences such as access to the Far North territories or offshore drilling. Such policies also contribute to weaker competition and, as a result, lower overall production levels.

By Anna Litvina