russia oil production Russian oil strategy - very good report made by OIES

[Tomasz + 1,608]

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Russia and Saudi Arabia have approved a production cut of 2.5 mb/d each from an agreed level of 11mb/d. However, there is some uncertainty about what this means exactly for Russia. Recent production of total liquids has been 11.3 mb/d, implying that the cut could actually be 2.8mb/d. However, this includes a significant amount of gas condensate, which was specifically excluded from Russian quotas in an agreement with OPEC in December 2019. Russia’s recent crude oil production has been around 10.5 mb/d, meaning that the reduction could be only 2mb/d if it applies to crude oil only.

The agreement is something of a surprise given previous Russian arguments for a more considered response to the current collapse in demand caused by the Covid-19 epidemic. However, it may well reflect three facts: firstly, that a production cut may have been inevitable as soon as oil storage reached its limit, secondly that responsible action was required to alleviate a global crisis and thirdly that political gains may also be anticipated given the involvement of the US and G20. In addition, the cut may be easier to implement now that we are approaching the summer months when operating (and shutting in) West Siberian wells becomes easier.

In addition, it is clear that the Kremlin and Russian oil companies have been surprised by the rapidity and depth of the recent oil price fall, which may have been another catalyst for the latest agreement. Nevertheless, it would appear that if low oil prices are here for an extended period then Russia can survive the crisis thanks to the flexible exchange rate, large financial reserves, low levels of debt and a low cost of oil production. As such, although Russia may have taken a tactical decision to cut oil production in the short-term for both oil market and geo-political reasons, its long-term strategy of attempting to enhance its competitive position as a robust low cost producer is likely to remain intact.

 

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/04/Insight-67-The-New-Deal-for-Oil-Markets-implications-for-Russias-short-term-tactics-and-long-term-strategy.pdf?v=9b7d173b068d -

New Oxford Institute fo Energy Studies report about russian oil strategy in last couple of years and in the future

I especially suggest reading this conclusions. I generally agree with them so I think that this can be considered a lot as my view of the matter

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Conclusion Somewhat to the surprise of many, Russia has agreed to rejoin the OPEC+ group and to cut its output significantly.

We have argued in this paper that the Kremlin believes that it is in a relatively strong position to survive a period of low oil prices and that its oil companies are also in reasonably robust shape, and to date the logic presented by the Russian Ministry of Energy has pointed towards allowing low prices to rebalance the market through the forced shut-in of higher cost production (most notably in the US, but also elsewhere in the world).

As a result, we are forced to conclude that Russia must perceive other significant reasons for its change of strategy.

These could include:

 Political benefits to be gained from joining a production cut at this time. It will be interesting to see how relations with Saudi Arabia and the US develop over the next few months. We would not be surprised to see a reduction in US rhetoric over sanctions, for example. In addition we would also surmise that President Trump’s successful intervention into the OPEC+ dispute and his ultimate acknowledgement of the positive actions now taken by OPEC+ bode well for future relations, and that this must have been a consideration in the Russian (and Saudi) thinking.

 Necessity, as production cuts might have become inevitable in the near future as oil storage reached its limits. Better to offer a cut now and gain some benefit from the impact rather than be forced into a cut later.

 Buying time for a possible rebound in demand before oil storage is filled and the oil price collapses completely. Linked to the previous motive, oil producers need to try and extend the period within which oil demand might start to recover.

 A sense that responsible action is needed at a time of global crisis. No useful purpose could be served by extending the oil impasse and being seen to catalyse a price war at a time when perceptions of the oil industry are already negative. Better to show a willingness for cooperation from a position of strength and to be part of a joint response by the OPEC+ group which has been positively recognised by the G20.

 An easier operating environment in Russia during the summer months. This will allow wells to be shut-in more easily and without such damaging long-term consequences as might have been experienced in winter. In addition, the impact on electricity and heat generation in West Siberia will not be as harmful during warmer months

 

 Having said all this, it will nevertheless be interesting to see how Russia observes the agreement.

As discussed earlier, if condensate is excluded it may well be that the reduction in output will be lower than expected at around 2 mb/d for May and June, and monitoring compliance with this will be important in judging how committed Russia is to restoring order in the global oil market.

Furthermore, in terms of the practical implementation of any cut there will be complications surrounding the geography of production, the choice of wells to shut in and the complexities of managing profitability versus oil volumes. Furthermore, it may be that President Putin has to impose his will on the country’s oil companies, as the evidence of the past 4 years has been that each will attempt to argue for a favourable share of any reduction.

As a result, it will be important to monitor compliance, especially as there is only a three-week period before around 20% of Russian oil production needs to be temporarily shut down.

We suspect that this may be a task that is very difficult to achieve but would not underestimate the ingenuity of the Russian oil industry and the Kremlin to at least make a case for compliance by May

 

Edited April 15, 2020 by Tomasz

[Gregory Purcell + 94]

4 hours ago, Tomasz said:

Conclusion Somewhat to the surprise of many, Russia has agreed to rejoin the OPEC+ group and to cut its output significantly.

I continually find it amusing that western think tanks, are always surprised when Russia does exactly what they said they would do.  

[BLA + 1,666]

4 hours ago, Tomasz said:

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/04/Insight-67-The-New-Deal-for-Oil-Markets-implications-for-Russias-short-term-tactics-and-long-term-strategy.pdf?v=9b7d173b068d -

New Oxford Institute fo Energy Studies report about russian oil strategy in last couple of years and in the future

I especially suggest reading this conclusions. I generally agree with them so I think that this can be considered a lot as my view of the matter

 

Russian oil strategy

Pray for a miracle 

 

Edited April 15, 2020 by BLA

[BLA + 1,666]

4 minutes ago, BLA said:

Russian oil strategy

Pray for a miracle 

 

I have to give Russia credit .   They learned and made adjustments after the 2015 to 2016 oil price crash.  They have built up cash reserves and budgeted for $40 oil. 

Credit due.

[Old-Ruffneck + 1,239]

45 minutes ago, BLA said:

I have to give Russia credit .   They learned and made adjustments after the 2015 to 2016 oil price crash.  They have built up cash reserves and budgeted for $40 oil. 

Credit due.

Add in the fact they been drilling in some good locations and coming up well in completions with larger quantities per field. Seem to be doing well in that area, less cost than our "shale" oil. 

[Gregory Purcell + 94]

1 hour ago, Old-Ruffneck said:

Add in the fact they been drilling in some good locations and coming up well in completions with larger quantities per field. Seem to be doing well in that area, less cost than our "shale" oil. 

There are huge swaths of Siberia which have never been surveyed.   To develop Yamal the first step is drive a railroad line 500 miles, build a port, and then start building a city from scratch, the wells they drill up there will pump for 30 years.   Gazprom has only recently started selling on the spot market, their preferred strategy is first sign a long term delivery contract, then build a pipeline, then drill a well.   

*Correction* 326 miles Railroad which is fully owned by Gazprom.

https://en.wikipedia.org/wiki/Obskaya–Bovanenkovo_Line

Edited April 15, 2020 by Gregory Purcell

[Ward Smith + 6,615]

1 hour ago, Gregory Purcell said:

their preferred strategy is first sign a long term delivery contract, then build a pipeline, then drill a well.   

There are plenty of companies worldwide who would be wise to follow this strategy. 

[Dg56 + 16]

Sorry, I missed the point in the details. 

But remembered that Russia has a strategy (i.e long term objectives). Same as China (1.4b people, with centuries-old culture).

2020 will he intersting. And beyond. 

[Tomasz + 1,608]

Contrary to what some write here, Russia's advantage is long-term contracts. This is the case in Europe, where oil flows through pipelines, and who cares about the cost of hiring tankers, and so it is in Asia, where Russia pushed Sauds out of the Chinese market.

And all thanks to the construction of oil pipelines and three long-term contacts.

About which i want to write a little more.

Russia signed the first contract with China in 2009 and was to be binding from 2011 to 2030, during which time 15 million tons of oil (about 110 million barrels) were to be delivered.

And it was only a trial stone.

The second contract was signed in 2013 with immediate effect, and 325 million tonnes of oil (approximately 2.36 billion barrels) was to be delivered within 25 years .

The third contract was also signed in 2013 and at the beginning was to supply 35 million tons of oil over 5 years, and in 2017 it was extended by another 5 years and an additional 56 million tons of oil.

In addition, this year, China additionally bought 1.6 million tons of Russian oil only in January, and additional purchases continued in the following months.

 

I have already written once  about how the price develops for long-term contracts. But I will write again: Once in the middle of the year, the average oil price for the last 6 months is set, and this price is valid for the next 6 months. And so every 6 months. Importantly, the average price of oil depends also on the price of gas.

For long-term contracts, the "average average" formula is usually used as agreed the period (e.g. 30 days) preceding the date of loading (if shipped overboard). So it adds up average quotes for a specified period and divided by the number of days. There are also coefficients that are also subject to negotiation.

 

 At this point, a link could be used
 

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Госмонополия «Транснефть» — крупнейшая в мире система магистральных нефтепроводов, обеспечивающих транспортировку около 95% объемов российской нефти.

 

State Monopoly Transneft - the world's largest system of trunk oil pipelines, providing transportation of about 95% of Russian oil
Share of russian pipeline and shipped oil

Let me just notice that monthly detailed reports on Russian oil exports both by pipeline and by sea can be found in the monthly OPEC report, 

 Siberian oil exported to Asia is of higher quality. There are 2 varieties Sokol and ESPO.

 

Edited April 23, 2020 by Tomasz