Russia, the oil industry is booming. But what does the boom hide?

OFoil industry of Russia Putin keeps getting good news and bad feedback on Western sanctions.

As highlighted in an analysis on Bloomberg, the Russian nation is on track for a second year record oil production in 2023, further proof of Moscow’s resistance to American and European retaliation for aggression against Ukraine.

The boom in activity went hand in hand with a recovery in both volume and value Russian oil exportsa clear example of how the country’s fossil fuel industry has been a vital source of funding for President Vladimir Putin’s war in Ukraine, now entering its second year.

The victory of Russia and the defeat of the West in the desire to punish a sector dear to Moscow’s coffers, which was never really and completely dead? The answer is more complicated than it seems.

Oil production in Russia is booming. But there is a problem

In the first 11 months of 2023, Russia drilled from oil production with a total depth of 28,100 kilometers, according to industry data seen by Bloomberg. This pace suggests that the previous year’s post-Soviet record will soon be surpassed.

Frenetic pace drilling — in the context of fairly static production — also offers a hint of some long-term issues that could affect Russia’s oil sector due to Moscow’s international isolation.

The industry is trying harder to maintain production from its older wells, while new projects that could sustain production for decades to come must adapt to the changing circumstances of the country (which no longer has Western technology at its disposal).

For the entire year 2023, according to analysts of the news company Kpler and the Moscow consultant Yakov & Partners productive drilling in Russia they reach 30,000 kilometers. The increase comes despite Western pressure on Russia’s energy industry. The sector was the subject sanctions from import bans and price caps to technology export bans.

Analysts point to a drilling boom in 2023 production cuts which Moscow implements in cooperation with OPEC. This suggests that a high level of activity is necessary simply to keep production at a steady level.

“The main reason for the growth in Russian production is the need to start new wells, because the fields that are currently being produced are running out.”said Gennadii Masakov, Director of Research and Insights Center at Yakov & Partners.

According to a research paper by the Oxford Institute for Energy Studies, in 2022 fields in operation for more than five years accounted for almost 96% of total Russian oil production. Many of these upstream projects have long passed, ie top production levelsstates the document.

“Natural attrition is a normal factor” for the domestic industry, said Sergey Vakulenko, an industry veteran who spent 10 of his 25-year career as an executive at a Russian oil producer.

Depletion must be compensated by new wells at existing locations, the so-called brownfieldor with new projects known as green field. According to a scholar at the Carnegie Endowment for International Peace in Berlin, “Greenfield development planned before the war was designed with Western technology in mind and must go back to the drawing board to adapt to available technology”.

The technological independence achieved by domestic drillers will be enough for Russia to maintain stable production in the medium term, said Masakov of Yakov & Partners. However, he estimates that over time the efficiency of Russia’s drilling operations will decline, potentially threatening up to 20% of the nation’s output if untapped reserves become uneconomic to develop.

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Russia and sanctions: impacts on the oil industry

If, on the one hand, the restrictions imposed on Russia by Western states affected the Russian oil industry from the point of view technological deficiency (also necessary for drilling), on the other hand, sanctions were not as effective.

The United States sanctioned dozens of manufacturing companies last year drilling equipment and develop new production techniques with a goal “limit Russia’s future mining capabilities”. In 2022, it was introduced by the European Union “Global restrictions on the export of equipment, technology and services for the energy industry in Russia”.

Two of the world’s largest oilfield service providers – Halliburton Co. and Baker Hughes Co. – sold their Russian troops. Two other giants, SLB and Weatherford International Plc, said they would continue to operate in the country while complying with the sanctions.

However, the data suggests that these restrictive measures have failed in their aim to completely shut down the Russian sector.

“Only about 15% of the domestic drilling market depends on the technologies of so-called enemy countries”said Daria Melnik of Oslo-based Rystad Energy A/S.

Downloading major companies oil services Westerners from Russia had minimal impact as they left their local branches largely untouched. These operations “They were mostly sold to management and retained the know-how accumulated over the years”said Viktor Katona, chief oil analyst at Kpler.

Another example, this drill in Russia, how difficult it is to use sanctions and how a nation can circumvent their impact in an effort to survive. Ultimately, the big dilemma that this Russian oil affair also teaches is: how dearly do we pay to stop regulated trade between nations?

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