Russian oil production: still no sign of decline

Russia is the world’s biggest oil producer and has been for quite a while — that’s a fact. Its output has consistently ranked above that of Saudi Arabia in the past few years and in May, Russian average daily output hit a new 2013 high of almost 10.5 million b/d.

Saudi output, meanwhile, has mostly stayed below 10 million b/d in the past few years given OPEC production limitations.

So it is still surprising to read reports about how the American shale boom is set to push the US ahead of Saudi Arabia as the top producer globally by 2017.

It is indisuptable that at the moment Russia’s oil production is significantly higher than even the most extravagant of estimates of Saudi output.

In 2012, Russian oil production averaged 10.4 million b/d. Saudi Aramco, in its annual report published last week, said it pumped 9.5 million b/d last year. Russia’s place at the top of the oil producing league, then, seems assured, at least for now.

Russia, though, is clearly pumping at capacity to make the most of high oil prices.

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Saudi Arabia, on the other hand, has room to increase output, at least in theory, if it wanted. Its total oil production capacity is officially estimated at 12.5 million b/d, including the kingdom’s share of production from the neutral zone shared with Kuwait. This may be why Russia’s rightful place as the world’s top producer is often neglected.

It could also be to do with the fact that Russia is plagued by the persistent assumption that its production has plateaued and is set for decline.

But Moscow keeps on proving the doom-mongers wrong. Almost every year since output first broke through the 10 million b/d mark in 2010, analysts have said that production has peaked and that decline would be the order of the day.

Apart from the occasional blip, however, output has actually continued to edge up. But how?

The answer lies in the icy wastelands of East Siberia. For every barrel lost in West Siberia because of natural decline, it is replaced by one–and maybe a trickle more–in East Siberia.

Leading the charge in the region is Russia’s biggest oil producer Rosneft, which operates the massive Vankor field. Vankor is almost single-handedly keeping Russian oil production above 10 million b/d, helped along by a string of other new fields in East Siberia.

Covering a vast area of some 447 sq km, Vankor is astonishing. It holds an estimated 3.8 billion barrels of reserves, making it one of the world’s biggest oil fields and the largest to be discovered and brought online in Russia in the last 25 years. It can produce at more than 500,000 b/d: at $100/b oil, Vankor production is worth a staggering $50 million each day, or calculated over a year, a colossal $18.3 billion. By the end of 2012, the total number of production wells in operation at Vankor was 237, a giant operation by any standards.

Another notable field in East Siberia is Talakan, operated by Russia’s third biggest oil producer Surgutneftegaz.

This year it launched commercial production at the East Talakan field–the latest stage in its East Siberian expansion to add to its projects at Talakan proper, North Talakan, Alinskoye and East Alinskoye.

Gazprom’s oil arm is also active in East Siberia, as are a number of smaller players.

East Siberia–for all intents and purposes–is the new West Siberia.

But the development of East Siberia was not inevitable. Ten years ago even it was still considered something of a risk. There was no export infrastructure and next to no local demand.

What changed was the construction of one of Russia’s biggest ever engineering initiatives: the East Siberia-Pacific Ocean export pipeline.

Born out of a Yukos plan from 2001, work on EPSO began in 2006. Now a fully functioning export route with a capacity of almost 1 million b/d, ESPO has changed the dynamics not only of Russian oil production and exports, but oil supply across the Asia-Pacific region. Russian crude could account for up to 10% of total Japanese imports in 2013, for example.

Moscow also has ambitions to turn the ESPO oil blend–effectively the oil exported through the ESPO line–into a new global oil benchmark. For this to happen, production will need to increase further though, and the doubters don’t see East Siberia being able to achieve this at a fast enough pace.

In addition, a growing portion of ESPO output will need to be diverted to domestic refineries to make up for the falling production in West Siberia.

But regardless of where Russia’s oil goes, the fact remains that there is no sign of output starting a material decline like those seen in a number of the world’s more mature producing regions. The UK, Norway and Denmark immediately spring to mind.

With every year that passes, analysts continue to predict the start of decline. But while Russia resists, and while the oil price stays high, the Kremlin, the state-controlled oil companies and even the odd private company are still getting very rich indeed.

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