Could economic sanctions finally halt Russia’s crude production growth?
In June last year, I wrote a blog post for The Barrel making much of the fact that Russia is the world’s biggest oil producer and has been for quite a while.
Its output has consistently ranked above that of Saudi Arabia in the past few years and production has continued to rise in recent months, averaging some 10.53 million b/d in February this year.
There is no sign of output starting a material decline — like those seen in a number of the world’s more mature producing regions such as the UK, Norway and Denmark — and Russia keeps finding new ways to pump more oil whether it be through improved technology or tapping new, under-explored regions like East Siberia.
So while the geology and the technology keep on bringing in the barrels, what factors are there that could hamper Moscow’s ability to achieve continued production growth?
Well, the most obvious factor that could come into play now, given Russia’s widely reported actions in Crimea, is the potential imposition of economic sanctions against Moscow by the international community, the US and the European Union in particular.
Already, billions of dollars have left Russia as investors fear a deterioration in the state of the Russian economy. Estimates put the flight of capital from Russia in the first three months of 2014 at as high as $70 billion, more than the amount that was withdrawn from the country in the whole of 2013.
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US President Barack Obama and UK Prime Minister David Cameron both said today that sanctions targeting Russia’s energy sector would be considered, without going into detail on any specific measures.
Speculation is rife over what any future US or EU sanctions might look like though. A ban on the purchase of Russian oil and gas seems unlikely given how dependent Europe is on Russian energy, at least for the time being.
But measures could be imposed that would make it harder for countries to pay for their Russian energy. This proved an effective tactic for Washington in 2012 when it introduced a wide-reaching sanctions regime against Iran.
One key element was that Iran’s remaining oil buyers — China, Japan, South Korea, India, Turkey and Taiwan — had to come up with inventive solutions to pay Iran for the crude they bought.
So making it harder for Russia to get its hands on its much-needed petrodollars would certainly be something to consider.
Another measure imposed on Iran was a ban on energy investment in the country. A similar move against Russia might have something of an effect on Moscow’s ability to maintain production at current levels in the future.
It’s hard to imagine many of the big western oil majors with JVs in Russian exploration moving to pile in the cash while the crisis over Crimea remains heightened and the threat of economic sanctions real. We’re talking about some of the biggest names in oil here, the likes of ExxonMobil, Shell, Chevron, Eni and Statoil.
Companies are remaining tight-lipped about their plans, but Platts understands that there are concerns.
One of the major fears is that Russia could react to any economic sanctions by seizing western assets in Russia — oil and gas fields, rigs, licenses. One CEO I spoke with said this was his biggest concern.
But could sanctions against Russia’s energy sector translate into a meaningful reduction in oil output?
It is unlikely in the near term. The Russian oil majors are well financed and have the backing of the state, so the oil should continue to flow unabated. Even if European and US buyers face restrictions in the future, Russia would likely find plenty of markets happy to take its crude. For example, Rosneft CEO Igor Sechin was in New Delhi this week discussing sending regular volumes of crude to India.
China, Japan and South Korea would also likely take increased volumes from Russia. China, in fact, has signed up for a big rise in the Russian barrels it buys.
It would be telling if any future international sanctions against Russia made any kind of attempt at reducing the global buying power of Russian crude. The tactic was used against Tehran when the US threatened to bar any country that did not reduce its crude imports from Iran from the US financial system.
The ball, it seems, is in Russia’s court. It has denied any intention to expand beyond Crimea.
For now, there is no danger to Moscow’s main revenue generator. It has been plagued for years by the persistent assumption that its oil production has plateaued and is set for decline. 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.
Moscow has kept on proving the doom-mongers wrong, but now maybe it is facing arguably its greatest threat to date: international isolation, economic stagnation and the prospect of sanctions that would disrupt its most powerful political weapon, its oil and gas.