Small and medium Russian oil producers are in good shape despite the failure of the recent Doha oil summit.
Pictured: An oil pump in Sakhir, Bahrain. Photo: AP
The recent failure of the Doha Summit to reduce global oil production has been touted by many as problematic for Russian oil producers as prices continue to tumble and economic growth in much of the world remains stagnate. However, this may be good news for the small and medium players in the Russian oil industry.
Despite a drop in oil production from Russia’s largest oil companies such as Rosneft and Lukoil during the price spiral of the last two years, hundreds of small and medium sized oil companies have ramped up production. Most of these companies are relatively unknown, but amongst them are Bashneft and Gazprom, Russia’s largest natural gas producer.
Russia’s Energy Ministry had expected a decline in production for 2015 as Western Siberian fields became exhausted, but according to data released by the ministry in January output has continued to increase as it has in every year since 1998 with the exception of a small decline in 2008.
BP’s Head of Russia and CIS Economics, Vladimir Drebenstsov recently discussed the impact of Russian small and medium-sized enterprises (SME) on oil production during a presentation at the European University in St. Petersburg. Drebenstsov stated that improved efficiency in Russian SMEs was the most important characteristic driving the increased output.
Drebenstsov also pointed out that in a recent agreement about production freezes in Russia, independent SMEs weren’t included in the agreement allowing for them to continue or even increase production further.
The outcome of the Doha Summit just solidifies the ability of SMEs to remain unrestrained. According to Deputy Energy Minister, Kirill Molodtsov, daily output in 2016 could grow by an additional 100,000 barrels. Several industry analysts including Maxim Nechaev of IHS Inc. believe that Russian production can continue to increase because of operating costs of about $4 a barrel.
This might be good news for the Russian economy in general because it indicates both the emergence and sustainability of SMEs in the oil industry and the adaptability and ingenuity of Russian firms in responding to a decline in prices. Furthermore, these SMEs are finding success in accessing tight oil in older Russian Brownfields that are often not interesting to large players like Rosneft and Lukoil.
The parallels to the U.S. tight oil surge should add weight to the optimism for Russian SMEs. U.S. tight oil was able to adapt to plummeting prices and isn’t the most expensive oil to produce as once thought. There has been a significant decline of capital costs and operating costs and U.S. SME efficiency has been able to keep up with or outpace declines in prices. There is reason to believe that Russian firms might be able to do the same.
Additionally, most Russian energy producers predict an increase in domestic and global demand over the course of the year. In its 2015 Oil and Gas Survey of Russian energy firms, Deloitte found that 96 percent of respondents believed that domestic oil demand would increase or remain stable and 64 percent believed that global demand would increase.
With low margins created by a fluctuating ruble, increased demand at home, and the ability to pipe oil to large consumer blocks like Europe and East Asia, Russian SMEs may be the big winner in gaining market share in an increasingly competitive oil market.
As these smaller firms develop more experience and introduce their own innovations to the industry we may see a Russian oil revolution sometime in the not so distant future.
Russian President Vladimir Putin echoed this sentiment in an address to the VII Chamber of Commerce and Industry Congress in March. Much of the focus of his speech was on the need for support of SMEs and Russia’s oil sector in general.
“Our task is to retain the stability of Russia’s oil industry, to ensure its consistent development and the implementation of long-term projects,” he said.
There certainly seems to be a concerted effort to balance the interests of large producers with the development of new fields and those of small producers that are taking advantage of those fields in decline.
The major concern now is for the income hit the Russian government is taking from the plummet in oil related tax revenues. There have been significant discussions in implementing changes to the existing structure.
Exactly what impact those changes may have on SMEs remains to be seen, but hopefully it will continue to bolster the emergence of a leaner, more efficient energy production sector going forward.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.