Russia struggles to keep pace with OPEC+ oil supply increases

(Bloomberg) – Russia may only be able to deliver about half of its projected increases in crude production over the next six months, joining the ranks of OPEC+ nations struggling to grow even as fuel demand rebounds after the pandemic.

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With crude already trading above $85 a barrel in London, the outlook for Russian production leaves the global market even tighter than expected. This risks amplifying the spike in energy prices that is contributing to the highest inflation in decades.

The OPEC+ member is supposed to add 100,000 barrels a day of crude to the market each month, but growth stalled in December. Due to a drop in drilling last year, most analysts polled by Bloomberg News expect Russia’s actual monthly increases cannot exceed 60,000 barrels per day in the first half of 2022.

“We struggle to see Russian suppliers sustaining a production increase of 100,000 barrels per day every month for the next six months,” Bank of America Corp analysts Karen Kostanyan and Ekaterina Smyk told Bloomberg.

The Organization of the Petroleum Exporting Countries and its allies are restoring production halted during the pandemic. The coalition is supposed to pump an additional 400,000 barrels a day each month, but actual increases in production have been insufficient due to factors ranging from internal unrest to insufficient long-term investment in a number of countries.

Last month, OPEC increased production by just 90,000 barrels a day. Russian production began to stagnate in November, and in December fell below its OPEC+ quota for crude, according to Bloomberg estimates based on Energy Department statistics. The first few days of January saw a less than 1% increase in the country’s total oil production, which includes crude and a light oil called condensate extracted from natural gas, according to Interfax.

Russia’s top oil official, Deputy Prime Minister Alexander Novak, said the country would continue to meet its production targets. Crude production will reach 10.1 million barrels per day this month, he told the Tass news agency last week. This would be in line with its OPEC+ quota and an increase of around 100,000 barrels per day from December.

Inflationary pressure

If OPEC+ continues to struggle to meet its production targets, the economic consequences could be greater. The recovery in oil demand has remained robust as the Omicron strain of the coronavirus has a milder-than-expected effect on the global economy.

Brent, the international benchmark, has jumped more than 10% since the start of the year and could still have some way to go, according to Vitol Group. High energy prices are contributing significantly to rising inflation, and the White House has consistently pressured OPEC+ to boost supply and help lower fuel costs.

For most of 2021, Russia has maintained fairly steady monthly production increases while restoring idle capacity at the onset of the Covid-19 pandemic. In November, the revival began to run out of steam.

The spread of active, inactive and closed Russian production wells has returned to pre-pandemic levels, indicating that the industry has almost fully deployed its spare capacity. This was later confirmed by the statements of the largest producers in the country, Rosneft PJSC, Lukoil PJSC and Gazprom Neft PJSC.

Last year, Russian oil majors were in no rush to increase their production drilling, a move that would have seen new capacity come on stream in late 2021 and into 2022. ‘year were down 4.5. % over the same period in 2020, according to Interfax data based on Department of Energy CDU-TEK figures.

Russia’s oil industry is in wait-and-see mode due to uncertainty surrounding the effect of the coronavirus on demand, according to analysts at Bank of America and Vygon Consulting. Several companies also capped production last year after some of their projects lost tax breaks.

These producers “are rather reluctant to invest” in these projects until they know whether the Ministry of Finance will restore some of these incentives, said Daria Melnik, senior analyst at Oslo-based consultant Rystad Energy A/S. The government is ready to consider tax cuts from 2023 at the earliest, provided that OPEC+ production cuts end this year as planned, Deputy Finance Minister Alexey Sazanov told Bloomberg last month. .

This year, most major Russian producers plan to increase their investments, ranging from around 10% at Gazprom Neft to around 20% at Rosneft. Tatneft PJSC expects its 2022 upstream investments to grow up to three to four times compared to last year.

This increase in drilling will eventually generate higher production, but most of the gains will come after 2022. New wells will generate only a modest increase this year, Rystad Energy analysts at Renaissance Capital say.

Rosneft, which accounts for a large share of the Russian oil industry’s total spending, “is now funneling money into its Vostok Oil project, that’s the main priority for the producer,” Melnik said. The company plans to start full-scale crude production at the Arctic project in 2024.

Gazprom Neft’s cluster of new Zima fields in Western Siberia, which analysts at Renaissance Capital and Rystad Energy point to as a source of new crude for the producer in 2022, will peak production in 2024. Its Arctic Oil Rims project produces already, but will gradually increase, doubling in five years.

This explains why most observers see Russia falling short of its 2021 targets. “We don’t expect Russia to increase production by 100,000 barrels per day every month of the year,” Melnik said.

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