The two most important countries for oil investors and traders to keep an eye on these days are the United States and Russia. Production data and forecasts from U.S. oil producers are updated regularly and the information is readily accessible, but Russian oil production is much more opaque.
Russian participation in the OPEC—Non-OPEC oil production cut deal has always been precarious. In the past, Russia promised to cut production and then failed to follow through. This time, Russia has largely followed through with its commitment but many wonder if Russia will continue to comply with the production quotas.
Russian compliance depends to some extent on the cooperation of Russian companies. As recently as November, 2017, both Lukoil (OTC:LUKOY) and Rosneft (OTC:OJSCY) announced plans to increase oil production in 2018. If they do increase production, Russia will surpass its quota.
It has been understood since last November’s OPEC meeting that even though Russia committed to continuing with the production cuts, it will likely want to arrange to exit the deal sooner than some of the OPEC countries. The expectation is that they will discuss exit strategies at the next OPEC meeting in June.
In a recent interview with S&P Global Platts, Russian oil minister Alexander Novak said that Russia has the capacity to quickly increase oil production once the production cut deal ends but he did not elaborate on the extent of Russia’s current spare capacity. In the future, Russia plans to keep production within the 10-11 million bpd range. Russia produced 10.95 million bpd in January, 2018.
However, there are some signs that the Russian oil situation is not as rosy as Novak and the Russian oil companies have been projecting. According to a Reuter’s report, production from Rosneft declined by 0.2% in January and production from Lukoil declined by 0.5% in January. This despite their stated desires to increase production this year. The decreased production could be due to bad weather, but no one has claimed this. More likely, the production decrease could be due to aging infrastructure and slowing output from mature fields in Siberia. This would imply possible long-term issues for Russian production, which Novak hinted at in his interview. It appears that the drop in output from these companies was offset by increases elsewhere in Russia, including from Russia’s sole offshore oil project.
Russia hopes to expand production in its arctic regions, particularly as Siberian fields age and production there declines. However, U.S. sanctions are hindering Russian companies from pursuing joint ventures in the arctic with American companies with capital and experience in this work. It seems that Russia’s own forecasts for oil production are especially robust and depend on new projects coming online in the near future.
If they are delayed for lack of funding or partnerships, Russia’s production rates might be naturally hampered. In that case, Russia would not be so keen to exit the OPEC production cuts as is currently portrayed.
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