IEEJ：March 2016○ｃ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (264)March 24, 2016

Russia Expands Oil Production to Highest Level since the Collapse of FSU
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanRussia has expanded oil production to a high level even under low oil prices. According toInternational Energy Agency statistics, Russia’s oil production in January totaled 11.25 million
barrels per day, the highest since the Soviet Union collapsed. Russian oil production (on an annualbasis) peaked at 11.08 million bpd in 1989 in the Soviet Union period and began to decline later. Asoil output continued to fall rapidly amid economic and social turmoil in the first half of the 1990s
following the Soviet Union collapse, output in 1996 came to 6.03 million bpd, down 46% in sevenyears. Later, Russian oil production recovered moderately amid oil industry realignment. Since 2000,
Russia accelerated its oil output expansion on the strength of rising crude oil prices. Russian output
rose back above 10 million bpd in 2007 and basically continued to steadily expand. As crude oilprices remained above $100 per barrel from 2011, Russia continued to increase oil production. In
2014, Russian oil output expanded close to 11 million bpd.
Since the second half of 2014, however, crude oil prices have plunged, dramatically changing
the environment surrounding the Russian oil industry. Nevertheless, Russian oil output has continued
to gradually increase since 2014. Russian output exceeded 11 million bpd in early 2015 andcontinued an upward trend before hitting the record level in January this year.
This is a noteworthy performance in a sense. In contrast, U.S. shale oil production expansion, amajor factor behind the latest crude oil price plunge, has lost momentum upon the price downturn.
U.S. shale oil output is now declining. Other non-OPEC oil producing countries, excluding Braziland Canada, have slowed down or reduced production since 2015, particularly since early this year.
Nevertheless, Russian oil production has toughly continued to expand.
Russia has faced another serious problem in addition to the oil price plunge. The problem is theimpact of Western economic sanctions that have been imposed and enhanced over developments
regarding the Ukraine crisis. The sanctions have affected the Russian oil industry’s introduction ofadvanced oil development technology and liquefied natural gas business. Exports of goods andservices to Russia for deep-water oil exploration and development, Arctic Sea oil exploration anddevelopment, and shale oil production have been banned. Given that Russia had expected to promote
oil development in the abovementioned frontier areas for future oil output expansion, the sanctions
have been feared to deal a severe blow to Russia along with the oil price plunge.

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As explained above, however, Russian oil production has toughly continued to expand even inthe severe environment. Two major factors are cited behind the Russian oil output expansion. The
first factor is the ruble’s depreciation against other currencies. The oil price plunge directly hit theRussian economy, forcing the economy to contract 3.7% in 2015. The ruble has been sold on theRussian economic deterioration, leading to the Russian currency’s depreciation that has affected theRussian economy by trigging high inflation and capital outflow. Interestingly, however, thedepreciation of the ruble has offset part of a plunge in dollar-denominated oil export revenues,
playing a major role in helping the oil sector maintain ruble-denominated investment.
The second factor is a tax system regarding Russian oil development. Important among factors
related to the economic feasibility of oil development is the oil development tax system as well as oil
prices and production costs. Specifically, the tax burden regarding oil development in Russia is fairly
heavy. When crude oil prices remained above $100/bbl, more than 70% of oil sales revenues is
estimated to have went to the government in the form of tax. In response to the oil price plunge, theRussian government revised oil export and production taxes to relatively reduce its share of oil sales
revenues, although the tax burden remained heavy. As a result, government tax revenues have been
affected by the oil price plunge more seriously than oil companies’ earnings. Plagued with fiscaldifficulties, however, the government is now considering increasing oil and gas taxes to secure
greater financial resources.
In the severe environment including the oil price plunge and economic sanctions, the Russian
oil industry, supported by the weaker ruble, has focused on production and development at major
operating oil fields in western Siberia and other regions that are relatively competitive. As a result,the industry has sustained the production expansion. When I discussed Russian problems in theUnited Kingdom, an expert indicated that Russian oil production achieved greater-than-expected
performance by taking advantage of the weaker ruble and tax change and by pursuing better quality
and efficiency as seen for U.S. shale oil production in response to the severe business environment.
In the future, however, how to respond to uncertain future changes in oil prices, exchange rates, thetax system and other factors will become a problem. At present, the Russian oil industry is
responding to the severe business environment by focusing business resources on major production
areas. From the medium to long-term viewpoint, however, the industry will have to explore anddevelop oil in new promising oil production regions. In this respect, the Russian oil industry has
various uncertainties.
The IEA’s recent medium-term outlook forecasts that Russian oil output would gradually
decrease from 11.09 million bpd in 2016 to 10.78 million bpd in 2021. This apparently indicates that
it would be difficult for the Russian oil industry to continue an oil output expansion over a medium
term by retaining the present approach. Greater problems and uncertainties exist in regard to along-term outlook. While the IEA predicts Russian oil output to decline to 9 million bpd in 2040, theU.S. Energy Information Administration expects the Russian output to increase to 12.20 million bpd
in the same year. The Organization of the Petroleum Exporting Countries predicts Russian oil output
in 2040 to level off from the present level at 10.70 million bpd. It is rare that the three major
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forecasters differ so sharply over Russian oil production. This means that great uncertainties exist
about the medium to long-term future for Russia and that various scenarios can be developed forRussian oil output. None of these forecasters might have concerned over abundance in undergroundresources. Rather, Russia’s oil production and energy sector will change depending on “aboveground factors”, such as political, economic, social, institutional and market developments involving
Russia.

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

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