Last year, against all odds, Russia managed to grow its oil output despite being hit with tough sanctions, a plethora of oilfield service companies exiting the country as well as the refusal by western countries to buy its crude for the most part.
Indeed, Energy Intelligence reports that in 2022, Russia’s
crude and condensate production increased 2%, with oil production clocking in
at 10.73 million b/d, above Russia's ministry for economic development forecast
of 10.33 million b/d.
Russia managed to pull off this feat mainly by offering huge
discounts to buyers like China and India, with Bloomberg's oil strategist
Julian Lee reporting that the two were receiving discounts of $33.28 per
barrel, or about 40% to international Brent crude prices oil at the time.
But Moscow cannot continue defying the odds indefinitely. BP
Plc (NYSE: BP) has predicted that the country’s output is likely to take a big
hit over the long-term, with production declining 25%-42% by 2035. BP says that
Russia's oil output could decrease from 12 million barrels per day in 2019 to
7-9 million bpd in 2035 thanks to the curtailment of new promising projects,
limited access to foreign technologies as well as a high rate of reduction in
existing operating assets.
In contrast, BP says that OPEC will become even more
dominant as the years roll on, with the cartel’s share in global production
increasing to 45%-65% by 2050 from just over 30% currently. Bad news for the
bulls: BP remains bearish about the long-term prospects for oil, saying demand
for oil is likely to plateau over the next 10 years and then decline to 70-80
million bpd by 2050.
Bleak Future For Russia
That said, Russia might still be able to avoid a sharp
decline in production because many of the assets of oil companies that exited
the country were abandoned or sold to local management teams who retained
critical expertise.
Bloomberg had earlier reported that Russia sharply increased
its diesel exports before the European Union sanctions on crude oil kicked off
in February. Fuel shipments from Russia's ports in the Baltic and Black Sea
were set to increase to 2.68 million tonnes in January, good for 8%
month-on-month increase from December’s volume and the highest export rate
since January 2020.
The European Union will ban Russian oil product imports by
Feb. 5. This follows a ban on Russian crude that took effect in December.
Exports of Russia's flagship Urals crude blend from the
Baltic Sea ports are, however, expected to fall to around 5 million tonnes from
6 million tonnes in November, thanks to an EU embargo on Russian oil and a
Western price cap, according to Reuters calculations. Some estimates have
predicted it could fall as low as 4.7 million tonnes.
The $60 per barrel price cap introduced by the European
Union, G7 nations and Australia allows non-EU countries to import seaborne
Russian crude oil, but prohibits shipping, insurance and reinsurance companies
from handling cargoes of Russian crude unless it is sold for under $60.
Traders have reported to Reuters that Russia is struggling
to fully redirect Urals exports from Europe to other markets such as China and
India India and is also having a hard time finding enough suitable vessels.
Russia’s problems have been compounded by a shortage of
non-western tonnage, moderate demand for the grade in Asia, especially in China
and a weak export economy. Indeed, Reuters has reported that Russia’s pipeline
monopoly Transneft has been unable to fill some of the available loading slots
due to a lack of bids from producers while other slots were postponed or
canceled. Only China, India, Bulgaria and Turkey are currently willing to buy
Urals with the blend now being sold to export markets at below overall
production cost including local levies.
Widening Budget Deficit
Back in December, Russia's Finance Minister Anton Siluanov
said that the country’s budget deficit in 2023 might exceed the expected 2% of
GDP as the oil price cap takes a hit on export income.
That marked the first time a Russian official has
acknowledged that the $60 per barrel price cap imposed on Russia by Europe and
G7 nations will negatively impact its economy. Siluanov said that the country
will be forced to tap debt markets to bridge the deficit.
Russia is projected to have used over 2 trillion roubles
($29 billion) from the National Wealth Fund (NWF) in 2022 as total spending
exceeded 30 trillion roubles above the initial budget.
Russia’s economy is expected to contract in the current
year, with Central Bank governor Elvira Nabiullina citing “worsening trade
conditions” as a key reason. Russia’s cash flows are expected to weaken
considerably in 2023 as oil and gas sales to Europe plunge. Ukraine’s Ministry
of Economy says it expects that the EU embargo on Russian oil and petroleum
products should cut Russia’s profits by at least 50%.
"We expect the collapse of profits from oil and gas
exports to be at more than 50%, precisely because of the introduction of the EU
embargo on oil and petroleum products and the introduction of price
restrictions. Oil and gas account for 60% and 40% of federal budget revenues.
We expect that Russia's revenues will fall below the
critical level of $40 billion per quarter," Yuliya Svyrydenko, First
Deputy Prime Minister and Minister of Economy of Ukraine has said. She has
expressed hope that plunging profits will make it more difficult for Russia to
continue waging an expansive war.
Meanwhile, the Russian rouble has finally caved in, slumping
past 70 per U.S. dollar to a more than seven-month low courtesy of plunging
crude prices as well as fears that sanctions on Russian oil could hit the
country's export revenue, Reuters reports. Russian equities have also taken a
hit, with the dollar-denominated RTS index finishing in the red last year.
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