I intend to live forever. So far, so good.
      — Comedian Stephen Wright

Russia’s resurgent oil production has fueled growth outside of the Organization of Petroleum Exporting Countries (non-OPEC) since 1999. The end is now likely in sight for yearly increases from the Federation. Growth has slowed since 2004, and although most analysts expect increases to continue in the near term, Russia is poised to peak or plateau sometime in the 2010-2012 period. If you are concerned about peak oil, it is necessary to track events in the world’s largest oil producer. The eventual outcome is uncertain, but a peak in Russia’s oil production in the medium-term seems all but assured.

Russia_oil_productionThe Energy Information Administration’s (EIA) data has Russia’s 2007 oil production at 9.846 million barrels per day (b/d, 5-month average), where oil includes crude, condensate, and natural gas liquids. Their graph (left) shows the longer trend. Production is expected to surpass 10 million b/d sometime this year.

The Paris-based International Energy Agency’s (IEA) Medium-Term Oil Market Report anticipates slower growth in Russia’s production. Output peaks at 10.61 million barrels a day in 2011 (3rd graph down, left) and declines in 2012. The IEA qualifies their forecast, saying that “extrapolating a decline in Russian production in the longer term [after 2011] would be … premature before examining post-2012 prospects (field developments) in detail.” The Russian Ministry of Economic Development does not feel the same need for caution. Pravda’s Stable oil production to make Russia world’s leading economic power by 2020 (July 25, 2007) reports that the ministry expects oil output to stabilize at 10.6 million b/d (530 million tons per year) sometime in the future.

Russian_onshore_production Russia is unusual nowadays in that almost all of their production is inland. TNK-BP’s 2006 Annual Report (graph left) shows how Russia’s production growth has moderated over the last four years when offshore developments (mostly Sakhalin) are excluded. Russia’s future output depends on the usual competition between managing dwindling production in old depleting fields and putting new oil projects on-stream. Sufficient investment must be available to support both activities.

Vladimir Putin’s government has two conflicting goals. The Federation must encourage oil exploration and production (E&P) while taxing the produced oil to maintain government revenues. Russia’s Oil Tax (Forbes, June 15, 2007) reports on this juggling act.

The Russian government has sought to maximize the benefits of the country’s oil wealth through a mixture of taxation and direct intervention. As oil prices have increased, government take has grown, although there are signs that high marginal tax rates, coupled with uncertainty over future policy, has dampened the level of production growth. The government has also sought to capture more value from the processing of crude oil through the use of export duties though this strategy may lead to problems in the future…

Policy regarding oil … has been to encourage indigenous companies but also maximize the state’s share of revenue, while keeping domestic prices as low as possible.

Russia constantly adjusts the Mineral Extraction Tax (MET) rate formula and the duties paid on exports based on the West Siberia Urals blend price to keep the right balance. Russian oil companies (Whiskey & Gunpowder) are always lobbying (Moscow Times, August 8, 2007) to get the tax rates decreased so that more of their profits can be plowed back into E&P. From the Times:

A growing chorus of industry participants, including LUKoil’s CEO Vagit Alekperov and Alfa Bank analyst Dmitry Loukashov, is calling for lower taxes to facilitate investment and new production. Russia has seen output growth slump to less than 3 percent last year from 11 percent in 2003 as field development costs have soared, according to British Petroleum.

Beyond burdensome tax rates, the Russian oil companies suffer from the same upstream capital costs inflation (ASPO-USA, August 8) that afflicts the world’s oil & gas industry. This is why the IEA cites both an “uncertain investment climate and tight drilling/service capacity” as potentially lethal constraints on new oil developments.

The oil price remains favorable for Russian oil companies, but the Urals blend typically trades “at a discount of around $3 to $5 to the benchmark Brent blend” (Moscow Times, August 16, 2005). Russia actually has four export oil blends, and it is possible that one of them, REBCO, could soon replace the Urals benchmark “as the basis for calculating supply prices, export duties and [the] mineral extraction tax” (Ria Novosti, October 10, 2006).

Iea_russian_oil_forecastTurning now to geological “below ground” factors, the choice of a decline rate in Russia’s existing production base is crucial to predicting their future oil production levels. The IEA based their estimates on a 3% rate, but considered the effects of other values as well (graph left). If a 5% decline rate is used, Russian production never reaches 10.5 million b/d. Assuming steeper rates yields concomitantly lower peak production levels by 2011.

The IEA’s assumption about the decline rate is similar to that used in John Grace’s study2 Russian Oil Supply: Performance and Prospects (Oxford Institute for Energy Studies, 2005). The EIA’s Russia Oil Analysis contains Table 1 (graph below left) taken from Grace’s book. The table list selected “pre-peak” and “post-peak” Russian oil fields. The EIA explains —

In the upcoming decade, a few major oil fields [Table 1] will contribute to most of Russia’s supply growth and others will offset decreasing production from mature fields. In 2004, around 20 percent (or 1.8 million bbl/d) of Russia’s oil production came from fields that had already produced 80 percent of their total recoverable reserves. Achieving continued growth at post-peak fields will become more problematic as oil companies run out of easy and less costly opportunities to manage the rate of decline.

“Pre-peak” fields, which have come online in the last decade, can add between around 1.2-1.5 million bbl/d to Russian supply according to John Grace’s recent analysis of Russia’s oil supply.

One of the notes to Table 1 indicates that Grace estimates that the older “post-peak” fields are declining somewhere between 1% and 5% per year. The IEA’s decline rate of 3% lies at the midpoint of this range.

Russia_fields_grace_data A review of Russian’s oil fields reveals a simple fact—there are lots of them. The Table 1 data is by no means complete and is not meant to be. Both the IEA and the EIA mention a number of new projects—not always the same ones—that do not appear there. Examining Russian oil company E&P data provides an excellent way to get a handle on future production in the Federation. The survey that follows is not comprehensive, but it provides enough information to allow an evaluation of Russia’s oil future.

Rosneft is likely Russia’s largest oil company now as measured by annual production, given its continuing take over of Yukos’ assets. Output in 2006 “increased by 7.8% to 582.7 million barrels [1.6 million daily] from 540.4 million barrels [1.48 daily] in 2005. Primary growth drivers were Yuganskneftegaz and  Severnaya Neft.” Yuganskneftegaz is Rosneft’s mainstay development, and includes the Priobskoye, Mamontovskoye, Malobalykskoye and Prirazlomnoye fields, which together make up 80% of reserves there. Prirazlomnoye, along with the Priobskoye field listed by Grace, are cited by both the EIA and IEA as sources of growth. Rosneft states the remaining proved reserves at Yuganskneftegaz as 10.924 billion barrels. The Severnaya Neft development is very small in comparison. Preliminary numbers for the first half of 2007 indicate that Rosneft has increased production to 1.849 million b/d, a 14.6 increase over 2006.

Rosneft is developing the East Siberian Vankor field, which has stated proved SPE reserves of 0.946 billion barrels. The first commercial oil flows are scheduled for 2008, but that date seems wildly optimistic. This project is supposed to make Transneft’s Siberian Pacific Pipeline viable, but “plans to build an oil pipeline to the Pacific coast will most likely remain on hold until at least 2015, waiting for the development of east Siberian fields,” according to Deputy Industry and Energy Minister Andrei Dementyev. This is a chicken and egg problem, so stay tuned. Rosneft also has shares in Sakhalin stage I and is developing stage III with China’s Sinopec. Production at Sakhalin was 0.274 million b/d in the first half of 2007, and is scheduled to increase to 0.420 million b/d by 2010 (St. Petersburg Times, August 10, 2007). It is reasonable to expect more growth from Rosneft in the near term.

The LUKOIL Group produced 1.84 million b/d in Russia during 2006 if one includes all affiliate partial shares. This output was 3.7% higher than in 2005, and 7.6% higher than 2004. LUKOIL, along with its partner ConocoPhillips (30%), expects to get an additional 200 thousand b/d from expansion of its Timan-Pechora developments in the 2010-2011 period. They are currently producing 279 thousand barrels a day in the region. Both the EIA and IEA cite this development as a source of continuing Russian production growth. LUKOIL’s 2006 discovery of the Filanovsky field in the Russian sector of the North Caspian, which contains an estimated 600 million barrels of proved and probable oil reserves, will likely add to the company’s production in the next decade. Insufficient information is available to evaluate the longer term outlook for LUKOIL’s existing production base, but the company’s output is still increasing.

Unlike political favorite Rosneft, TNK-BP and Tafneft have the hard job of maintaining and expanding production in Russia’s oldest oil-producing basins. Tatneft operates the aging giant Romashkino in Tartarstan along with some other smaller old fields. Accordingly, their report reveals that “due to the relative maturity of the Company’s main producing fields, approximately 44.3% (11.3 million tons) of all crude oil was produced using various enhanced recovery techniques.” Nearly flat yearly production stood at 0.514 million b/d in 2006, with an unknown proportion of that coming from Romashkino, which Grace lists as producing 0.295 million b/d in 2004. Geology is the implacable foe in Tartarstan—time is not on Tafneft’s side.

The production picture is more complicated at TNK-BP. This joint venture operates in Western Siberia, Russia’s most mature oil basin. TNK-BP’s crude oil output is decreasing according to the company’s data. Production stood at 1.419 million b/d in June, 2007. Average daily production was 1.501 million b/d in 2006 but was already below that level in the final 3 months of that year. Output was 1.569 million b/d in 2005. Gas condensate production is also down in 2007. Although their production is not falling off a cliff, TNK-BP is not meeting the goal stated in its 2006 annual report—

We expect that production will be broadly flat through to 2009, but will grow thereafter due to the development of a number of greenfield [new] projects. The Company continues to focus on efficient growth of production volumes at our mature (brownfield) oil fields located largely in Western Siberia.

Grace’s data indicates that Samotlor—one of the world’s great oil fields, now considerably past its prime—was still producing 0.974 million b/d in 2004. TNK-BP operates the field through two of its subsidiaries, Samotlorneftegaz  and TNKNiznevartovsk. Adding these together, the data indicates that Samotlor’s production was only 0. 628 million b/d in 2006, which was about 40% of the company’s total output. The field has very high water cuts. TNK-BP’s 2007 brochure reveals that the number of horizontal wells and sidetracks rose considerably after 2003. They are now drilling multilateral wells to maintain production levels at Samotlor and elsewhere in Western Siberia. After 2009, TNK-BP expects their new “greenfield” developments to boost production. TNK-BP hopes the largest of these, Uvat, will produce 200 thousand b/d by 2020, but the project will only break even at $40/barrel (Reuters, June 4, 2007).

Where is Russian oil production headed? Russia’s “post-peak” fields, which accounted for 2.4 million b/d in 2004, are mostly depleted. Samotlor is in steep decline. As the old production base erodes, new oil from Sakhalin, Yuganskneftegaz, Timan-Pechora and elsewhere will offset declines and stimulate modest growth in the near term. The IEA’s choice of a 3% baseline decline rate seems generous, however. Most of Russia’s oil production still comes from its most mature basins, West Siberia and the Volga/Urals. Russia’s oil companies must deal with onerous taxation just as inflation eats into their E&P budgets. It is very expensive to manage highly depleted fields. Challenging new projects like Vankor or Uvat come with steep price tags, and will likely face delays.  Prospects at Sakhalin (phases III and IV) remain bright, but it is too early to tell how new discoveries like Filanovsky will turn out.

It is uncertain whether Russia will ever see 10.6 million barrels per day. This number appears to be an upper bound on Russia’s post-Soviet production peak. Wherever production crests, it is not obvious how production will be sustained at that level thereafter. The only sure thing is that Russia’s production peak or plateau is now on the horizon. The end of growth in Russia’s oil production is an event of great historical significance. The world should take note, and prepare for the consequences.

1. Conversions here are 7.3 barrels per standard ton, or 7.48 barrels per metric ton, if these units are known. The former is the default.

2. If the term “peak” refers in this context to the high point of oil production—over 12.5 million b/d—in the former Soviet Union during the late 1980’s, then the usage is confusing. The term “pre-peak” should be “post-peak” and vice versa. The author has not read Grace’s book.