December 15, 2022

Incorrys expects limited decline in Russian supply in next 1 – 1.5 years and Russia will remain one of worlds largest oil exporters. While Russia’s exports of crude and oil products to Europe, the US, Japan and Korea have fallen by nearly 2.2 MMBbl/d since the start of the war, the rerouting of flows to India, China, Türkiye and others, along with seasonally higher Russian domestic demand, has mitigated upstream losses. By July, Russian oil production was only 0.31 MMBbl/d below pre-war levels while total oil exports were down just 0.58 MMBbl/d. The EU embargo on Russian crude in December 2022, and product imports that comes into full effect in February 2023, is expected to result in further declines, as some 1 MMBbl/d of products and 1.3 MMBbl/d of crude would have to find new homes.

According to the Russian Government Scenario (an optimistic case), Russian oil production will drop to 9.8 MMBbl/d in 2023, down from 10.9 MMBbl/d  in 2022. In the Low Scenario, the 2023 production is expected to be 9.2 MMBbl/d. Russia experienced a similar production decline in yearly 1990s due to a structural crisis in the Russian economy. According to the Government Scenario, oil production will reach 10.04 MMBbl/d  in 2024 and 2025. This compares to the Low Scenario where production is forecast to decline to 8.2 MMBbl/d  in 2025.

The main reasons behind the expected production decline include:

-Very limited investment into exploration and development coupled with significant growth in the full cycle cost of Russian oil; an issue that started before Ukrainian war. Existing Russian oil reserves are mature with very limited new development. To make matters worse, the Russian government recently increased taxation on the oil industry leaving oil companies with fewer funds for new field development. New field exploration and development will be focused primarily on just a few projects, such as Vostok oil, increasing the risks that some of these projects will be uneconomical.

-Major oil producers and oilfield service companies have left Russia, taking their technologies with them, critical for development of most newer reserves. Russia will probably develop some newer technologies and import them from other countries, but the cost will be significantly higher.

-The EU oil ban will require rerouting Russian oil to other markets. Some oil can be sold to Asian markets at discount prices, but these countries cannot accept all of the oil coming from Russia. It is particularly critical for refining products which will can be processed mostly in Europe.

-The Price Cap on Russian oil will affect Russian oil production however, the exact impact of the cap remains to be seen.

Due to the financial issues facing Russia (from sanctions, the cost of the war on Ukraine and inability to access capital in western markets) coupled with the lack of new western technologies, Incorrys expects Russian oil production will decrease significantly over the coming years as little to no new development is expected to occur. Once the conflict in the Ukraine ends, Incorrys  believes it will take Russia years, if ever, to recover to post-war production levels, severely impacting future revenue from its largest export products-fossil fuels.