Oil drilling likely to contract further in 2021

In Russia, a slowdown in both oil demand and production has already caused an inevitable decrease in oil drilling that is expected to continue in 2021. Experts warn that lower drilling at new oilfields may delay production capacity growth when demand recovers.

Russia’s crude producers are looking to cut drilling in 2021, says Bloomberg. Eriell Russia, one of the country’s top-three independent oil-service providers, expects Russian oil producers to cut oil drilling by 20% in 2021 after reducing it by one-third so far this year. “The year 2021 doesn’t look too good,” says CEO of Eriell Russia Vitaly Dokunikhin. According to Dokunikhin, very specific discussions about reductions of drilling volumes are ongoing amid expectations of suppressed demand. Eriell’s key clients include Gazprom Neft and largest LNG producer Novatek.

Oilfield spending in Russia and the former Soviet Union is expected to shrink by 31% to $38,7 billion in 2020 becoming the third-biggest victim of the crude crash worldwide after North America and Africa, according to Evercore ISI advisory. The Russian oil-service market may contract by half in 2020-2021 compared to 2019, said Minister of Energy of Russia Alexander Novak in a column for Energy Policy magazine in September.

Unprecedented output cuts made by Russia this year under a deal with the Organization of the Petroleum Exporting Countries are among factors that oppress new drilling. The restrictions were expected to be eased from January 2021, but this plan is now in doubt, as crude prices are again under pressure due to new coronavirus surges. Amid the cuts, Lukoil limited operations at its less economical project and distant fields, said the company’s CEO Vagit Alekperov last week.

Both the Ministry of Energy and oil producers believe that Russian output can be restored relatively fast after the deal expires. However, lower drilling at greenfields may delay capacity growth at projects seen as the drivers of future ramp-ups. “Lower drilling now will result in lower production at the most promising new fields that have just started to operate,” explains Dokunikhin. “If we are talking about new Arctic fields, the delay may reach several years,” he adds.

Russian producers have a high level of flexibility, considers Senior Director at Fitch Ratings Dmitry Marinchenko. Nonetheless, he admits that if Russian producers decide to delay planned greenfield drilling to 2022-2023 due to prolongation of the OPEC+ pact, the setback in production capacity growth may reach one or two years.

Russia’s Ministry of Energy intends to drill about 2,700 unfinished wells until April 2022. Those wells are supposed to be completed after the deal expires to speed up the recovery of Russia’s production capacity. If implemented, the project could support the service industry, says Dokunikhin adding that in the Russian oil-service business, it makes a difference whether your orders fall by 20% or 30%. “It means that you are either still alive or already bankrupt.”

By Anna Litvina

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