‘The reality is that there is nothing to replace the volumes of oil produced in our country with on the world market’
The current situation in the world, as well as Western sanctions, may lead to a decrease in oil production in Russia and a decrease in the profits of mining companies, says Viktor Rusinovich, a Rosneft expert, geologist. Nevertheless, he notes that the oil and gas sector has a certain margin of safety and technological base to overcome emerging difficulties.
“Further drilling will depend heavily on import substitution opportunities”
Before dealing with the current difficulties, Viktor Rusinovich notes, first you need to figure out how the technological processes were built before the introduction of anti-Russian sanctions. The expert says that in working fields, in order to maintain the level of oil production, it is necessary to drill new wells in areas that have not yet been developed or poorly developed.
To do this, you need to order the necessary equipment in advance so that everything is already 'on the ground' by the start of work. As a rule, the process of equipment procurement began a year before drilling, the expert notes. Accordingly, he concludes, now Russian oil companies have a certain stock of equipment to maintain production levels in the future.
“Further drilling will strongly depend on the possibilities of import substitution: relatively 'simple' wells can still be drilled, but the use of modern equipment for pumping wells, which increased oil production, has become impossible," says Viktor Rusinovich.
The expert also relies on the development of parallel imports for the import of necessary equipment, although he notes that an increase in logistics chains will lead to an increase in the cost of wells. Accordingly, some of them may simply become unprofitable and they will have to be abandoned.
“It is not enough to raise oil to the surface, it still needs to be cleaned of associated water, gas and impurities, otherwise it will not be possible to sell it, this requires appropriate equipment, which can be partially replaced by domestic, and this is a simple production capacity for the time of installation, piping, commissioning of new equipment and additional costs. It is not a fact that the new equipment will work with the same level of performance and fault tolerance," Viktor Rusinovich notes.
“In such conditions, it is hardly possible to expect a reduction in the tax burden on mining companies”
High oil prices, the expert notes, help oil companies cope with current difficulties. The oil and gas sector remains profitable even in those conditions when it sells raw materials at a discount to market value. Although some batches have already started shipping at full price. For example, in the first nine months of this year, Tatneft's net profit, compared to the same period in 2021, increased by 49% to 184 billion rubles. At the same time, revenue also increased significantly — by 30%, to 997,5 billion. At the same time, production increased by only 5%.
Also, the Russian oil sector has a certain margin of safety due to the availability of equipment and consumables. Nevertheless, Viktor Rusinovich notes, sanctions have a deferred character and will create certain difficulties in the future.
In addition, the current explosive revenue of oil companies in the coming years may be followed by its decline. Anton Sokolov, an independent expert, told Realnoe Vremya about this. In his opinion, this will mainly be due to the reorientation of raw material flows.
Anton Sokolov shared that in the long term the pressure on the market will also be exerted by the actions envisaged by the EU Arctic Strategy to consolidate international legal norms aimed at stopping oil and gas production in the Arctic and adjacent regions, as well as de facto removing trade in raw materials from the legal field.
“In such conditions, it is hardly possible to expect a reduction in the tax burden on mining companies, although maintaining the production level set by the Energy Strategy in the conditions of a steady increase in the share of hard-to-recover reserves in the total production structure without state support measures is hardly possible," said Anton Sokolov.
“China and India are becoming beneficiaries of the current situation”
In the current conditions, those countries that do not support sanctions pressure on Russia and continue to maintain close contacts with the country benefit the most. First of all, our experts note, in the oil industry we are talking about China and India.
“It is interesting to observe changes in the price of transactions for the sale of Russian oil, the discount on oil is steadily decreasing, and individual batches are already being sold without it. The reality is that today there is nothing to replace the volumes of oil produced in our country on the world market, and demand continues to grow under the influence of the lifting of Covid-19 restrictions around the world, primarily in China," says Viktor Rusinovich.
India and China are the main buyers of Russian oil, he notes. Not following the general trend of refusing to cooperate with Russia, they retain their economic advantage in the world market.
“Here it should be noted the significant positive influence of China and India, the main buyers of Russian oil, who do not support the sanctions imposed against our country and become beneficiaries of the current situation. By buying Russian oil, they ensure their economic advantage on the world market," he concludes.
Nevertheless, Anton Sokolov notes, the reorientation to the East brings new difficulties for the Russian oil sector. This is primarily due to that the western route for the supply of raw materials has been developing over the past few decades, and the eastern one is “just taking the first steps”. Here it is necessary to develop pipelines, navigation along the Northern Sea Route. The expert says that in the coming years, navigation on the NSR is likely to remain more of an image event than an everyday business practice.
“The delivery time through the Arctic Ocean is still more than twice as long in comparison with the suppliers of the Gulf countries, and the uncertain status of Russian oil is also superimposed on this. It may well turn into unexpected secondary sanctions for the largest buyers of our oil — China and India, given the rather acute confrontation between China and the United States and India's cautious, hesitant position," adds Anton Sokolov.
“Even an unlikely complete withdrawal of oilfield service companies from the market is unlikely to lead to shock consequences”
Other difficulties faced by the Russian oil industry are operational ones. They are primarily connected with the departure of a large number of Western companies from the country. Anton Sokolov notes that although Western companies occupied less than 20% of the Russian oil sector, they were in the niche of high-tech industries. From this, he concludes that the development of the mineral resource base of Russia, of course, will continue, but at a slow pace.
“Even an unlikely complete withdrawal of oilfield service companies from the market is unlikely to lead to shock consequences. Domestic oil and gas companies have their own service units that occupy more than half of the entire Russian oilfield services market, and have also significantly deepened their competencies in terms of complex infrastructure projects implemented, including on the Arctic shelf," the expert concludes.
Another dampener, which makes it possible to smooth out the heterogeneity of the technological security of individual components of the oil and gas sector, according to him, is that Russian companies have been engaged in import substitution and the development of their own scientific and technological base for hydrocarbon production for several decades.
According to Viktor Rusinovich, now Russia will stay away from the oil race for some time and will definitely not return to it in the foreseeable future.
“For me, the landmark event of October this year is the Abu Dhabi National Oil Company, in cooperation with Exxon Mobil and INPEX/JODCO, which has withdrawn from Russia, drilled the longest well in the world. Its length is 15,240 m . Let me remind you that earlier this record belonged to the Sakhalin-1 project and was 15,000 m. Technological records are the result of the work of a large number of specialists from all over the world, the use of advanced equipment and technologies. Russia will stay away from this race for some time, I would like to hope that someday it will return to it, but not in the foreseeable future," the expert concludes.