Oil production in Russia, the second largest oil exporter in the world, is set to decline sharply. According to reports, the country has not been able to increase its oil output for the last three months in a row. Current production stands at slightly below the maximum of 9.93 million bpd that was reached in October last year.This amounted to almost 11% of world consumption. Output has declined by between 0.5% to 1.5 % for most major Russian producers, including the state controlled Rosneft. Only Lukoil and Tatneft managed to increase their output by 0.1% and 0.6% respectively.The decline has ended a steady ten year increase in production from 6.2 million bpd in 1998.Russian oil production has stagnated since growing 9% in 2004 and a record 11% in 2003.
Russia is one of the largest oil producers in the world. In fact its production is only marginally behind that of Saudi Arabia, which is the world's largest oil producer. Russia is also the second largest oil exporting country in the world.Many European countries are dependent on Russian energy. Sweden today imports 35% of its oil from Russia, up from 5% in 2001. After the break up of the Soviet Union in 1991, Russian oil production dropped by 50%. Although it has grown significantly since then, how will it shape up in the future?
Various scenarios have been predicted for Russian oil production, based on estimates of its oil reserves , which range from 70 billion barrels to 170 billion barrels, as well as its rate of production. In the worst case scenario Russian oil production and exports have already peaked in 2006 or will do so very soon. In the best case, a constant level of exports may be maintained till 2036. It is also unlikely that Russian production will increase by more than 5-10% over current levels.
The main reasons for the decline are that extraction costs are mounting and newer fields are harder to find. Added to these problems is the high rate of taxation the industry is burdened with. There are already indications that the industry demand of a cut in taxes may be met shortly. Export, extraction and other taxes must be cut or companies won't have any incentive to develop new fields, including in the Arctic, says OAO Gazprom Neft CEO Alexander Dyukov. Lukoil's chief estimates that $1 trillion needs to be spent to develop new resources, if current output levels are to be maintained.
For now, the surprise fall in Russian output in the first part of this year has raised fears about the ability of global supply to keep up with demand over the next decade, and is surely to add further pressure on prices which are already at record highs.