Russian crude oil production set to increase in 2022 despite demand concerns


Strong points

OPEC + quotas, drilling programs to increase production capacity

Production could increase by nearly 500,000 bpd by June to November 2021 levels

Omicron, sanctions and releases of strategic reserves could affect production

Russian oil production is expected to increase in 2022, although factors such as the coronavirus pandemic and the release of strategic oil reserves could lead OPEC + to modify its production plans, analysts say.

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Analysts expect the OPEC + deal to continue to be the main driver of Russian production volumes, with potential changes in Western economic sanctions policy, as well as spare capacity volumes playing a role as well.

“We estimate that a new drilling program will bring Russian supply growth back in line with its OPEC + quota increases, allowing crude production to increase by nearly 500,000 bpd by June 2022 by report to November 2021, ”said Platts Analytics Paul Sheldon.

Economic conditions have also supported Russia’s approach to production volumes in recent years, with Russia being comparatively resistant to oil price volatility compared to its OPEC + allies. Current oil prices are well above the levels included in the Russian state budget for 2022 of $ 44.20 / bbl.

Prices for the main grade of Urals crude oil in Russia rose significantly in 2021, reaching a high of $ 72.78 / bbl on October 26. S&P Global Platts valued the Urals at $ 72.78 / bbl on December 10, up 33% from the year’s first valuation of $ 48.90 on January 4

Exit expectations

The Russian government, producers and analysts are currently forecasting that Russian crude and condensate production will increase next year, with Russian officials predicting it will return to pre-pandemic levels by May 2022.

Outside of Russia, OPEC’s latest forecast includes forecasts for Russian crude and condensate production at 11.78 b / d in 2022, up from 10.79 b / d in 2021. The Agency Energy International estimates Russia’s liquid production in 2021 at 10.87 mil b / d and 2022 production at 11.66 b / d.

The OPEC + agreement does not include the production of condensate. The Russian government does not provide a breakdown of crude and condensate production, but condensate typically accounts for around 8% of production.

For crude in particular, Platts Analytics predicts a steady increase in production through the middle of 2022.

Platts estimated Russian crude production at 10.569 million barrels per day in April 2020, the last month before the group introduced large production cuts in response to the impact of the coronavirus pandemic on demand. It estimated production at 10 million b / d in November 2021, above its quota of 9.91 million b / d.

Supply constraints

Despite the forecast for production growth in 2022, there are major concerns about demand next year, which could lead to changes in OPEC + policy. Platts Analytics currently predicts that OPEC + will freeze February quotas at January levels.

Many analysts see the coronavirus pandemic, including the recent emergence of the omicron variant, as the main risk to production growth plans.

“The main obstacle for Russian oil companies to increase production is the risk of further bottlenecks and severe production restrictions, both due to falling demand and due to cuts within OPEC + “, senior consultant at Vygon Consulting Marina Mosoyan in Russia. noted.

Some analysts also believe that Russia has almost exhausted its spare production capacity, having increased production in 2021 in line with OPEC + quota increases.

Platts Analytics estimated Russia’s spare capacity at 240,000 bpd in November, most of which is in its traditional production region of West Siberia.

During third quarter earnings conference calls, some major Russian oil producers confirmed that they were producing near full capacity.

However, drilling programs in 2022 should see their production capacity increase.

“At the current Urals oil price of $ 70 / bbl, about 72% of Russia’s reserves are profitable, indicating high potential for increased production. not be difficult to reconsider this decision, ”Mosoyan said.

Mosoyan said the increases in production will come mainly from untapped reserves in the fields of West Siberia, as well as large assets ready for commissioning in East Siberia.

“These reserves are sufficient to ensure an increase of up to 20% in 2022 this year. However, the question arises as to whether there will be demand for such volumes from consumers,” he said. she declared.

Punishments

Another potential constraint on Russian production volumes is the risk that the United States will introduce tougher sanctions against Russia in response to escalating tensions with Ukraine. The current sanctions target technology used in offshore Arctic, shale and deepwater oil projects, as well as access to Western funding. U.S. officials said the new sanctions being considered would go further than sanctions imposed in 2014 in response to Russia’s role in the conflict in Ukraine.

Analysts believe, however, that negotiations on an Iran nuclear deal could increase demand for Russian crude.

“The call for OPEC + would grow even more than currently thought if an Iranian nuclear deal is not reached in 2022, a scenario that could accelerate the need for Russian producers to launch new projects,” he said. Sheldon said.

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