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#30 - JRL 2007-77 - JRL Home
Russia Profile
www.russiaprofile.org
March 30, 2007
Turning Off the Taps
Is Russia About To Cap Its Oil Production?

Comment by Douglas Low

Douglas Low is the director of the Oil Depletion Analysis Centre, a UK-based NGO working to promote better understanding of the world's oil depletion problem.

Russia is currently the largest oil producer in the world, and second only to Saudi Arabia in terms of oil exports. In terms of future growth, in its Medium-term Oil Market Report published in February 2007, the International Energy Agency (IEA) forecasts Russian oil production to increase over the period 2006-2011 by 1.1 million barrels per day (Mb/d). Russia's growing production will play an important role in future global supplies of oil.

There are however two issues that raise doubts regarding Russia's abilities to increase its' oil exports. First, from February 2006 to February 2007, Russian oil production increased by over 400,000 barrels per day (b/d), whereas exports remained flat. That is to say, Russia did an exemplary job of raising its oil production, but consumed all the extra oil itself. This is not surprising -- growth in Russian car production and sales through 2006 was phenomenal, and is forecast to remain so until at least 2010. The long-term implications of this are that even if Russia maintains its oil production growth as forecast by the IEA -- estimates thought to be optimistic by some analysts -- Russian oil exports will still continue to drop.

Secondly, President Vladimir Putin is thinking of capping Russian oil production. In this month's issue of Petroleum Review, Chris Skrebowski reviews the London-based Energy Institute's International Petroleum Week which was held in February:

�In the course of all the informative presentations, every IP Week produces defining moments in which speakers provide information that produces a shock of recognition in the audience. This year there were three of these defining moments.

�? The second moment came during the Russian conference, when Vladimir Milov, President of the Institute of Energy Policy, noted that in both January and February of this year President Putin had questioned the merits and desirability of expanding Russian oil production above current levels. Milov showed that with the private companies controlling 42 percent of Russian production in 2006 compared with 83.5 percent in 2003, such an idea would now be much easier to implement.

�Apparently, on January 9, in a meeting with cabinet ministers, President Putin had said: "We must discuss the possibilities for reducing oil extraction with the corresponding Russian companies." Then, at the opening address to the Russian Union of Industrialists and Entrepreneurs on 6 February, President Putin said: 'Russia can potentially become the world's largest extractor of oil. Truth to tell, I am not sure we need this, but...'�

Should Putin decide to limit Russian oil production later this year, then such an announcement would be good news for Russia. Russia's balance of payments and the economy in general are both very healthy; Russia does not need more money from pumping more oil, especially if the price of oil increases. On the other hand, leaving more oil in the ground now means there will be more available later. This is very important since there are an increasing number of analysts who think that global oil production will peak or plateau any time between now and 2015. Post-peak, whenever that is, oil reserves are more likely to be viewed as a scarce resource and much more valuable.

But such an announcement is also likely to send alarm bells ringing outside Russia. Irrespective of whether global oil production is about to peak or not, the oil industry is having problems increasing global oil supply. For example, last year non-OPEC countries produced considerably less oil than forecast by the IEA, almost 1 Mb/d less. In its Jan/Feb Global Oil Report, the Centre for Global Energy Studies writes: "Once again, project delays, adverse weather, equipment failure and oil field problems combined to trim nearly 1 Mb/d off non-OPEC supply growth projections for 2006 -- leaving the market much tighter than expected." Many recent reports have concluded that these supply problems are likely to continue for at least another 10 years, not least because of a shortage of skilled workers.

So Russia may be about to cap its oil production just when the global community is looking for it to produce more oil. Of course, that is the global community's problem, not Russia's. The problem goes further than Russia capping its oil production though. The country may be setting a precedent. One of the biggest conundrums within the so-called Peak Oil community is why every oil producing country, and there are about 100 of them, pumps its oil as fast as it can when it is a finite resource, and is inevitably going to become scarce one day. Oil production has already peaked and is now in decline in over 60 countries. There are a few countries that produce a lot of oil relative to the size of their population -- Norway and Kuwait for example -- and where a high standard of living could be maintained by producing much less oil. Indeed, Kuwaiti citizens pay no income tax and the national budget had a surplus of 40 percent in 2006. It is somewhat bizarre therefore that Kuwait is planning to increase its oil production from about 2.5 Mb/d now to about 4 Mb/d by 2020.

In summary, if and when Russia caps its oil production, it will send alarm signals worldwide for two reasons. As Russian oil consumption is currently growing, oil exports will correspondingly fall at a similar rate. Secondly, capping production may set an example that others will want to follow, especially if global oil production is seen to be peaking any time between now and 2015.