Despite an awful lot of doom and gloom about its prospects, including Lukoil’s CEO going on the record with a prediction of a whopping 8% decrease in total output and Rosneft officials going public with doubts about the sustainability of one of their major new fields , the Russian oil industry is holding up OK.
In March, Russian production hit another new post-Soviet high, Through the first few months of 2015, production has increased fractionally (about 0.37%) from late 2014′s level.
Exports via the pipeline monopoly Transneft rose by an even larger amount: roughly 2%.
As an extremely capital-intensive industry, oil production doesn’t tend to move up and down very suddenly. It’s expensive to start projects and can be just as expensive to mothball or decomission them. Some, and likely most, of the recent increase in production was due to projects that were put in motion months or even years ago.
Yet Russia’s recent economic travails, particularly the plunge in its currency, weren’t entirely irrelevant. According to Bloomberg, due to lower service costs oil producers boosted their drilling by 23%. Since producers get their revenues in dollars but have costs which are denominated in rubles, their operations have gotten significantly cheaper at a stroke. There was also a modest stimulus from some changes to the tax code which marginally reduced export duties.
But if production is up and producers are confident enough in their own future prospects to significantly boost drilling (Bashneft, which was recently nationalized, increased drilling by an insane-sounding 160% over the past few months) what is the problem? Well, as you are no doubt aware, the price of oil went on a little bit of a slide towards the end of 2014. OK that’s far too understated: the price of oil crashed.
It’s not exactly PhD level economics, but Russia’s total oil revenues are a function of its production (which has been going up) and its price (which has been tanking).
Now, to be clear, the 2015 figure is preliminary: it’s the amount of money that Russia would earn over the course of the year if both prices and production stayed at their current level. Given the steepness and severity of the recent crash it is likely that prices over the second half of the year will be higher than they are now, but that is by no means a certainty. Prices could not only stay where they are now, they could conceivably go even lower.
But even if prices simply stay steady, as I hope the chart about makes clear, Russia is in for some pretty serious trouble. At the current pace, oil revenues in 2015 would be lower than at any point since 2005. And, of course, in that intervening decade the Russia’s government’s cost structure, as well as the popular expectations of its citizenry, have moved to a much higher and substantially more expensive level. Absent a rapid uptick in the price of oil, there is going to be a lotof pressure on the Russian government’s finances.
No that doesn’t mean Russia will collapse or that we’re on the precipice of a 199-style unraveling, but unless oil prices rebound (and rebound quickly!) we’re likely to see a serious economic challenge to Putin, likely the most serious economic challenge he’s faced since he first came to office. Yes there’s a silver lining in every cloud and it seems clear that Russian oil producers have weathered the storm in surprisingly rude health and that output has fared better than almost anyone expected. But the Rusian government’s finances are about to face the sort of pressure that they haven’t in a very long time.
