Russian Oil Production Appears to Have Peaked

The United States reached peak oil production in 1971, as forecast by M. King Hubbert, the Shell geologist. Before that time, the US attained a form of glory in its oil age with spectacular discoveries in Texas, a robust industry, strong exports to the rest of the world and lots of free wildcatting. The oil age in the US also gave rise to novels and films, like Upton Sinclair’s Oil and of course George Steven’s vehicle with James Dean, Giant.

Russia appears to have peaked now, without enjoying any such glory. Perhaps the promise of Khodorkovsky’s Yukos, which charged out of the gate and looked to deliver on the dream of a modern, efficient corporation was doomed by the oligarchical terms of its founding. Large mega-projects like Sakhalin also succumbed to the vagaries of the State, and now the bloated Gazprom (OGZPY.PK) looks more like a portrait of decay than an instrument of power. It’s not just the volatility in the price of Oil and Gas that was the undoing of Russia. It was Russia’s historical propensity to eat itself.

Russia’s oil industry now resembles the unbuilt buildings of Russia’s futurists, from the 1920’s. Production, which was boosted to new heights in 2007, has now fallen 1.00% in calendar year 2008. But the chatter out of Russia is much darker, than a 1.00% fall would suggest. First, Russia does not have as much easy oil as is found in the Arab states. This makes Russia’s achievement in this decade, when it was able to match Saudi Arabia in daily production above 9 Mb/day, all the more impressive. But we know that a goodly portion of Russia’s ability to increase production from 2000-2008 comes directly from its previous collapse. In other words, Russia did not discover a lot of new oil this decade. It simply went back to mothballed wells, many of which were aging. But while mothballed wells giveth, they also taketh away. They tend to have a surge flow after reopening, only to reach peak quickly thereafter.

More relevant now to the world however is the ability of Russia to export oil. 2008 saw Russian oil exports fall by over 5.00% and the outlook is not pretty from here. The fall in oil prices not only hurt Russia economically. Current prices are simply way too low for great swaths of Russian production to carry on profitably. While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago. Very few oil producers do. And as a general point, oil at $45.00 continues to set the stage for a supply collapse. Russia is vulnerable to a huge drop in production.

The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over. Non-OPEC supply is on a severe downward supply path. Some are even calling for a global supply collapse. Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing. That is grim.

Photo: Photomontage of the Wolkenbugel by El Lissitzky in Nikitsky Square, Moscow 1925

Comments

[Moon Kil Woong:]

With oil at the price it is now it is hard to say that oil production fall off has to do with no more supply, rather it is a function of falling demand. We probably won't know the answer to that question until oil is $100+ a barrel again. Hopefully, that will be way out in the future.

BTW, there are tons of hydrocarbon deposits in the North Pole and Russia will be able to claim a lot of them so my feeling is that no, Russia in the future will have even more oil deposits to tap if there is need for them (hopefully there is not anytime soon or we will all be living in a spa).

Jan 27 02:16 PM

[Firat Ünlü:]

'While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago.'

With increasing Chinese demand for oil and a pipeline to the Asian states yet to be finished wouldn't it make sense for them to get into a partnership with them? There's already a million Chinese working in Africa...

Jan 27 02:37 PM

[Chris B:]

On Jan 27 02:16 PM constructe wrote:
>
> BTW, there are tons of hydrocarbon deposits in the North Pole and
> Russia will be able to claim a lot of them so my feeling is that
> no, Russia in the future will have even more oil deposits to tap
> if there is need for them (hopefully there is not anytime soon or
> we will all be living in a spa).

Efforts to obtain natural resources from places like Alaska, Siberia, and the Arctic have always been constrained by the bitter cold. Gasoline, diesel, and motor oil turn to jelly. Engine blocks crack. Doors and pipe valves freeze shut. Metal scaffolding turns brittle. Ice buildup damages buildings, rigs and ships. Workers lose fingers, ears, toes, and lives to double-digit negative temps. Supplies have to be airlifted in at great expense and risk, and sick workers airlifted out. Energy expenses just to provide indoor heat or energy become prohibitive. As we've seen again and again, Arctic operations become so costly that it cannot produce resources at a profit. Even Soviet slave labor failed to produce significant resources in Siberia. Global warming will only "improve" things by 2-5 degrees in our lifetimes, but -40 is still too cold to do any work!

So I wouldn't expect Siberian, Arctic, or Alaskan reserves to save us. Those resources may always be there, but "peak oil" always meant peak economically obtainable oil.

Jan 27 04:53 PM

[Michael K:]

Chris B:

As an Alaskan, with numerous family members working on the North Slope, I can tell you that you are almost completely wrong. Yes, there are additional costs intrinsic to working in an arctic environment, but it's been almost three decades since the oil fields in arctic Alaska were opened, and at this point economies of scale have taken over to reduce those costs to all time lows.

And the idea of -40 would be a blessing during the winter, try more like -60 to -80 F.

Jan 27 05:11 PM

[OilDaddy:]

King Hubbert's bell curve analysis predicting the extent of future U.S. oil field discoveries had nothing to do with predicting U.S. oil productive capacity and did not accurately predict the 1970 drop in U.S. oil production. The drop in U.S. oil production in 1970 was caused by the U.S. Congress holding domestic oil prices well under $3/B starting in early 1958 by importing increasingly higher annual volumes of cheaper foreign oil and setting area natural gas prices at such low levels in 1960 eliminating all economic justification for expanding domestic oil and gas production during the 1960's from development drilling, well workover and large scale, secondary recovery (waterflood) operations in Texas and Oklahoma and forcing domestic integrated and large independent oil companies who were at the early stage of exploiting the potential of the Offshore Gulf Coast Region overseas in search of economically viable exploratory/developmen... prospects. By holding domestic oil and gas at prices far below that needed to justify investments to expand domestic oil and gas production, Congress not only caused the decline in domestic oil production in 1970, it also destroyed the domestic oilfield drilling and service industries' infra-structure that provided the research facilities and served as the breeding and training grounds for domestic and the world's oilfield technicians prior to 1960. Not to mention that the Congessional stupidity promoted by inane academia based economists' dreams of unlimited supplies of cheap energy to build and grow the nation's economy without considering the ramifications would have the effect of causing formation of and nationalization of OPEC and its oil resources!

Jan 27 07:54 PM

[isaac the t...:]

Good article. Alot of people don't realize that the concept of effective peak oil relates to the idea of how much oil can be brought to the global market (taking into account geology, economics, politics, and management). Russia, may,in the future be able to ramp back up their production if things are extremely well managed by them, but it is doubtful they will ever match the volumes they have already brought to market, since idomestic consumption will consume increasing amounts. So if they havn't peaked, they awefully close.

Jan 27 11:41 PM

[John Petersen:]

For what it's worth, I've found it useful to think in terms of "peak cheap oil" as an economic concept rather than "peak oil," which many would argue is a theoretical geological and geophysical concept. There may be lots of hydrocarbons out there to be had - but they won't be cheap.

Jan 28 02:51 AM

[Ferdinand E...:]

Good article and some good comments. I especially like the expression "inane academia based economists", because I have been around plenty of those, and they still dominate the profession. Of course, where oil is concerned you can't always trust the non-academics, but at least they wear expensive clothes.

About Hubbert's geometry and math, I'm not sure that I can fully accept the criticism offered by OilDaddy, although his comment is valuable. All Hubbert did was to take the existing data and fit a logistic curve to it, designating its inflection point as the peak. Many observers say that he was lucky to get the result that he did,

The point is that, as Mr OilDaddy implies, it was economics and not mathematics or geology that best explains the US peak. In my lectures Hubbert is what might be called a supporting actor, but he makes more sense than the people who made their careers tweaking the Hotelling hypothesis.

As for the Russians, the vice president of one of their largest oil companies says that they will never produce more than 10 mb/d, and everything considered, their exports will probably fall. Even if they can produce more, it might be smart to abstain.

Jan 28 09:52 AM

[bindlepete:]

Russia's gentle alliance with OPEC may prove exciting. The Russians do not like folk who break deals unless of course it is them. Let obvious cheating come to light on quotas and some high ranking family members may start to disappear be detained or have accidents.

As Nikita so aptly put it " lie down with dogs and you get up with fleas".

There are folk I do not do business with and without a firm grip on a sensitive part of their anatomy the Russians and Chinese are two. Mexicans - for get it as they will sacrifice any and all for fresh money and they have no courts other than the local Jefe.

Jan 28 10:23 AM

[Moon Kil Woong:]

Thanks for the comment Michael K. Indeed, oil drilling technology has gotten better and better. Even with oil under $40 Exxon put up the biggest structure in the world, an oil field in the middle of the ocean. It will be a longtime before Russia even knows what peak oil means.

It is funny that oil keeps being found in the extremes (extremely hot middle east, extremely cold Alaska and Russia, extremely deep oceans). What gives? Who made this world? Did they make oil as some sort of consolation prize for living in a crappy location, lol?

Needless to say, engineering enginuity keeps the oil a gushing. And I am happy to say most of that innovation comes from the USA still.

Jan 28 02:57 PM

[Gregor Macd...:]

Thanks for all the remarks. I was surprised the Pravda picked this article up overnight, and published it today with my permission.

I actually think Russia could help its own cause if it were to either admit to peak (peak flows of course) and/or release updated reserves data. In an article last year which could be regarded as naiive (but that's OK by me) I suggested that Russia should be more transparent. Won't happen anytime soon, but that's what I would advise.

Oil Glasnost. Advice To Russia: Try Transparency

Gregor

Jan 28 03:24 PM

[G. Doctorow:]

The demise of the Russian oil industry has been repeatedly predicted by gloating detractors in the West for decades. The reasons for stagnating or falling production in Russia at present are not dwindling reserves, shortage of capital, backward technology or mismanagement by state administrators - the arguments usually brought up by those paid Western lobbyists on behalf of the international oil majors wishing to move back in and colonize Russia. The comparatively banal facts explaining stagnation and decline are purely economic and fiscal motivation: at $40 a barrel it is uneconomic to produce for export at many of Russia's more remote and climatically challenged fields - at $60 per barrel it will begin to become interesting. Secondly, until the recent economic crisis began to bite, the government export taxes provided a disincentive to expand exports, though those taxes were essential to insure the revenues from export accrued to the stabilization fund and the proficit that today promises to keep Russia afloat in the face of forecast deficits of 5% or more now and in the several years to come.

Jan 30 11:53 AM

[Alex Filonov:]

Government mismanagement is the main reason for falling oil production in Russia. Prices have nothing to to with it: production started falling in the first quarter of 2008.
Government mismanagement was the reason for fall in oil production in USSR in 1980s. Then USSR fell apart, new countries in its place invited Western oil companies (Russia included), effective national companies emerged, and oil production shot up. Now in Russia oil production is mostly nationalized, Western companies are pushed aside, result is here.

On Jan 30 11:53 AM G. Doctorow wrote:

> The demise of the Russian oil industry has been repeatedly predicted
> by gloating detractors in the West for decades. The reasons for stagnating
> or falling production in Russia at present are not dwindling reserves,
> shortage of capital, backward technology or mismanagement by state
> administrators - the arguments usually brought up by those paid Western
> lobbyists on behalf of the international oil majors wishing to move
> back in and colonize Russia. The comparatively banal facts explaining
> stagnation and decline are purely economic and fiscal motivation:
> at $40 a barrel it is uneconomic to produce for export at many of
> Russia's more remote and climatically challenged fields - at $60
> per barrel it will begin to become interesting. Secondly, until the
> recent economic crisis began to bite, the government export taxes
> provided a disincentive to expand exports, though those taxes were
> essential to insure the revenues from export accrued to the stabilization
> fund and the proficit that today promises to keep Russia afloat in
> the face of forecast deficits of 5% or more now and in the several
> years to come.

Feb 02 11:29 AM

[adamnb:]

much Russian-bashing goes on across the western media. Russia has enormous reserves that has not even begun development, mostly in Siberia, where it's been successfully pumping for more than half a century. Right now, BP-TDK is responsible for nearly 20% of BP's revenue. One question: if Sakhalin has no prospect, what's Exxon, Chevron, Shell, and other Japanese and Korean producers doing there?


On Jan 28 03:24 PM Gregor.us wrote:

> Thanks for all the remarks. I was surprised the Pravda picked this
> article up overnight, and published it today with my permission.
>
>
> I actually think Russia could help its own cause if it were to either
> admit to peak (peak flows of course) and/or release updated reserves
> data. In an article last year which could be regarded as naiive (but
> that's OK by me) I suggested that Russia should be more transparent.
> Won't happen anytime soon, but that's what I would advise.
>
> Oil Glasnost. Advice To Russia: Try Transparency
>
> Gregor

Feb 02 06:36 PM

[adamnb:]

Where's your evidence for this Russian downfall. It's really hard to take anything about this article seriously. Not one single fact to uphold it's argument nor a single statistic. To quote Gary Dorsch, publisher of SirChartsalot, "Russia holds the world’s largest natural-gas reserves, the second largest coal reserves, and the eighth largest oil reserves." To say nothing of its other world class mining interest in uranium, gold, nickel, platinum, paladium.

Feb 03 11:57 PM