Oil Plunge: Russia is not the only affected party

Posted on Updated on

Nagesh K Ojha

royal-dutch-shell-plc-energy-strategy-2014 shell Photo: Shell

The logic of efficiency and technological advancement has been effectively waning from the American shale oil revolution narratives.

It was always a known fact in general that Russian oil industry easily could survive at $60 a barrel; however, it could be stretched up to $50 for some time as well, but it is not possible to grow beyond that point of market prices. Now, when the specter of low prices looming to go away far from that lower limit; it is certainly a great matter of concern for the Russian policy makers and industry personnel.

How to solve the price crisis, in the long run, is a major question before the Russian state, in general, and energy strategists in particular. Though, the state has made a U-turn on major private initiatives in the past; now again, it has started to promote the policy of inducting independent players in the industry. The First Deputy Minister of Energy Alexey Teksler recently said that the Russian Energy Strategy until 2035 provides independent gas producers an opportunity to export of pipeline gas. He said that “In terms of access of independent producers to export sales firstly we expected at the first stage to liberalize and develop the LNG production, and at the second stage – provide independent exporters access on a competitive basis to a single channel of pipeline gas export”. Furthermore, the state has the plan to push reforms regarding domestic gas prices, but only after 2020.

On the one hand, there is a bigger goal to provide access to many independent gas producers in the ‘Power of Siberia’ pipeline program; but the main objective is to find out independent gas producing companies that could sell their products to Gazprom. The competitive prices would be close to the export prices. Along with the Rosneft, a state oil company, independent gas producing companies may get access to export through the Power of Siberia pipeline up to 2020-2025. In fact, the state is interested in exploiting the efforts of independent producers to assist the Chinese supply especially from the oil and condensate oil fields.

  • “The Power of Siberia is a gas transportation system to deliver gas the Yakutsk and Irkutsk gas production centers in Siberia to Russia’s Far East and China. Its planned capacity is 61 billion cubic meters per year. The pipe’s total length is 3,968 km. The estimated construction cost is $21.3 bln. The pipeline route will run along the existing route of the Eastern Siberia – Pacific Ocean oil pipeline.”

It looks that independent producers may get an access due to prices; however, it has some long-term game plans as well. Current oil market prices do not suit the long-term Arctic programs and it is based only on the constant high prices. Lower prices have hit Shale industry in the U.S. and are ready to hit the Russian efforts in the Arctic.   Alexei Texler, the First Deputy Energy Minister, explained that “It is possible if the [oil] price is lower than the current level. It’s obvious that amid such prices the Arctic shelf development will be out of the question. We base all our plans on boosting output in the Arctic on projections that we’ve announced [of oil price growth to $80 per barrel within 5 years – TASS].”

Though, the Russia’s Energy Strategy 2035 gives hope for the oil export growth by 40-50 mln tonnes, it is difficult to maintain the promises at the current trends of oil prices. Neither OPEC itself nor Russia independently or even collectively has any plan to curb the current production levels. Lukoil CEO Vagit Alekperov said that “Russia cannot agree upon the oil production limits with the OPEC in view of specific process features of domestic oil production.” The real reason seems behind the continued high level of production that the Russians “have challenging fields; the majority of them have low production rates… It is impossible to stop wells because starting will require much more funds than stopping… In certain cases, it will simply be impossible to restart wells.”

However, CEO of Rosneft, Igor Sechin thinks that the market could be balanced by OPEC quota system and by sticking with it. He said the countries of the Organization of the Petroleum Exporting Countries (OPEC) are currently exceeding their own quotas by 1.5-2.5 mln barrels per day… A lot is still potentially connected to the OPEC losing its regulatory functions. I would like to note, that the OPEC countries currently exceed their own quotas (30 mln barrels per day) by the amount, according to various estimates, from 1.5 mln to 2.5 mln barrels per day. If the quota was met, according to our estimates and the OPEC Secretariat analysts, the global oil market would be balanced, which would undoubtedly have a positive impact on the oil price.”

Nowadays, Russian approach toward the oil market depends on its potential Asia-Pacific destinations. It could double the export to this market by 2035. The new document on the draft Energy Strategy 2035 says that “Growing demand on the soaring Asia-Pacific market creates an opportunity of increasing Russia’s oil export by 1.8-2.2 times and the natural gas export by 8-9 times in this destination by 2035…This opens new opportunities for the Russian fuel and energy sector but requires huge investments into development of the relevant energy transport infrastructure.” 

However, slowly, now the question of stabilizing the prices has become more pertinent. The experts of Bank of America Merrill Lynch expressed the hope that OPEC may try to keep the prices above $50 a barrel. In fact, weak demand in developing countries could compel the OPEC to react very soon. Experts believe that “Over the past few years, the breakeven points of OPEC countries budgets increased, while Saudi Arabia is able to finance its budget deficit at the expense of state reserves while Brent price stays in the range of $55-70 per barrel.”

However, while, the U.S. shale oil revolution is facing a fatal crisis in many cases; other than North Dakota, where breakeven costs varies from $20-$120; the average breakeven costs has been generally estimated between $40 – $60. From the beginning, OPEC-“which supplies about 40% of the world’s crude and has produced above its 30-million-barrel-a-day quota for the past 15 months”, has taken a tough stand to retain its market share along with the Saudi Arabia. In its recent report, the cartel has stated that “in North America, there are signs that U.S. production has started to respond to reduced investment and activity…Indeed, all eyes are on how quickly U.S. production falls.”  In fact, the drilling rig counts in America are continued on “its decline and dropping to 662, while the overall rig count is now down 864 units year on year.” It is not only the warning of the OPEC; Paris-based International Energy Agency (IEA) also has the opinion that American fracking industry would feel the heat of the sustained lower oil prices and “on the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, ‘inefficient’ production…U.S. oil production is likely to bear the brunt of an oil price decline that has already wiped half the value off,” the major international oil contract.” It expects only a little chance to rebound the production from shale. The logic of efficiency and technological advancement has been effectively vaning from the American shale oil revolution narratives. It is evident even to the IEA that “that OPEC’s market share strategy was bearing fruit.” It has shown the relevance of OPEC and how market could be dominated by the cartel or how it could affect any nascent oil and gas industry even in a powerful country. At this point of time, the Iranian oil has become crucial to the market supply that would certainly balance the shortage created by the low shale oil production. Libya should also not be ignored, which roughly has the capacity to produce 1.5 mb/d.

royal-dutch-shell-plc-energy-strategy-2014-Photo: Shell

  • Production outside the Organization of Petroleum Exporting Countries will fall by 500,000 barrels a day to 57.7 million in 2016. Shale oil production in the U.S. will drop by 385,000 barrels a day next year as a crude price below US$50 a barrel “slams brakes” on years of growth.(IEA)
  • For the global surplus to end by the fourth quarter of 2016, U.S. output will need to decline by 585,000 barrels a day, with other non-OPEC production falling by a further 220,000 barrels a day. (Goldman)

The most intimidating, scary, and alarming hints came from the Goldman Sachs Group Inc, which has the opinion that due to lower demands the prices may keep low for the next one and a half decade. However, according to the Goldman the long term crude prices could be at $50 a barrel. As far as the bottom line is concerned, “the global surplus of oil is bigger than it previously thought and that failure to reduce production fast enough may require prices to fall near US$20 a barrel to clear the glut. Prices may touch that level when stockpiles are filled to capacity, forcing producers in some areas to cut output.” This bottom-line would certainly complete a circle of fluctuating prices in the world oil market that would remind us 1947, 1972, and 1998.

http://www.macrotrends.net/1369/crude-oil-price-history-chart

http://www.tradingeconomics.com/commodity/brent-crude-oil

Author:

Having more than 15 years of professional teaching experience; the author holds a Master’s degree in History and M. Phil. in International Relations with a focus on ‘National Security Strategy of the United States and Russia’. He is pursuing Ph.D. in International Relations, where the focus is on the ’Energy Security’. His research mainly focuses on the ‘Role of Energy in the Foreign Policy Behavior of Major Oil and Gas Producing States’.

His current research is focused on the Russian and Eurasian energy markets and its geopolitics at the Center for Russian & Central Asian Studies, School of International Studies, at Jawaharlal Nehru University, New Delhi, India. He has presented many papers in various National and International conferences. Most recently, he presented his research paper “Russian Energy: Breaking the Ice” that was selected for the lX World Congress of the International Council for Central & East European Studies in Makuhari, Japan. Along with lectures and scholarly writings, he participates in Tv discussions and writes commentaries in newspapers and magazines as well.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s