Poor Russian Production Prospects May Support Higher Oil Prices Down The Road

A series of reports by EnergyTechStocks.com suggests that the prospects for Russian oil production going forward are fairly grim.  That sounds about right.  Russian producing fields are old and therefore likely to face increasing decline rates; new fields that could be exploited present difficult technical challenges that apparently require the sophisticated capabilities of western companies; non-state entities have been unfairly exploited by the Russian government over the past few years and therefore western companies are reasonably becoming reluctant to invest in Russia; and the motivations of the Russian government to foster higher production in the first place are highly suspect anyway given that Russia benefits substantially from higher global oil prices and may well want to reserve its potential new fields for future domestic use. All of this suggests that it is completely reasonable to expect that the world may see declining Russian production going forward.

Moreover, as discussed in a recent post, any decline in Russian production becomes magnified by rising domestic Russian consumption to result in a far greater decline in Russian exports of oil. The matter is particularly significant since Russia is currently the largest oil producing country in the world and the second largest oil exporting country.

Here is the report:

Raymond James Says State of Russian Oil ‘Much Worse than We Would Have Imagined 6 Months Ago’ (Pt. 1 of 2)

Russian oil production will decline over 1%, or approximately120,000 barrels a day, through 2010, a situation that is “much worse than we would have imagined as recently as six months ago,” Raymond James & Associates, the investment banking firm, said in a new report.

Raymond James blamed the expected decline on factors including “the creeping nationalization of energy assets and the fact that much of the ‘low-hanging fruit’ has been picked.” The firm’s Houston-based energy analysts concluded, “The deteriorating investment climate in the Russian energy sector has clearly deterred foreign investment, and it goes without saying that fighting wars with neighbors is not going to make the Kremlin look warm and fuzzy,” the latter a reference to Russia’s ongoing conflict with Georgia.

Asked to comment, independent Texas-based petroleum geologist Jeffrey Brown said he expects that the decline in Russian oil production “will be pretty steep,” noting, “The Russians are highly dependent on old oil fields, with rising water cuts.” (The older a well, the more likely water is being pumped in so as to force the remaining crude to the surface.)

Brown indicated that as sharply as he expects Russia’s output to fall, the amount of oil Moscow will have available for export will fall even more, reflecting rising oil consumption inside Russia. In the first half of 2008, Russian oil exports reportedly fell 5.2% compared with the prior-year period. (For more on Brown’s oil analyses, see Does Your Financial Adviser Know What Jeffrey Brown Knows About Mexico’s Oil Exports? (If Not, Listen Up) and Jeffrey Brown’s Warning On Oil Producers’ Own Rising Consumption Gains New Wall Street Backing.)

Noting that Russia accounted for two thirds of the increase in non-OPEC oil production between 2000 and 2007, the Raymond James report further concluded that “with Russian oil production now heading south, it will be extremely difficult for non-OPEC oil supply to post any meaningful growth in the future.”

Raymond James Warns Any ‘Meaningful’ Oil Disruptions Will Cause ‘Significantly Higher’ Prices (Pt. 2 of 2)

“The world now has a precariously balanced oil market that cannot withstand any meaningful oil supply disruptions without significantly higher oil price implications,” warns a new report from Raymond James & Associates, the investment banking firm.

This precarious balance is due to both geopolitical factors and a lack of oil supply growth in non-OPEC countries, Raymond James’ Houston-based energy analysts said. Geopolitically, Raymond James said the Russian threat to the oil pipeline running through Georgia must be added to the existing conflicts between Iran and the West and between Turkey and Iraq. Each is an oil “hotspot” that could cause oil prices to rise. “Additionally, increasing demand from Caspian countries for a bigger piece of the oil profits may continue to delay and push back some of the larger projects scheduled to come online over the next five years,” the report noted.

Caspian project delays are part of why Raymond James sees non-OPEC oil production being essentially flat through 2012 or so. “We believe that over the next three to five years, the world will see no meaningful or sustainable net increase in non-OPEC oil production.”

With non-OPEC output 60% of total global output, and with per-capita oil demand continuing to rise in Asia, India and the Middle East, Raymond James fears “significantly higher” oil prices will result should there be any flare-up in geopolitical tensions.

Posted in Categories: Commodities, Contributor, External Research.

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