The reduction of oil production by Russia was called an inevitable step

Experts assessed the country’s possible losses

Due to the price limit imposed by the West, Russia may reduce oil production, “there are such risks,” said Deputy Prime Minister Alexander Novak. The official made a similar confession earlier – in December, voicing then the estimated reduction parameters – 500-700 thousand barrels per day. In combination with information from the Ministry of Finance about the extremely high budget deficit of 1.76 trillion rubles in January, this indicates one thing: against the backdrop of sanctions, the state has problems with raw material exports, and hence with income, with the replenishment of the treasury.

Earlier, Novak said that in January, oil production in Russia remained at the level of December, about 9.8-9.9 million barrels per day, and by the end of 2022 it increased by 2%, to 535 million tons. According to the Deputy Prime Minister, “production and exports are stable”, despite two types of sanctions restrictions that simultaneously entered into force on December 5 – the EU embargo on oil supplies by sea and the “ceiling” of oil prices at $60 per barrel. As suggested by the International Energy Agency, Russia will be forced to cut production by 1 million barrels per day as a result. That is, by about 49.8 million tons per year, or 9%.

“For Russia, this is clearly not the best option,” says Artem Deev, head of the analytical department at AMarkets. – Firstly, the budget, with its current record deficit of 1.76 trillion rubles, will receive less revenue. Payments of the MET (mineral extraction tax) depend on the volume of oil production, which have already decreased. Secondly, the decline in production will directly affect the volume of exports and income tax payments. Thirdly, the problem will have to be solved by mothballing the wells, and there are no guarantees that they will be restored later.”

Having reduced production after the pandemic in 2020, the country lost about 10% of wells. Subsequently, some of them did not recover at all, and some of them earned half or a third of their capacity. In general, this situation will require budget consolidation, that is, cost reduction. In addition, argues Deev, in the near future we will certainly see the strengthening of the positions of the dollar and the euro on the stock exchange, which will become an additional way to replenish the revenue side of the treasury.

“Being under sanctions, the oil industry is rebuilding, and this process will take place in the coming months, the uncertainty in the markets remains very high,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation. – And Novak’s statement does not mean an automatic reduction in oil production. As part of the OPEC + deal, Russia is systematically reducing it, since it has specific obligations to other participants. Yes, in the conditions of the price “ceiling” our country has problems with the sale and transportation of its raw materials, in particular, oil products. But if they can be solved, the topic voiced by Novak will become irrelevant.”

It is not known how many tankers Russia eventually managed to assemble in order to use this “twilight fleet” to deliver oil products to Asia, regardless of the “ceiling” of prices. It is possible that there are not enough ships, or that not all planned contracts have been signed. This market is much more peculiar and complex than the oil market, Yushkov notes. The analyst sees Russia’s task at the first stage in convincing Asian consumers to buy its oil products for their domestic needs. For India, this is undoubtedly beneficial: it can take Russian goods at a huge discount, and oil products produced at its own refineries (this industry is well developed in the country), including fuel oil and diesel fuel, can be sold abroad at world prices.

“The embargo on the supply of Russian oil products to Europe, which has been in effect since February 5, makes production cuts an almost inevitable measure,” said Mark Goykhman, chief analyst at TeleTrade. – Unlike crude oil, this product is extremely difficult to sell in China, India, and other Asian countries that have their own developed oil refining. On the contrary, they will certainly want to increase their own exports. The domestic market of the Russian Federation also does not experience a shortage of this product, respectively, it will be necessary to reduce output, reduce the load on a number of refineries. In this case, they will not need the previous volumes of oil.”

According to various estimates, Goykhman sums up, the reduction in production may be 7-10%. As a result, losses for Russia will be significant. Oil refining volumes will fall by about 30%, which will seriously undermine the income of exporters, related and service industries, and finally, the budget.