OIL IN RUSSIA

OIL IN RUSSIA

Russia is the world's largest producer of crude oil. It was the world's largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2014, with average liquids production of 10.9 million barrels per day. Most of Russia's oil production originates in West Siberia and the Urals-Volga regions. However, production from East Siberia, Russia’s Far East and the Russian Arctic has been growing. [Source: U.S. Energy Information Administration, July 2015 ~]

Russia's proved oil reserves were 80 billion barrels as of January 2015, according to the Oil and Gas Journal. Most of Russia's reserves are located in West Siberia, between the Ural Mountains and the Central Siberian Plateau, and in the Urals-Volga region, extending into the Caspian Sea. ~

In 2014, Russia produced an estimated 10.9 million barrels per day of petroleum and other liquids (of which 10.1 million barrels per day was crude oil including lease condensate), and it consumed slightly more than 3.5 million barrels per day. Russia exported more than 6 million barrels per day in 2013, including roughly 5 million barrels per day of crude oil and the remainder in products. According to EIA's International Energy Outlook 2014, Russia's petroleum and other liquids production grows modestly over the long term. ~

In 2003, Russia edged out Saudi Arabia to become the world’s largest oil producer. In the 1990s, Russia ranked third in the world in oil production, after Saudi Arabia and the United States. Estimates at that time placed proven and potential oil reserves at 8 to 11 billion tons. Russia's oil production peaked in 1987, then began a decline that continued through 1995. In the latter year, the yield was 741 million barrels, 13 million barrels less than the previous year. Output for the first quarter of 1996 was 182 million barrels. [Source: Library of Congress, July 1996 *]

A) Crude oil - proved reserves: 80 billion barrels (1 January 2014 est.); country comparison to the world: 8. B) Crude oil - production: 10.05 million barrels per day (31 September 2014 est.); country comparison to the world: 3.C) Crude oil - exports: 4.625 million barrels per day (2013 est.); country comparison to the world: 2. D) Crude oil - imports: 17,610 barrels per day (2013 est.); country comparison to the world: 70. E) Refined petroleum products - production: 4.812 million barrels per day (2010 est.); country comparison to the world: 4. F) Refined petroleum products - consumption: 3.32 million barrels per day (2013 est.); country comparison to the world: 5. G) Refined petroleum products - exports: 2.968 million barrels per day (2013 est.); country comparison to the world: 1. H) Refined petroleum products - imports: 28,040 barrels per day (2013 est.); country comparison to the world: 94. [Source: CIA World Factbook =]

Russia possesses one seventh of the world's proven oil reserves. Oil deposits in Siberia are the second largest after deposits in the Persian Gulf. There are some concerns that Russia's oil could run out in the next 30 to 40 years. Countries with largest reserves (2006, billions of barrels): 1) Saudi Arabia (266.8); 2) Canada (178.8, including 174.1 billion barrels of oil sands); 3) Iran (132.5); 4) Iraq (115); 5) Kuwait (104); 6) United Arab Emirates (97.8); 7) Venezuela (79.7); 8) Russia (60); 9) Libya (39.1); 10) Nigeria (35.9).

History of Oil in Russia

Oil exploration in Russia began in the late 19th century. The entrance of Russia into the world oil trade broke Standard Oil's monopoly in the 1870s. Soviet dumping of cheap oil in the 1960s led to the formation of OPEC. After the break up of the Soviet Union, oil and natural gas provided 80 percent of Russia's hard currency exports.

It can be argued that the Soviet Empire was propped up with Russian oil. Ten million barrels of the 12 million barrel a day production went to support the Soviet Union and its satellites in Eastern Europe, Cuba and North Korea. The other two million barrels was sold on the world market and was the Soviet Union’s primary source of hard currency. The oil and hard currency were essential for supporting the Soviet Union’s 4-million man army, its 45,000 nuclear weapons, its space program and its impressive Olympic team.

Large deposits of oil have been discovered in Siberia in recent decades. Oil was discovered in Kogalym, Siberia in the 1970s. Production rose 50 percent between 1999 and 2004, thanks to modernization, foreign investments and incentives offered by high oil prices.

In the 1980s and 90s, wasteful Soviet oil exploration and extraction techniques depleted wells, which often fell far below their potential capacity. Soviet technology was not capable of exploring and extracting as deeply and efficiently as Western technology. These handicaps played a big part in Russia's plummeting oil production during in the 1980s and 90s. In 1994 the number of oil wells drilled was only one-quarter the number drilled in 1983. In the mid 1990s, it was estimated that 20 percent of the oil that left Russia was smuggled out of the country.

Russia's Oil-Producing Regions

Most of Russia's oil production originates in West Siberia and the Urals-Volga regions. However, production from East Siberia, Russia’s Far East and the Russian Arctic has been growing. Most of Russia's reserves are located in West Siberia, between the Ural Mountains and the Central Siberian Plateau, and in the Urals-Volga region, extending into the Caspian Sea. [Source: U.S. Energy Information Administration, July 2015 ~]

Russia's oil production by region in 2013 (region, thousand barrels per day): A) Western Siberia: 6,422; B) Urals-Volga: 2,310; C) Krasnoyarsk: 426; D) Sakhalin: 277; E) Arkhangelsk: 269; F) Komi Republic: 257; G) Irkutsk: 227; H) Yakutiya: 149; I) North Caucasus: 62; J) Kaliningrad: 26. Total: 10,425. [Source: Source: Eastern Bloc Research, CIS and East European Energy Databook 2014, Table 6 (2014), p. 2. ~]

About two-thirds of Russia's oil comes from Siberia, mostly from huge fields in the northwest part of the region. Much of Russia's oil is produced in Western Siberia in a harsh environment with high production costs and thousand of miles from ice-free ports, which necessitates the construction of expensive pipelines. As much as 20 percent of Siberia is believed to contain oil and gas. Once the area is completely explored, it could produces more oil that Saudi Arabia. Oil was discovered in Siberia in 1965. During the Brezhnev a lot of money was poured into infrastructure projects to develop oil projects.

The second largest reserves of oil are in Siberia in the swampy Timan-Pechora region northeast of the Urals. There are also large reserves east of the Urals and around the Caspian Sea. There are large oil fields north of Tyumen and Omsk. The vast Tyumen oil fields lie in a vast area of wetlands north of Tomsk. There is also oil in Surgut. The main European oil and gas fields are located in the Volga-Ural region, the North Caucasus, and the far north of the Republic of Komi. Three of the richest oil fields—Langepas, Urai and Kogalym—are owned by Lukoil.

Oil Production in Russia

Most of Russia's oil production originates in West Siberia and the Urals-Volga regions, with about 10 percent of production in 2013 originating in East Siberia and Russia's Far East (Krasnoyarsk, Irkutsk, Yakutia, and Sakhalin). However, this share is up from less than 5 percent in 2009. In the longer term, Russia's eastern oil fields, along with the untapped oil reserves in the Russian Arctic, may play a larger role. The Russian sector of the Caspian Sea and the undeveloped areas of Timan-Pechora in northern Russia also may hold large hydrocarbon reserves. [Source: U.S. Energy Information Administration, July 2015 ~]

A number of new projects are in development. Some of these new projects may only offset declining output from aging fields and not result in significant output growth in the near term. The use of advanced technologies and the application of improved recovery techniques is resulting in increased oil output from some existing oil deposits. Fields in the West Siberian Basin produce the majority of Russia's oil, with developments at Rosneft's Samotlor field and Priobskoye area fields extracting more than 1.6 million barrels per day combined. ~

Russia pumped about 8.4 million barrels of oil a day in 2003. Between 1999 and 2003 oil production increased by 25 percent. Russia had hoped to be pumping 10 million barrels a day by 2006 but problems with Yukos and other oil companies prevented it from reaching that figure. Western Europe, the United States, China and Japan want the production figures to rise so that Russia can provide a reliable alternative to the volatile Middle East.

Production is lower than it was in the Soviet era. Production declined from a peak of 11.8 million barrels a day in 1987 to 11.5 million barrels a day in 1988 to 11 million barrels a day in 1989 to 10.3 million barrels a day in 1990 to 9.4 million barrels a day in 1991 to 8.1 million barrels a day in 1992 to 7 million barrels a day in 1993 to 6.3 million barrels a day in 2000 before rising to 7 million barrels a day in 2001 and 8.4 million barrels a day in 2003.

Characteristics of Russian Oil Production

Production costs are about $10.30 per barrel, compared to $5.40 per barrel in Saudi Arabia (2001). Transportation costs for oil and gas pumped in Siberia can be quite high.

Russia has chronically suffered from oil gluts caused by overproduction, excess refining capacity and subsidized domestic prices. The Russian oil industry has been hurt by decrepit explorations and extraction equipment and a crumbling oil transport infrastructure that is in the process of being overhauled. Many companies don’t produce at full capacity because they lack the pipeline space.

Reasons for the decline in production in Russia and the Soviet Union in the 1980s and 90s: 1) deteriorating infrastructure: 2) lack of investment to improve infrastructure: 3) massive siphoning of energy for sales abroad; 4) inefficiencies related to barter, unpaid bills and unpaid taxes; 5) exports taxes of $5 a barrel; 6) the instability of the ruble and the Russian economy; 7) restrictive bureaucracy and unclear jurisdictions; 8) inability of the pipeline system to carry oil that was produced.

Oil production increased greatly by revamping oil fields that have already been developed. For the oil industry to really grow it needs to find new sources of oil in places like Sakhalin Island. Privately-owned companies have been much productive than state-owned ones. Between 1998 and 2003, the three largest private firm increased production by 90 percent while state firms had minimal growth.

Oil and the Russian Government

A number of ministries are involved in the oil sector. The Ministry of Natural Resources and Environment issues field licenses, monitors compliance with license agreements, and levies fines for violations of environmental regulations. The Ministry of Energy develops and implements general energy policy. The Ministry of Economic Development supervises tariffs, while the Finance Ministry is responsible for hydrocarbon taxes. ~

There are two main hydrocarbon taxes in Russia, the minerals extraction tax and the export tax. The export tax varies for crude oil and for different products, and in 2011 product export taxes were changed so that export tax rates on all products were lower than for crude oil in order to encourage investment in refining capacity. In recent years, the government has also offered special tax rates or tax holidays for difficult-to-develop resources, such as Arctic offshore and low-permeability reservoirs, including shale reservoirs. On January 1, 2015, hydrocarbon tax rates changed again. Previously, the export tax was about twice as high as the extraction tax. The 2015 tax change raised the extraction tax and lowered the export tax. This change will increase the value of previously agreed discounts to the extraction tax for difficult resources, and it will also tend to increase exports of crude oil over exports of refined products. ~

Russian Oil State, OPEC and the Curse of Oil

Russia has been described as an oil state. Energy revenues account for 20 percent of the economy and the bulk of its hard currency. The fate of the entire economy often hinges on the price of oil and production limits. Russia is an important source of oil should trouble erupt in the Middle East.

By some estimates every $1 increase in the world price for a barrel of oil earns Russian oil companies $1 billion and provides the government with $250 million to $300 million in tax revenues. When the price of oil skyrocketed in the early and mid 2000s, Russia was so flush with cash it had problems absorbing t all and there worries about inflation.

Russia is not a member of OPEC. It profits from OPEC moves but fails to follow them. In recent years it has been increasing its production while Saudi Arabia and the OPEC countries have been reducing production to keep oil prices high. When OPEC cut production by 13 percent to raise the world prices Russia increased production and made a bundle.

Some think that Russia will turn out to be a example of the “resource curse.” Originally oil was heralded as a great blessing but has turned out to be a curse. It has encouraged people to sit around while money flows in with little effort and has discouraged the development of a work ethic, entrepreneurship and innovation. One of the problems with countries that are rich in natural resource money is that the wealth raises the price of goods and labor. Starting a factory becomes unrealistic because the labor costs are too high to compete with poor countries that have low labor costs. This hurts the entire economy because manufacturing is often an engine for economic growth and innovation, which tends to augment itself and increase with time. The state oil monopolies create a dependence on the state. People look to government for hand outs and solutions to their problems rather than taking care of themselves and solving their own problems

Russia's Oil Grades

Oils from Saudi Arabia and Russia tend to be heavy and sour while Brent crude from the North Sea is very light and sweet. Russia has several oil grades, including Russia's main export grade, Urals blend. Urals blend is a mix of heavy sour crudes from the Urals-Volga region and light sweet crudes from West Siberia. The mixture and thus the quality can vary, but Urals blend is generally a medium gravity sour crude blend and, as such, is generally priced at a discount to Brent crude. Siberian Light crude is a higher quality and thus more valuable when marketed on its own, but it is usually blended into Urals crude because there is limited infrastructure to move it to market separately. [Source: U.S. Energy Information Administration, July 2015 ~]

Sokol grade is produced by the Sakhalin-1 project and is a light, sweet crude with an API gravity of 36.9̊ and 0.27 percent sulfur content.21 As of December 2014, Vityaz blend is being replaced with a new grade of crude, Sakhalin blend. Vityaz was a light (33.6̊API), sweet (0.24 percent sulfur content), crude produced under the Sakhalin-2 production-sharing agreement (PSA) at Piltun and Astokh fields. Sakhalin blend adds to this condensate production from the Kirinskoye gas and condensate field. Since its introduction, Sakhalin blend has traded at a premium to Vityaz blend. Like the Vityaz crude, Sakhalin blend is loaded at the Prigorodnoye port, on the southern tip of Sakhalin Island. ~

The Eastern Siberia-Pacific Ocean (ESPO) blend came on stream in late 2009 and is a mix of crudes produced in several Siberian fields. The grade is exported through the recently constructed ESPO Pipeline to China as well as through Russia's Pacific coast port of Kozmino to other Asian countries. ESPO blend is a fairly sweet, medium-light blend, with a gravity of 35.7̊API and 0.48 percent sulfur content.

Russian Oil Industry

Most of Russia's oil production remains dominated by domestic firms. Following the collapse of the Soviet Union, Russia initially privatized its oil industry, but Russia's oil and gas sector has gradually reverted to state control over the past few years. The Russian oil industry underwent a kind of creeping nationalization in 2004 and 2005, with the Kremlin gaining control of two large oil companies. [Source: U.S. Energy Information Administration, July 2015 ~]

Starting in the late 1990s, privately-owned companies drove growth in the sector, and a number of international oil companies attempted to enter the Russian market, with varying success. More recently the Russian oil industry has consolidated into fewer firms with more state control. Five firms, including their shares of joint venture production, account for more than 75 percent of total Russian oil production, and the Russian state directly controls more than 50 percent of Russian oil production. Smaller firms have generally had higher production growth than larger firms, but smaller firms could be less resilient in the face of lower oil prices. ~

In 2003, BP invested in TNK, forming TNK-BP, a 50-50 joint venture and one of country's major oil producers. However, in 2012 and 2013, the TNK-BP partnership was dissolved, and the state-controlled Rosneft acquired nearly all of TNK-BP's assets. For its share in TNK-BP, BP received cash and 18.5 percent of Rosneft. In the previous decade, Rosneft emerged as Russia's top oil producer following the liquidation of Yukos assets, which Rosneft acquired. ~

Russia has 40 oil refineries with a total crude oil distillation capacity of 5.5 million barrels per day as of January 1, 2015, according to Oil and Gas Journal. Rosneft, the largest refinery operator, owns nine major refineries in Russia. LUKoil is the second-largest operator of refineries in Russia with four major refineries. Many of Russia's refineries are older, simple refineries, with low-quality fuel oil accounting for a large share of their output. Previous tax changes have, with modest success, encouraged companies to invest in upgrading refineries to produce more high-value products such as diesel and gasoline. The tax changes introduced in 2015 will negatively affect the refineries that have yet to be upgraded. ~

Oil Companies in Russia

Russia's oil production by company in 2013 (company, thousand barrels per day): A) Rosneft: 3,997; B) Lukoil: 1,703; C) Surgutneftegaz: 1,224; E) Gazprom Neft: 640; F) Tatneft: 526; G) Gazprom: 340. ) Slavneft: 335. ) Bashneft: 320. ) Russneft: 316. ) PSA operators: 278. ) Novatek: 95; H) Others: 651. Total: 10,425. [Source: Eastern Bloc Research, CIS and East European Energy Databook 2014, Table 7 (2014), pp. 3-5]

Russian oil companies are vertically integrated units that control the entire production process from exploration to transmission. The dominance of a few large companies has made all stages of petroleum exploitation and sale extremely inefficient. National and local government policies have discouraged individual retailers from establishing independent gasoline storage facilities and stations; therefore, retail gasoline likely will continue to be in very short supply (only 8,900 stations were operating in Russia in 1995). Until January 1995, government policy applied quotas to oil exports, and until July 1996 tariffs were applied to oil exports. Both policies, resulting from the gap between controlled domestic prices and world market prices, aimed at ensuring a sufficient supply of oil to meet domestic demand; both were lifted as the gap narrowed. [Source: Library of Congress, July 1996 *]

Russia's state oil industry was broken up into smaller units after the break up of the Soviet Union. Many of the auctions were rigged and handful of future oligarchs were able to take assets for a fraction of their value and become almost instant billionaires. Large Russian oil and gas companies, such as Lukoil and Gazprom, all flush with cash, purchased pipelines and refineries in former Soviet-bloc countries and invested large amounts of money in overseas companies. Russian oil companies are heavily involved in Iraq.

In 2002, Russian oil firms were regarded as seriously undervalued. Their shares were valued at one-third to one-tenth of their Western counterparts. In May 1998, Russia's last large oil company was put n the auction block but no one bid for it. The starting price of $2.1 billion was regarded as too high and the Russian economy at that time was a mess.

Some oil companies have robbed minority shareholder of profits through a practice called transfer pricing,. The parent company sells oil to a subsidiary for a low price, sometimes as low as a few dollars. The subsidiary then sells the oil on the world market for whatever, $50, $100 a barrel. The parent company makes profits from the subsidiaries. Shareholders are cheated out their share because they only get a return based on the price that the parent company sold the oil to the subsidiaries for. Similar practices are used to cheat the government out of taxes.

Oil Exports from Russia

Russia exports about 4.6 million barrels of oil a day, compared to 7.6 million barrels of oil a day in Saudi Arabia. Russia This accounts for about 10 percent of global trade. Russia exports 25 percent of oil production, compared to 90 to 95 percent in Said Arabia. The United States gets about 10 percent of it oil from Russia.

A) Crude oil - exports: 4.625 million barrels per day (2013 est.); country comparison to the world: 2. B) Crude oil - imports: 17,610 barrels per day (2013 est.); country comparison to the world: 70. C) Refined petroleum products - exports: 2.968 million barrels per day (2013 est.); country comparison to the world: 1. D) Refined petroleum products - imports: 28,040 barrels per day (2013 est.); country comparison to the world: 94. [Source: CIA World Factbook =]

In 2014, Russia had roughly 7.3 million barrels per day of petroleum and other liquids available for exports. The vast majority of Russian crude exports (72 percent) went to European countries, particularly Germany, Netherlands, Belarus, and Poland. Revenues from crude oil and products exports in 2013 accounted for 54 percent of Russia's total export revenues. Additionally, half of Russia's federal budget revenue in 2013 came from mineral extraction taxes and export customs duties on oil and natural gas. While Russia is dependent on European consumption, Europe is similarly dependent on Russian oil supply, with more than 30 percent of European crude oil supplies in 2014 coming from Russia. [Source: U.S. Energy Information Administration, July 2015 ~]

Asia accounted for 26 percent of Russian crude exports in 2014, with China and Japan accounting for a growing share of total Russian exports.35 Russia's crude oil exports to North America and South America have been largely displaced by increases in crude oil production in the United States, Canada, and, to a lesser extent, in Brazil, Colombia, and other countries in the Americas. Russia's Transneft holds a near-monopoly over Russia's pipeline network, and the vast majority of Russia's crude oil exports must traverse Transneft's system to reach bordering countries or to reach Russian ports for export. Smaller volumes of exports are shipped via rail and on vessels that load at independently-owned terminals. ~

Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.5 million barrels per day of fuel oil and an additional 860,000 barrels per day of diesel in 2013. It exported smaller volumes of gasoline (100,000 barrels per day) and liquefied petroleum gas (60,000 barrels per day) during the same year. ~

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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated May 2016

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