Omicron Overshadows Russian Production Growth

Copyright © 2022 Energy Intelligence Group All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.

Russia will likely fall into line with whatever decision is taken this week by the Opec-plus alliance in response to the emergence of the new Omicron variant of the Covid-19 virus and the release of strategic oil reserves by the US and other countries.

The country's production growth has lost steam and its spare capacity has nearly been exhausted. Furthermore, output volumes usually decline in January because of the severe cold in the regions where the bulk of Russia's oil is extracted.

This means that Russia would not object if the Opec-plus group opts at its meeting on Dec. 2 for a pause in the current trajectory of a monthly incremental growth in production of 400,000 barrels per day, of which Russia's share is 100,000 b/d.

Another option under consideration would be to roll over the increases, which seems to be favored by Moscow. Indeed, Deputy Prime Minister Alexander Novak said this week that no "hasty decisions" are needed, more information is required about the Omicron variant and that it is necessary to keep watching the situation on the market and the new limitations taken by various countries against the spread of the new strain.

However, doubts are emerging about when Russia would be able to reach its 10.5 million b/d pre-pandemic level of crude production, excluding gas condensate. This might take longer than by May 2022 as envisaged under the Opec-plus deal, while Russia's new baseline of 11.5 million b/d to be used for calculations by the alliance after that, has always looked overambitious.

Slowing Down

Already last month, Russia's production growth rate fell. According to data from the energy ministry's TsDU Tek central dispatch unit obtained by Energy Intelligence, Russia's crude oil and gas condensate production in the first 29 days of November averaged 1.485 million metric tons per day, or 10.873 million b/d under the 7.32 barrel per ton conversion rate. This is only 0.3% higher than the 10.84 million b/d of crude and condensate that Russia produced in October. The growth rate from September to October stood at 1.1%.

The slim increase could have been supported by condensate, which is growing during the colder season but which is excluded from the Opec-plus deal.

In October, Russia produced 9.921 million b/d of crude and 895,000 b/d of condensate.

Even assuming that condensate output last month remained at the October level, Russia's crude production could have grown by about 50,000 b/d, less than half of what is envisaged in the Opec-plus deal.

Limited Spare Capacity

Russia's top three oil producers — Rosneft, Lukoil and Gazprom Neft — which jointly account for about 65% of the country's oil output, have announced they have fully recovered their volumes cut under the Opec-plus April 2020 deal, or are close to doing so.

During its third-quarter earnings call last week, Lukoil said it has now restored about 90% of the 310,000 b/d of oil output that it shut in last year when the Opec-plus cuts were first implemented.

At the beginning of November, Lukoil's spare capacity stood at just 30,000 b/d, which is to be fully utilized by the beginning of February 2022, according to CEO Vagit Alekperov.

Gazprom Neft said it would be producing at full capacity again by the end of this year, while Rosneft revealed it had utilized its remaining 25,000 b/d of spare capacity in the third quarter of the year.

Future growth would depend on intensified drilling and tax breaks. Lukoil already stepped up drilling in the second quarter of this year and plans further expansion.

Lukoil aims to increase its liquids production in Russia to about 1.71 million b/d in the next three years from 1.57 million b/d in the third quarter of 2021.

The oil major is also pushing for the return of tax breaks for high-viscosity crude earlier than 2024 as planned by the government, to support production growth.

President Vladimir Putin has signed this week into law tax allowances for the southern part of the Priobskoye field developed by Gazprom Neft worth nearly 100 billion rubles ($1.3 billion) over 12 years in exchange for bigger investments and production.

Omicron Scenarios

Plans, however, would depend on how things develop with the new strain of the virus. According to Putin's aide Maxim Oreshkin, there could be three scenarios.

Under the most negative one, the virus would spread faster with high severity of the disease which could require similar restrictions to those introduced at the beginning of the pandemic.

Another scenario could be "a false alarm" if Omicron is not more dangerous than other strains.

The final one could be even "positive" if it doesn't cause severe disease and could "oust the Delta strain from the chain." But this scenario is low probability, Oreshkin said, adding that the situation would become clearer in the next few weeks.

Russia is ready to resist new US sanctions but implications for energy markets and global economy could be severe.
Wed, Jan 19, 2022
President Joe Biden has emphasized that the US is lining up broad economic sanctions against Russia, if it should decide to invade Ukraine.
Fri, Jan 21, 2022
Oil futures retreated Friday but still eked out a weekly gain as supply concerns and geopolitical risk paint an increasingly upbeat picture.
Fri, Jan 21, 2022