RUSSIA MONITOR
Date: 23 April 2020
Russia Confronts Serious Technical Problems on the Pathway to Curb Crude Output
In line with the OPEC+ agreement struck in mid-April, Russia is bound to reduce its crude output by nearly 25 percent from May 1 onwards. But Moscow could be inept for such a large drop in production in just a two-week time. What is to blame is the peculiarity of the Russian crude industry.
Energy experts, as well as Lukoil Vice President Leonid Fedun, say Russia could curb its crude output by no more than 300,000–400,000 barrels per day –– thus with no major harm to the sector. Under the OPEC+ deal, Russia promised to cut oil production in the first two months by about 2.5 million barrels a day. The targeted cut is about eight times larger than the biggest reductions Russia managed to make until late March this year. This, of course, will deliver a blow to the country’s crude oil giants and the federal budget, with oil export revenues accounting for 33 percent of the country’s gross domestic product. Russia could see less crude at a record low price. However, while the level of demand and the level of prices on the global market may improve quite quickly, another consequence of a deep cut in output may have a big negative impact on the Russian oil sector.
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Russia has some 180,000 oil wells. Yet they reveal low performance, with 9,500 tons of oil pumped out of a well each day. For the sake of comparison, a Saudi oil rig delivers between 1,000 and 2,000 tons. This low efficiency is due to some geological preconditions. Most Russian fields are in northern Siberia where oil rigs are much more profound than those in Saudi Arabia as they go through a frozen solid, or permafrost. Mostly Soviet era-built wells contain oil highly tainted with water, where 4 percent is crude and the remaining 96 percent is water. What comes at the surface needs to be separated, though. Should digging operations halt, water flowing through the pipes will freeze. When in shutdown, an oil well becomes covered with paraffin and stearin that require to be removed before resuming further operations. Much time is needed to go ahead with drilling new rigs and replacing damaged installations. In short, Russian energy firms could find it uneasy to reopen production all where they will want to bring it to halt amid the OPEC+ deal.
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