- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.

Following the collapse of oil prices in mid-2014, many oil-producing countries that were highly dependent on oil exportation, experienced difficulties keeping their economies afloat. Surprisingly among all these petrostates, Russia’s oil industry has shown intense resilience during an era of low oil prices. Not only did Russia lose oil export revenue since then, it has also faced heavily imposed sanctions and found it difficult obtaining international funding to revitalize its oil industry. There was no secret recipe for how Russia managed to navigate through these trying times, however, a combination of the devaluation of the ruble, a friendly tax environment, and a commitment to maintaining upstream spending have all worked in favor of the oil industry in Russia.

The success of the Russian oil sector’s resilience is based mainly on increased oil production in newly developed greenfields, or new fields, and in the maintenance of production in brownfields or mature fields. While many of Russia’s well-known big oil companies have shown flat production since oil prices dropped in 2014, it has been the other smaller oil companies that eventually contributed to Russia’s increased oil production. 

Major oil companies Rosneft and Lukoil were unable to increase their production, whereas the relatively smaller companies; Tatneft, Gazprom Neft and Bashneft have genuinely performed well. The production growth in all of these relatively smaller companies is primarily based on new greenfields. For instance, Gazprom Neft operated in the Arctic, Tatneft focused on fields in Tatarstan and Bashneft operated in Timon Pechora fields, which is still in its growth phase. 

Compared with the 10.58 million barrels per day (/d) of production in 2014, Russia continued to increase oil production over the following years. Overall production reached 10.73 /d in November 2015, and at the end of the year, Russia produced 10.83 /d. This rapid growth in production continued in 2016 and 2017 as well. At the end of 2016, oil production grew to 11.24 million bpd to reach a 30-year high. 

With the aim of maintaining tax revenues, the Russian government focused on companies operating chiefly in brownfields during the period of lower oil prices. To control depletion of these fields and to further generate growth, production was reduced by 2 percent since 2013, however, production could easily have dropped by as much as 10 percent. Oil market experts assert that if no intervention were taken in these brownfields’ production, their output level would have dropped further. Furthermore, to enhance brownfield reservoir productivity, companies such as Rosneft began to utilize horizontal drilling, which currently accounts for almost 30 percent of its operations. As companies further invest in horizontal drilling technology, it is estimated that horizontal drilling will be responsible for half of all oil production in Russia by 2025. 

The resilience in Russia’s oil sector also stemmed from increased expenditure in upstream activities. Remarkably, local companies found a way to get extra funding for upstream activities during the oil price collapse and at a time when western sanctions aimed at hampering Russia’s big oil projects. 

There is no doubt that the oil sector operates with high capital intensity and that the Russian oil sector has experienced problems accessing international funding after the annexation of Crimea. To further increase oil production, many companies deliberately delayed downstream investments and prioritized their strategy towards upstream projects. 

To increase the volume of higher quality and value-added products, the government introduced a tax system that gradually increased taxes on companies that produced sub-standard products. Therefore, many companies were forced to increase investments in better quality products and to enhance the quality of refining to alleviate their tax burden. As a result, the overall quality of the refining system in Russia has started to recover.  

The devaluation of the ruble has also played an important part in propping up Russia’s oil sector. The decision of the government to allow the ruble to float freely amid market forces has helped the industry to maintain its profitability and thus to invest in the upstream sector.  Despite the heavily imposed sanctions, the Russian oil sector managed to survive, and moreover, continued to fund its upstream projects to increase overall production.

The main challenge for the Russian government since mid-2014 has arisen from the overall drop in oil tax revenue. Although total oil production reached over 11 million bpd for the last two years, the share of oil revenue in the federal budget plummeted from approximately 50 percent prior to 2014 to 36 percent in 2017. The government budget deficit has also increased during the same period and the Reserve Fund, which was built up during the oil price boom years, has been utilized to curb the increasing budget deficit. The government slashed its spending but it is expected that with the help of increased oil prices, Russia’s financial position could return to one of strength. 

In the short to medium-term, despite the heavy sanctions and low financing, the Russian oil sector managed to grow. However, the acceleration in growth, which peaked in 2016 and 2017, might not last over the long term unless Russia’s new fields are exploited. Three major regions in Russia offer great potential over the long term. Firstly, enormous potential lies in the Arctic but it requires international funding and high technology. Secondly, Russia Eastern Siberia has increasingly become a center of attention with its vast reserves both for local and international oil companies. Lastly, Russia holds one of the largest oil shale and tight oil fields in West Siberia that is waiting to be explored. Neither Russia’s current technology nor its domestic funding will be sufficient to operate these fields, but if sanctions are lifted, numerous opportunities will arise for production.  

The help of a supportive tax environment, the devaluation of the ruble along with strategic investment in the upstream sector have all helped Russia to increase its overall oil production during an era of collapsed oil prices and heavy sanctions. The steady progress that has been seen since mid-2014 has shown the oil sector’s resilience to shocks and proved that during the most pressing of times, an industry can reinvigorate itself with the right strategy. The current solutions employed have helped Russia overcome bottlenecks in the short term, nevertheless, once the East Siberian, the Arctic, and shale oil fields are fully discovered and the necessary technology and funding found, the potential in expanding the sector over the long-term looks enormous.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.