Though Russian oil production continues to rise and is currently approaching Soviet-era levels, forecasts predict it will soon peak and then decline, causing potential problems both for global oil importers and the Russian government’s budget.
Averting this decline will require applying more-advanced production techniques to existing fields and exploiting new ones in the Arctic Ocean and elsewhere. Russia’s oil companies will be unable to accomplish this transformation on their own, however. To do so, they will need to secure greater foreign investment and partnerships offering more-advanced technologies and the exposure to better management skills. The benefits of increased foreign investment in the Russian oil sector would be felt by Russians, in terms of their everyday socio-economic conditions, as well as in U.S.-Russian relations, which would be widened and strengthened. Yet, foreign companies, especially those based in the United States, will continue to hold back from supporting the Russian oil sector until the Russian government creates a more benign environment for foreign investment.
Last year, Russian oil production increased by an average of 100,000 barrels per day (bpd), to 10.4 million bpd, the highest total since the collapse of the Soviet Union. As Russia exports about half its production, the increase has helped keep oil prices down, with follow-on benefits for a global economy struggling to return to strong growth.
These oil exports are also essential for the Russian economy, which derives more than half of its export income from oil, and the Russian government, which depends on oil and natural gas exports for about 40 percent of its budget revenue. In recent years, the government has used this hydrocarbon money to support investment, defense modernization, welfare and pension benefits, and other government programs.
The problem for Moscow is that almost all of Russia’s current oil production comes from the giant West Siberian fields developed during the Soviet period. Production there has been declining during the past few years. While Russia has brought a few other smaller fields online in recent years, their production potential is much less and the costs of developing them are much higher.
Russian oil production may continue to rise for a few more years, but without new fields entering operation, or the application of more-sophisticated production techniques to the existing fields, Russian oil production is expected to decline starting around 2015, with steady decreases after that. Production could fall to as low as 8 million bpd by 2020.
The drop-off in exports could be even greater, as Russian domestic oil consumption continues to rise, almost equaling recent production increases. Last year, for instance, though production increased by 100,000 bpd, domestic consumption rose by 80,000 bpd. With Russians making little progress in conserving energy or using it more efficiently, the trend toward increased domestic consumption is likely to continue.