Russia's recent oil production defies forecasts

Feb. 19, 2005
Expectations about oil supply from Russia may need to be adjusted. Downward.

Bob Tippee

Expectations about oil supply from Russia may need to be adjusted. Downward.

The country's production, surging since 1998, has sputtered in recent months. In a world with rising demand and a shrinking number of places able to increase production, that's something to worry about.

The International Energy Agency sketches the picture in its February Monthly Oil Market Report. Year-on-year monthly production growth, it says, peaked in the summer of 2003 at 12%, nearly 1 million b/d. Through early 2004 growth remained at 10% but fell to 6% by the end of the year.

Extrapolation of the slowdown indicates the production increase for all of 2005 will be less than 350,000 b/d. In January, IEA had projected the gain at 430,000 b/d. The slower growth would amount to 3.8%—bringing production for all of 2005 to an average 9.58 million b/d—following an 8.7% increase last year.

How important is this to global supply? IEA notes that Russia's share of worldwide production growth amounted to 65% in 2001, 50% in 2002, 95% in 2003, and 75% in 2004. Very important, in other words.

IEA says 2005 might be a "year of consolidation for the Russian upstream, born of a still-uncertain regulatory and fiscal environment."

Following increases in production taxes and a series of moves tightening the Kremlin's grip on Russia's oil industry, and with movement slow on a petroleum law, investors are chilled.

IEA says the government acknowledges the slowdown in a draft economic program for 2005-08 that projects production increases of 2.1-5% and cites the need for exploration in new areas.

"Stronger production growth could return when the shape of Russia's upstream investment [and] operating environment becomes clearer," IEA says.

Russia's annual average production has been as high as 12.5 million b/d (in 1988) and as low in recent years as 6-6.1 million b/d (in 1996-98). The geologic potential for Russian output to push well past current levels is not in doubt.

But Russian production in 2005 is likely to be a reminder that it's never safe to expect future conditions in the oil market to represent extensions of present trends.

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