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Apr-15-2008Russian oil production fails to grow for first time in a decade(topic overview)
CONTENTS:
- Tue Apr 15 02:15:02 GMT+02:00 2008 Russian oil production, for years a vital font of new crude for world energy markets, has begun to stagnate and even slump, adding to market uncertainties that have helped push oil prices to records even as the global economy founders. (More...)
- The Russian government, however, has been reluctant to admit Peak Oil has arrived. (More...)
- Oil rich Western Siberia is more like Mexico and the North Sea i.e. output is sliding fast. (More...)
- From here you can use the Social Web links to save Drop in Russian oil output pumps up price pressure to a social bookmarking site. (More...)
- In a bid to kick-start investment, Russia's government recently unveiled a $4.2 billion tax cut for the sector. (More...)
- About two years ago, Chevron announced it discovered a potentially lucrative oil reservoir in the Gulf of Mexico. (More...)
- New oil, even in Brazil, will not alleviate supply concerns in the long term. (More...)
- Exxon said it "has met and continues to meet or exceed the project production targets approved by the Russian authorities". (More...)
- I have a pretty hard time buying into $100-plus oil amid a serious economic recession in the United States and, eventually, a slowdown overseas. (More...)
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Tue Apr 15 02:15:02 GMT+02:00 2008 Russian oil production, for years a vital font of new crude for world energy markets, has begun to stagnate and even slump, adding to market uncertainties that have helped push oil prices to records even as the global economy founders. Russian supply in the first three months of this year fell for the first time this decade, averaging 10 million barrels a day, a 1% drop from the year-earlier period, according to the International Energy Agency, the industrialized world's energy watchdog. That is dismal news for a country that saw double-digit-percentage output growth earlier this decade. [1] Russian oil production, for years a vital source of new supplies for world markets, is showing signs of a slump, adding to uncertainties that have helped push oil prices to record highs. Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007. Declining production from the world's largest oil producer and one of its largest exporters puts further pressures on an already.[2]
The warning helped to push crude oil prices to a fresh all-time high above USD 112 per barrel (pb) Tuesday, threatening to stoke inflation in many countries, the Financial Times (FT) newspaper said. Leonid Fedun, the 53-year-old vice-president of "Lukoil", Russias largest independent oil company, told the main business daily in Europe he believed last years Russian oil production of about ten million barrels a day was the highest he would see "in his lifetime".[3] LONDON (AFP) — Russian oil production peaked last year, the vice-president of Lukoil, the country's second largest oil group, said in an interview published Tuesday. Speaking to the Financial Times, Leonid Fedun said Russia's oil production of 10 million barrels a day was the most he would see "in his lifetime". He added that in terms of production in Russia's oil-rich western Siberia region, "the period of intense oil production (growth) is over" and compared the region to the North Sea and Mexico, where oil production has declined. Lukoil said last week its 2007 net earnings rose 27.1 percent to more than 9.5 billion dollars (5.9 billion euros) from 2006, attributing the rise in net income to "favourable market conditions, high refinery margins. as well as effective cost control."[4] Leonid Fedun, vice-president of Lukoil, Russia's largest independent oil company, told the Financial Times he believed last year's oil production of about 10 million barrels a day (bpd) by Russia was the highest he would see "in his lifetime."[5]
U.S. crude oil West Texas Intermediate surged in London trading to $113.06 a barrel, above last week's record of $112.21 a barrel. It later traded 125 cents higher at $113.01 a barrel. Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia's largest independent oil company, told the Financial Times he believed last year's Russian oil production of about 10m barrels a day was the highest he would see "in his lifetime".[6] Analysts worry the tax cut is inadequate to achieve that. "We still do not see it generating enough free cash flow to the industryto support higher investment levels," Citigroup said in its report. While the Russian government is still loath to throw in the towel, Mr. Fedun, 52, told the Financial Times that Russia has already peaked: 'He believed last year's Russian oil production of about 10m barrels a day was the highest he would see 'in his lifetime'."[7]
As China and other emerging markets rapidly industrialize and consume record amounts of crude oil, demand has exceeded production by about 2 million barrels per day or 87 million barrels. From its low in late 1998, at about $10 per barrel, West Texas intermediate crude oil has skyrocketed more than tenfold in price. This incredible price increase makes oil one of the best performing commodities in the world. Another blast of bearish news for oil producers hit the markets as Russia announced that oil production has probably peaked in Western Siberia, home to one of the world'''s richest concentrations of oil.[8] After Saudi Arabia, Russia is the world'''s second largest oil producer. According to Leonid Fedun, vice-president of Russia'''s largest independent energy company, Lukoil (OTC-LUKOY), oil production in 2007 of roughly 10 million barrels per day would be the maximum he would witness '''in his lifetime.'''[8]
Russia, the worlds biggest oil exporter after Saudi Arabia, averaged 10 million barrels per day from January through March, the International Energy Agency said in a recent report. That marked a 1 percent drop compared with 2007 and the first time production has failed to exceed previous-year figures since 1998.[9]
Citigroup said in a report late last month that it expected Russian oil volumes to increase by 1.5 million barrels a day between now and 2012, largely thanks to new projects in eastern Siberia. It cautioned: "Russian oil production growth is no longer to be taken for granted." The IEA predicts Russian oil production will resume growth this year. It estimates an annual increase of only 0.8 per cent over 2007, compared with an average 2.5 per cent in the past three years and much faster growth before that.[10] The slowdown in Russia, the world's second-biggest oil exporter after Saudi Arabia, has intensified already widespread concerns about long-term oil supply amid diminishing output from once-huge fields like Alaska's Prudhoe Bay and Mexico's Cantarell field in the Gulf of Mexico. Fading optimism that strong Russian output this year would offset ebbing flows from once-reliable sources like the North Sea has increased jitters in an already tense oil market. As prices have soared, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have argued that anticipated bursts in new supplies from non-OPEC countries mean the world hasn't needed additional barrels from OPEC. Even with an easing in oil-demand growth due to the U.S. economic downturn, many analysts still worry that a global supply pinch later this year could send prices still higher. "There isn't a lot of supply coming on right now, so this is framing the whole narrative of the market," said Roger Diwan, a financial energy adviser at PFC Energy in Washington.[1] Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically, saying that in the oil-rich region of western Siberia, the mainstay of Russian output, "the period of intense oil production growth is over".[3] In an interview, Leonid Fedun, vice president of OAO Lukoil, one of Russia's biggest oil companies, blamed the first-quarter slip in Russian production on an electricity-supply crunch in western Siberia and a mild winter.[1] Speaking to the Wall Street Journal, Leonid Fedun, Vice President of Lukoil, one of Russia's major oil companies, cast doubt on whether Russian output could continue to increase. He said that highly productive fields in Siberia are slowly being exhausted and the huge cost of searching for oil in the untapped but remote region of eastern Siberia has deterred firms.[11] Leonid Fedun, vice-president of Lukoil, one of Russia's biggest oil companies, said a mild winter meant Siberia's icy ground was less stable, making it harder to move drills between oil wells. He acknowledged that the fall also reflected the depletion of Siberia's older fields. "Western Siberia is repeating the fate of Prudhoe Bay, with a time lag of five to six years," he said.[10]
You have seen it in Alaska and the Gulf of Mexico and now you are seeing it in Siberia," Fedun said, adding that $1 trillion was needed for investing in key oil infrastructure projects. The Lukoil executive said he believes that unless investment is made an urgent matter, Russia is unlikely to maintain 2007 production levels over the current year.[11] Lukoil's Mr. Fedun says Russia's oil industry needs $1 trillion of investment during the next 20 years just to maintain production of 10 million barrels a day.[1]
Russian production averaged about 10 million barrels a day, a 1percent drop from the first quarter of 2007. Declining production from the world's largest oil producer and one of its largest exporters puts more pressure on a strained market and adds to the potential for higher prices for a global economy coping with slowdown.[10] Russian production averaged 10 million barrels a day in the first three months of 2008, according to the International Energy Agency, down 1% on the same period last year.[12] Figures released in March indicate that Russian production averaged 10 million barrels per day over the period, according to the International Energy Agency, down 1% on the corresponding period last year.[11]
The Russian government, however, has been reluctant to admit Peak Oil has arrived. On Monday, even its energy minister, Viktor Khristenko, conceded that '''the output level we have today is a plateau or stagnation,''' according to a Financial Times commentary. Despite the dual confessions in Russia, crude oil is opening higher this morning in New York at $113.39 a barrel, another all-time high. It was interesting to learn that as Peak Oil slams into Russian production in 2008, Brazil'''s oil industry is about to boom. [8] In recent years, increased Russian production has helped offset the additional and growing demand from Asia and help keep a lid on the price of crude. If Mr Fedun right, this particular brake on the price has reached its limit. Future new production for Big Oil increasingly rests on '''unconventional''' sources such as the 54,000 square miles of black rock that comprise the Athabasca Oil Sands in Alberta, Canada. Such public admissions do nothing to weaken the oil price, so are self-serving in the short-term to producers such as Lukoil. Contributing factors such as the fortunes of the dollar are outside their control.[13] The prediction by EWG, a German-based independent think-tank, that global production, currently around 81 m bpd, will fall by 7 per cent a year, comes as oil prices are continuing to set new record prices, reaching 112 dollars per barrel last week.[5]
Russia's stumbling production growth highlights a troubling reality: despite soaring oil prices in the past five years, crude output from nations outside the Organisation for Petroleum Exporting Countries has remained essentially flat since 2005, defying the normal link between high prices and increased production.[10] Russia was until recently considered as the most promising oil region outside the Middle East, the FT said. Its rapid output growth in the early 2000s helped to meet booming Chinese demand and limited the rise in oil prices. The trend, however, has turned, with supply dropping below year-ago levels for the first time this decade, according to the International Energy Agency, the energy watchdog, the FT added.[3]
Commodity analysts at Barclays Capital believe the surprise fall in Russian oil output during the first quarter of 2008 has heightened fears about the ability of global supply to keep pace with demand over the next decade especially in the case of Non-OPEC producers. They added that Russia continues to "disappoint."[11]
Russian oil production has peaked and may never return to current levels, one of the country's top energy executives has warned, fuelling concerns that the world's biggest oil producers cannot keep up with rampant Asian demand.[6] Assuming that Russias oil production has peaked, the Organization for Petroleum Exporting Countries can pump out more barrels to meet demand and keep prices from skyrocketing.[9]
'''Peak Oil''' is defined as the point at which the world reaches maximum oil production, after which a declining long-term trend in overall annual production combined with rising or steady demand will occur. The majority of oil-producing countries, regions and companies increasingly cannot replace their annual production of crude oil, natural gas and other distillate fuels.[8]
Global production constraints - along with surging demand, rising oil field expenses and political instability in petroleum-rich regions - have already sent oil to more than $US110 ($118) a barrel from $US30 in about four years.[10] In Canada, where output is increasing thanks to massive investments in Alberta's oil sands, production costs now top $65 a barrel, by some estimates. There are bright spots on the production front that could ease tightness in global supplies starting later this year.[1]
"We just dont have enough capital going into developing the fields." Konchin said the fact that Russian oil accounted for roughly 12 percent of world supply makes this years production drop "not particularly significant." Oil companies have seen their profits slashed because the Russian government slices off 80 percent of revenues when oil rises above US$27 per barrel.[9] Sakhalin 1, a huge project off Russia's east coast led by Exxon Mobil, accounted for much of Russia's production growth in 2007. Output there will drop by more than 25 per cent this year, according to Rosneft, the state-run oil giant that is a partner in the project.[10] Russia's energy ministry says it still expects a rise of 1.8%, while the Paris-based International Energy Agency is predicting 0.8% growth. It is clear that Russia's oil production has hit at least a temporary ceiling after years of strong growth.[1] The International Energy Agency reported that Russian oil production in the first quarter declined for the first time in a decade.[7]
'''The period of intense oil production growth is over''' claims Fedun. They'''ve sucked up the oil fast and now the party'''s over. The Russian government has admitted so far to oil production growth '''stagnating''' but not that it has '''peaked''' says the FT so this is news to those less intimately familiar with Russian oil reserves.[13] The vice president of the Russian petroleum giant Lukoil yesterday told reporters that not in his lifetime would Russian oil production exceed last year's figure.[14] Russian oil production has begun to stagnate and even slump, adding to market uncertainties that have helped push oil prices to record highs.[1]
So far, oil companies have been deterred by heavy taxes that provide little incentive to invest in so-called greenfield production. Business sentiment has also suffered from growing state interference in the energy sector, typified by the nationalization of oil giant OAO Yukos and the travails of foreign investors like Royal Dutch Shell PLC, which was forced to sell half its stake in a big project off Russia's east coast to the state-run gas company. BP's Russian joint venture, TNK-BP, has also come under pressure: Last month, intelligence services arrested one of its employees on suspicion of industrial espionage.[1] Russian oil output collapsed after the breakup of the Soviet Union as the price of crude plummeted and investment dried up. It began to recover in 1999 as newly minted private oil companies used Western techniques to rejuvenate mature fields.[1] Russian oil officials and the world's oil companies say the country needs to open up the remote, untapped expanses of east Siberia to ensure future growth. The lack of infrastructure such as roads and pipelines and the harsh operating conditions limit growth.[10] With much of the output growth in recent years coming from deep offshore drilling, oil companies have seen the cost of offshore rigs triple in the past five years.[10]
Russia became the world's biggest source of incremental new barrels of oil as output grew from six million barrels a day in 1996 to an average of 9.4 million barrels last year.[1] Saudi Arabia during the same period went from around 8.2 million barrels a day to 9.2 million barrels last year, according the U.S. Energy Information Administration. Russia's challenge now is that its older Siberian fields, which accounted for much of the rebound, have reverted to their long-term downward trend.[1]
To get there, producers will first have to keep abreast of steep declines in existing fields. That decline rate now subtracts an estimated 4.5 million barrels a day from annual output.[1]
Most forecasts predict that liquid fuel demand world wide will hit 100 million barrels a day by 2015.[10]
Analysts point to big projects in the Caspian as well as deep-water projects off Australia, Brazil and in the Gulf of Mexico, including BP's long-delayed Thunderhorse platform. The U.S. also expects ethanol production to hit 550,000 barrels a day this summer, up from 418,000 barrels a day last year.[1] The reasons for that plateau range from spiraling exploration costs to the increasingly remote climates where new oil pockets are being found. Some senior officials in Russia, such as the country's natural-resources minister, Yuri Trutnev, are now predicting that the country's full-year production may be lower than last year's.[1] Russia's energy ministry expects a rise of 1.8 per cent. Earlier this month, Yuri Trutnev, the nation's natural resources minister, said the country's full-year production might be lower than last year's.[10]
Speaking to the BBC, Mikhail Kroutikhin, editor-in-chief of the Russian Petroleum Investor said, "We now see that Russian production peaked last year.[11] The Russian government has so far admitted that production growth has stagnated, but has shied away from admitting that post-Soviet output has peaked.[3] Industry watchers and Russian officials blame the country's production slowdown on a combination of weather and tight electricity supplies in some parts of the country. In a longer-term worry, they also point to ageing Siberian fields that once fuelled its production growth.[10]
The future supply of Russian oil is threatened by a likely decline in production levels, one of the country's top oil executives has warned.[12] Artyom Konchin, an analyst with Aton Capital, put Russias oil supply lull down to high taxes and insufficient reinvestment into infrastructure that could increase production from existing fields. "Its not that we dont have enough oil," he said.[9] I suppose you could make the waek argument that Mexico could increase production if foreign investment is allowed and years from now they bring some new fields online but in the meantime their existing tired fields deplete at higher rates.[7]
Last October, a new study by Energy Watch Group (EWG) warned that world oil production will fall by half as soon as 2030 and that extreme shortages of fossil fuels will lead to wars and social breakdown.[5] As many industry analysts'and even some insiders'have questioned whether global oil production can keep rising to meet ravenous global demand.[7] The warning by the world's second biggest oil producer renewed fears that global production has peaked much sooner than previously expected.[5]
Russian oil executives are gloomy about keeping production steady, let alone increasing output at the world's No. 2 producer.[7] Analysts at Citigroup recently said annual increases in Russian output could "no longer be taken for granted" but argued that production was expected to rise until 2012.[12]
Russia basically nationalized their oil industry 5 years ago. Russian Gov't employess are now running their oil industry. Are we surprised inertia has set in and their output is falling even though they have some of the most promising and underutilized oil resources in the world.[7] Russian worries underline longstanding concerns about whether there is enough oil to meet the needs of the global economy, particularly fast-growing China and India. They are also a particular cause of concern for several of Europe's largest economies, such as Germany, which buy a large share of their oil from Russia.[12]
The economic downturn in the U.S., by far the world's largest oil consumer, has taken some steam out of oil demand. Fast-growing Asia and other places are still adding to demand, and many analysts worry that a global supply pinch later this year could send prices higher.[10] Unrest in Nigeria, war or the threat of war in the Middle East, Venezuela playing politics with supply, and a large increase in demand have combined to set the speculators in the commodities markets off on a frenzy. Many analysts see a speculation "premium" of at least $25 bbl - probably more now with this recent spike in oil prices.[6] Oil prices reached another record high Tuesday, thanks to the cocktail of usual suspects like strong demand from developing countries and a weak dollar that drives money into commodities like crude.[7] The warning helped on Tuesday to push crude oil prices to a fresh all-time high above $112 a barrel, threatening to stoke inflation in many countries.[6]
For the moment, oil prices are in a '''bubble.''' China, of course, continues to increase its oil imports to the tune of 27% year-over-year, while U.S. consumption is flat or down about 2%.[8]
The concept of Peak Oil is increasingly becoming conventional wisdom among global investors this decade as crude prices continue to hit new inflation-adjusted highs.[8] Petroleo Brasileiro, or Petrobras (NYSE-PBR), Brazil'''s largest oil company, announced it has discovered a reservoir that might harbor one of the world'''s largest oil fields. Located off the Brazilian coast, Petrobras speculated that this new discovery might potentially result in a massive 33 billion barrels of new crude.[8]
Oil companies have also been deterred by heavy taxes that provide little incentive to invest in new production.[10] David Fife, an IEA oil analyst, said the Paris-based agency was taking a "cautious approach" on the news. An IEA forecast on future production in Russia is to be withheld pending spring results, which could eliminate weather-related distortions typical of winter months, he said.[9]
"The period of intense oil production is over," Fedun was quotes as saying by the Financial Times.[9] The warning, based more upon production data, also contrasts to International Energy Agency projections, which have suggested there is little reason to worry about oil supplies.[5]
Oil rich Western Siberia is more like Mexico and the North Sea i.e. output is sliding fast. [13] Oil companies are dealing with the depletion of reserves in western Siberia by diversifying.[10]
Russia will have multiple peaks for the indefinite future, as long as it pursues its erratic method of nationalising mutli-national oil companies' assets as soon as they develop large fields. All the third world countries who practise the bait-and-switch with the multi-nationals will experience this phenomenon, over and over.[7] The stock surged more than 8% yesterday on the news, with other oil companies in the region joining in on the rally.[8]
The majority of companies are still reluctant to spend vast sums of money to extract oil. They fear a replay of the post-1980s bear market that resulted in bankruptcies, foreclosures and over expansion as prices peaked.[8] If the west goes into recession, demand will fall off and prices will ease - how much is anyone's guess. At that point, the current solidarity on price of oil producing states may fall apart and it will be every country for itself, pumping more oil to keep market share and profits up.[6] "When the (oil) well's productivity falls, you have to keep drilling more and more.[11]
Elsewhere on the oil patch, Downing Street is said to be keeping a close eye on Chinese stake-building in BP. The purchases are via a sovereign wealth fund which has already a 1.6% holding in French oil company Total. Their stake in BP has reached almost 1%. European stocks are positive this morning as Silvio Berlusconi wins a third term in the Italian election and in spite of a fall in formerly bullish German business confidence. The FTSE 100 is 73 points higher in early afternoon trade at near 5,900 as Tesco proved its supermarket chain is a sound defensive play in difficult times. It cheered the market, and no doubt shareholder Warren Buffett, by beating analysts''' estimates with a 12% increase in profits to ''2.8bn.[13] "Instead of the six to seven months we normally have to work in, we had only 1'' months," said Mr. Fedun. He acknowledged that the fall also reflects a longer-term trend -- the depletion of Siberia's older fields. "Western Siberia is repeating the fate of Prudhoe Bay, with a time lag of five to six years," he said.[1] The question is whether Russia, whose healthy output in recent years helped meet Asian demand, is next. "Western Siberia is repeating the fate of Prudhoe Bay, with a time lag of five to six years," he said.[7] Blamed on supply problems in western Siberia and weather conditions making it harder to move drilling equipment, the fall contrasts with substantial output rises in recent years.[12]
From here you can use the Social Web links to save Drop in Russian oil output pumps up price pressure to a social bookmarking site. [10] There seem to be two factors at play: on the one hand, existing Russian oil fields, primarily in Siberia, are genuinely drying up.[14] Once highly-productive fields in Siberia are slowly being exhausted and the huge cost of searching for oil in the untapped but remote region of eastern Siberia has deterred firms.[12]
Former big producers like the U.K., Norway and Mexico are also fighting to squeeze oil from once mighty but now increasingly old and tired fields.[1] The question about other big fields like the North Sea and Mexico is one of investment in new facilities versus the likely return.[6]
In a bid to kick-start investment, Russia's government recently unveiled a $4.2 billion tax cut for the sector. It was broadly welcomed in the industry. "It's a very important point that the Russian government has realized that with cost growth and inflation, there needs to be additional relief for companies to develop fields," said Bob Dudley, chief executive of TNK-BP. It may not be enough. [1] Hoping more investment might halt or reverse the decline, Russia plans to cut taxes in the oil sector. It may not be enough.[7]
About two years ago, Chevron announced it discovered a potentially lucrative oil reservoir in the Gulf of Mexico. [8] There are huge reserves in several places around the world including Africa, the Gulf of Mexico, Alaska, and South America. The problems today with high prices have much more to do with politics as they have to do with the world running out of oil.[6] The possibility of less oil from one of the world's key suppliers will add more pressure to prices now at record highs.[12]
New oil, even in Brazil, will not alleviate supply concerns in the long term. [8] The Energy Ministry called the drop a "stagnation" last week, and Leonid Fedun, vice president of independent producer OAO Lukoil, said in comments published Tuesday that supply had peaked.[9] Lukoil's Leonid Fedun said $1 trillion would have to be spent on developing new reserves if current output levels were to be maintained.[12] In an interview with the Wall Street Journal, Lukoil vice president Leonid Fedun cast doubt on whether output could continue to increase.[12]
Exxon said it "has met and continues to meet or exceed the project production targets approved by the Russian authorities". [10] Fading Russian production would put even greater weight on projects elsewhere in the world.[10]
I have a pretty hard time buying into $100-plus oil amid a serious economic recession in the United States and, eventually, a slowdown overseas. [8] Many big producers like Saudi Arabia, however, are now looking to preserve some fields for longer-term gain, instead of pumping to meet rising world demand.[10]
SOURCES
1. Moneyweb - Wall Street Journal - Russian output slumps as oil price hits a record
2. Free Preview - WSJ.com
3. Khabrein.info
4. AFP: Russian oil production has peaked: Lukoil executive
5. Russian oil production already peaked, says Lukoil - Irna
6. American Thinker Blog: Has 'Peak Oil' Arrived
7. Environmental Capital - WSJ.com : Peak Oil: "Da" Say Russian Oil Execs
8. Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG: Peak Oil Comes to Russia, New Oil Surprises Brazil
9. Russian oil production fails to grow for first time in a decade - International Herald Tribune
10. Drop in Russian oil output pumps up price pressure | The Australian
11. Canadian Economic Press - Welcome
12. BBC NEWS | Business | 'Threat' to future of Russia oil
13. russia hits peak oil 00087
14. THE NEW REPUBLIC | Blogs
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