- In the next 10-20 years, Russian oil will become more expensive as extraction from less accessible basins becomes necessary to maintain current export levels.
- Internal inefficiencies within Russia’s oil sector, as well as the remote locations of remaining reserves and potential shifts in future oil demand, add up to a murky future for the country’s energy-reliant economy.
- Moscow may adjust its budget to ensure plummeting oil prices don’t cut into its government spending, but proper economic diversification away from energy remains a complex and unlikely process.
Russia’s easily accessible oil reserves have long been the cornerstone of its economy. But these conventional fields are depleting, leading to the need to invest and expand into more untapped sources. This transformation will not be easy or cheap, as various factors have led to a poorly optimized oil sector that’s ill-equipped to soften the blow of rising costs. The key to maintaining a strong energy market, and securing the capital needed to develop new and expensive fields, will instead rest on whether Moscow can secure its foothold in China’s increasingly oil-hungry market. In any case, Russia may have little choice but to accept that its glory days of oil dominance and high profit margins are nearing an end.
Russia’s days of cheap and easy-to-access oil are numbered. As active reserves shrink, energy producers will eventually be forced to shift extraction to lower-margin, higher-cost areas. This will likely coincide with slowing global growth in fossil fuel demand, with peak demand coming before 2040. These compounding hardships will not be limited to the oil industry, however, as the coupling of energy rents and government expenditure will radiate the damage throughout Russian society.
In the mid-2000s, West Siberian conventional fields revitalized the Russian economy, producing vast sums of low-cost oil at a time of rapidly rising global demand. But 15 years on, many of these fields have since plateaued or begun to decline. New fields have the potential to largely offset this decline, but developing these areas come with higher upfront costs and will also eventually progress to a stage of declining production sometime in the 2030s.
To maintain supply, Russian oil producers will thus be forced to explore new avenues of “unconventional” production in the years ahead, generally situated in the following two categories:
- Hard-to-recover reserves in the Caspian, Black and White sea regions, as well as deep drilling in the Arctic (currently curbed by sanctions) and East Siberian fields. Accessing these reserves, however, require considerable upfront investment or hefty tax incentives.
- Shale reserves are perhaps more prevalent in Russia than anywhere in the world, with key areas being the Bazhenov and Domanik formations. But Russia’s lack of tools to efficiently extract the resource due to sanctions, combined with poor inter-industry competition, has led to a measly output of 15,000 barrels of tight oil per day at a steep price tag.