Energy Insight: Conventional onshore oil & gas in Russia

Russia is a major producer and exporter of both oil and natural gas. Russia was the world’s largest producer of crude oil in 2016, with average production of 11.2 million barrels per day (b/d) and the second-largest producer of dry natural gas (second to the United States), producing an estimated 21 trillion cubic feet. The country’s economy is highly dependent on revenues from the sector which accounted for more than half of the federal budget revenues in the early 2010s and dropped to approximately a third in recent years due to a global fall in oil prices. Crude oil accounts for the larger share of hydrocarbon revenues (around 90%), though natural gas has a higher importance for the domestic energy consumption.

[PLEASE NOTE - IF THIS ENERGY INSIGHT DOES NOT APPEAR IN FULL, PLEASE DOWNLOAD THE PDF ATTACHED TO THIS RECORD]

Figure 1. Russia's primary energy consumption, 2016

Source: Ministry of Energy of Russian Federation (2017)

Figure 2. Russia's natural gas consumption by sector, 2014

Source: Ministry of Energy of Russian Federation (2017)

Approximately two-thirds of Russia’s natural gas production is consumed domestically. As of 2016, natural gas accounted for the majority of Russia’s primary energy consumption (52%). Around half of Russia’s electricity production is generated from natural gas. The industrial sector, mainly the chemical industry, is also dependent on the supply of natural gas. From a labour market perspective, the significance of the oil and gas sector is small: production and transport of oil and gas as well as the oil refining industry employ approximately one million people in Russia, or 1.5% of the workforce.

Early history

Birth of the modern petroleum industry

The history of the oil and gas industry in Russia dates back to the 19^th century, though oil has been mentioned as a discovery as early as the 16^th century. The world’s first oil well was drilled on the Absheron Peninsula near Baku in 1846, which was at that time part of the Russian empire. The Nobel brothers and the Rothschild family played a major role in the development of the oil industry in Baku. The industry grew rapidly, and by the turn of the century Russia accounted for over 30% of world oil production. Shell Transport & Trading, which later became part of Royal Dutch Shell, began life by ferrying oil produced by the Rothschilds to Western Europe. In the second half of the nineteenth century, Russia began to discover oil fields in other parts of the country.

Communism, black gold and OPEC 

The revolution of 1917 and the subsequent nationalisation of oil fields in 1920 by the communist party had a bad impact on oil production. However, the continued inflow of Western funds from companies such as ExxonMobil helped Russian oil production to recover, and by 1923 oil exports had climbed back to their pre-revolutionary levels. The Caspian and North Caucasus remained the centre of the Soviet oil industry until the Second World War when development of the Volga-Urals region was accelerated. Exploitation of the vast territories of Western Siberia got underway in the 1960s and within a few years the Soviet Union had replaced Venezuela as the second largest oil producer in the world. The increase in Soviet oil exports led to a decline in world oil prices, and was one of the reasons for the establishment of the Organization of the Petroleum Exporting Countries (OPEC) in 1960. Nonetheless, in 1988 production hit a new record at 11.4 million b/d, making the nation the largest producer in the world, with output significantly higher than in either the US or Saudi Arabia. The production boom was halted after the collapse of the Soviet Union.

A new era

Nowadays, domestic companies dominate most of Russia’s oil production. Following the collapse of the Soviet Union, Russia initially privatized its oil industry in an attempt to boost oil production. Starting in the late 1990s, privately-owned companies drove growth in the sector, and a number of international oil companies attempted to enter the Russian market with varying degrees of success. More recently, the Russian oil industry has consolidated into fewer firms with more state control. In 2016, the top five firms in Russia accounted for more than 80% of total Russian oil production.

Oil production today

Oil production in Russia has been growing for the past few years, peaking at 11.29 m b/d in 2016, a level not seen since the late 1980s.

Figure 3. Data source: Ministry of Energy of Russian Federation, 2018

This growth can be attributed to three main factors: substantial investments in the maintenance of declining existing oil fields, growth of production in new “greenfield” sites and the rapid uptake of horizontal drilling.

Brownfield sites

If left without intervention, oil fields in Siberia would naturally decline at around 10-15% per annum. However, since 2013 the average rate has slowed to just over 2% per annum. This reflects the much greater effort being placed on maintenance of production at existing fields, which has been encouraged by the Russian government. In 2011, President Putin encouraged the Russian oil industry to upgrade the country’s refining system in order to upgrade the quality of Russian oil by introducing a gradually harsher tax burden on lower quality oil. As a result, the quality of the Russian oil has increased. However, since the oil price crash in 2014, the priority for the Russian government and the oil companies has shifted towards the maintenance of existing fields. 

Greenfield sites

Several new oil fields have begun operations, the largest of which is the Yarudeyskoye field. However, due to lower costs of operation the focus of the oil and gas sector in Russia has been on maintaining existing fields, rather than exploring new ones. 

Horizontal drilling

Horizontal drilling is often used to enhance reservoir productivity. Over the past decade the number of horizontal wells drilled in Russia has increased by a factor of four. All companies in Russia are now incorporating horizontal drilling into their development plans and their brownfield recovery operations. Rosneft estimates that around 30% of its wells in the first nine months of 2016 were horizontal, while Gazprom Neft has stated that horizontals account for around half of all new wells. By 2025, 50% of all new wells in Russia will be horizontal, up from around 30% today.

Location of fields

Most of Russia’s oil production originates in Western Siberia, between the Ural Mountains and the Central Siberian Plateau, and in the Urals-Volga region, extending into the Caspian Sea.

Table 1. Russia’s oil production by region, 2016

Data source: EIA, 2016

Oil grades

Russia has several oil grades, ranging from heavy sour to light sweet. Urals blend is the country’s largest export.

Table 2. Russia’s oil grades, 2017

Oil exports

Russia exports most of the produced crude oil and the federal budget is heavily dependent on revenues from those exports.

Figure 4. Data source: EIA Short Term Energy Outlook 2018

Most Russian exports (70%) went to European countries, particularly the Netherlands, Germany, Poland, and Belarus. Asia and Oceania accounted for 26% of Russian crude oil exports in 2016, with China accounting for a growing share of total Russian exports. In 2017, Russia was the largest supplier of crude oil to China, surpassing Saudi Arabia. 

Figure 5. Data source: EIA, 2016

There are many factors behind the change in the geographical structure of exports. Oil demand has grown significantly faster in Asia than in Europe. Russia’s new oil production regions are located mainly in Eastern Siberia and the Russian Far East, so it is significantly less expensive to transport their production to the closer Asian market. With the onset of production from the new oil fields, Russia has also built the transport infrastructure necessary for this, particularly the Eastern Siberia Pacific Ocean (ESPO) pipeline. Russian ESPO crude oil does not have to travel as far as Middle East crude to reach Chinese ports. This shorter distance allows Russian crude oil to be shipped in smaller volumes and with more flexible scheduling, which makes it more desirable.

Natural gas production

Russia holds the largest natural gas reserves in the world, accounting for about one quarter of the world’s total proved natural gas reserves.

Figure 6. Data source: CIA World Factbook, 2017

Most of these reserves are located in large natural gas fields in Western Siberia.