By John Helmer in Moscow
Talk of oil supply crunch intensifies price threat as Russian output tips and additional export markets beckon.
Russian oil producers have been losing oil output at Russia’s onshore fields since February of this year, and a combination of tax, investment, and technical factors has led to a forecast of “dire straits”, according to a new report by Moscow’s Alfa Bank.
But these straits appear to be deeper and direr for oil consumers, than for Russia as a producer; especially since new oilfield developments are likely to swing the direction of oilfield growth in the direction of China. Korea, and Japan.
The Russian warning comes on the heels of a review of global supply contraction by the International Energy Agency (IEA). The agency warned in its Medium Term Oil Supply Report this week that “oil looks extremely tight in five years time”, and “prospects of even tighter natural gas markets at the turn of the decade”. According to the iEA, the widening gap between rising consumption and lagging non-Opec supply will force Opec to sharply increase its production in the next five years, and oil prices are projected to jump beyond current $76+ highs.
IEA and Russian data show that, with average daily output of 9.85 million barrels, Russia is now well ahead of Saudi Arabia as the world’s leading supplier of oil; with an 11.9% share of the global market. Saudi Arabia produces 8.58 mbd, with a 10.3% share. While Saudi Arabia can add swiftly to its daily output — more substantially than can Russia — Russian control of the lion’s share of the world’s natural gas supplies preserves its position at the top of the global pecking order for energy supply.
Most of Russia’s crude oil is despatched by tanker on to the Baltic Sea from Primorsk, near St. Petersburg. It then heads for delivery to Central Europe. Add the Druzhba (“Friendship”) pipeline deliveries direct to Germany, Poland, Czech Republic, Slovakia and Hungary, and the aggregate comprises just under 60% of the oil export total. Tanker loading of Russian crude on the Black Sea — Novorossiysk and Tuapse ports on the Russian shore, Odessa and Yuzhny on the Ukrainian shore — amounts to another 33% of export volume, which is directed mainly towards Turkey and southern Europe.
A historical geographer might notice that this export market covers roughly the ground which Hitler’s armies occupied at the end of 1941. But if, as the Bush Administration, the European Commission, and ex-UK prime minister Tony Blair have warned, this energy dependence on Russia is a hostile threat, to be fought off, then this week’s fist of analytical reports explains why the alliance has dwindling fuel alternatives to fight with.
State-controlled oil output in Russia, led by Rosneft and Gazprom, averaged 3.7 mbd in June, 34% of the Russian total. According to the Alfa report, rising water levels, lower well yields, and costs of drilling to pump water and sustain oil liftings have been driving onshore oilfield volumes downward since February of this year. Growth in aggregate production is slowing, and now depends on new offshore fields coming on line in the northwestern Arctic and Sakhalin region of the Fareast.
For the time being, LUKoil and Rosneft control most of the new Arctic crude oil supply; Gazprom, the gas supply.
The oil companies are committed to shipping to Hamburg and Rotterdam, and thence to the rest of Europe. At very high crude prices per barrel, however, LUKoil says it is considering shipping across the Arctic to the east coast of the US.
At the same time as the US needs this new Russian crude to fill refineries which Venezuela has stopped supplying, and for which Nigeria is unreliable, Washington, with some support from London and Brussels, is trying to prevent Gazprom from laying the Nord Stream pipeline under the Baltic for gas deliveries to Germany.
That campaign appears likely to be neutralized by Gazprom’s latest move, hinted at on Monday, to offer US companies like Chevron an equity stake in the Shtokman gasfield. According to today’s myopic observation from the Financial Times, “the Shtokman field looks like a victory for international energy companies”.