Russia’s energy sector declares victory over Washington's attempt to spark Soviet-era “oil implosion”
Washington's sanctions regime against Russia's energy sector has backfired spectacularly.
Russian Energy Minister Alexander Novak announced on Monday that the country's oil and gas sector has defeated U.S. sanctions designed to deprive Russian firms of the latest technology used for energy extraction.
But Russian innovation prevailed.
Novak noted that Russian companies "have managed to build up the output volumes and, on top of that, to raise efficiency and to bring down the prime costs that stand at $ 10 to $ 15 per barrel on the average".
He also said the returns on Russian oil and gas projects were among the world’s highest:
"Despite the sanctions that were imposed on a number of our companies, our oil and gas sector has managed not only to overcome the difficulties but even to demonstrate positive dynamics. In the past two years, Russia’s oil output has gone up by 400,000 barrels," he said.
"The financial status of our companies is much, much better than of many foreign companies," he said. "They have a small debt load, the debt/EBITDA ration of less than 1, and a small credit indebtedness.
What's important to highlight here is that Russia managed to drastically increase production while also increasing efficiency and competitiveness.
The driving motivation behind targeting Russia's energy sector with sanctions was the hope that Moscow would suffer a repeat of its Soviet-era "oil implosion", it which its energy sector collapsed in an attempt to ramp up production.
As Business New Europe reported shortly after sanctions were imposed in late 2014:
Ramping up production could be achieved through innovation, but this is unlikely since Russian oil companies, because of their Soviet past, have an internal culture that "encourages meeting fixed targets on an annual business plan rather than trying new methods". Moreover sanctions have restricted access to new Western technologies.
Russia is thus likely to try to ramp up production using obsolete home-made methods and inferior domestic or Chinese rigs. "Russia will be precipitous in trying to respond to sanctions with an ‘import substitution’ campaign", Davletshin writes, adding that "the Russian oil field service sector has limited capacity to meet all new demand in the short term."
"We cannot avoid a comparison with oil production in the USSR in the 1980s," Renaissance Capital's analyst Ildar Davletshin concludes gloomily. According to Davletshin, the Soviet Union desperately needed more revenue from oil to fund the Afghanistan war, just as oil prices collapsed from $30-40 per barrel to below $15 in 1998.
As a result, the Soviet state oil industry went into overdrive to ramp up production - with disastrous results. One of the world's top 10 oil fields - Samatlor - was largely destroyed as Soviet engineers injected too much water in desperate attempts to boost output, causing premature water break throughs. "We see increased risks of similar mistakes being repeated in the near term given a situation when volumes become critical and access to western technologies is reduced," writes Davletshin.
But this didn't happen. This time around, Russia managed to ramp up production without entering into self-destruct mode.
We should end by saying that Moscow is still interested in cooperating with U.S. energy firms — but the idea that Russia depends on western oil technology is now a certified myth.
As Novak stated, "Opportunities for cooperation in the energy sector yield good economic results and have good investment prospects. We are open [for cooperation] and want foreign companies to take part in the implementation of projects in Russia."
Going forward, let's make sure not to confuse cooperation with dependency. Russia's energy sector doesn't need the West — this is quite clear now:
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