Laboring under the weight of the Ukraine war, the Russian energy industry has become dependent on China and India and it’s scrambling to make more liquefied natural gas because American LNG exports are crippling it.
Odessa oilman Kirk Edwards, Waco economist Ray Perryman and 2023 Permian Basin International Oil Show President Larry Richards say Russia’s natural gas pipelines to Europe are the main thing propping up the nation’s economy.
“The European boycott of Russian oil exports has had little effect in my opinion,” Edwards said. “When you see countries like China and India continue taking the Russian oil because it is priced somewhat cheaper, that circumvents any effects of a boycott.
“Natural gas exports have been reduced and Russia is desperately trying to get more LNG capabilities going so they can ship that commodity to countries like China and India in the future.”
Edwards said Russia’s big long-term challenge is the quality and maintenance of its existing oil and gasfields.
“Many American and European companies were uniquely qualified to keep those fields up and going, companies like Schlumberger and Halliburton, which have now pulled out,” he said.
“Big companies like Shell, BP and Exxon have written off investments there. That is where Russia will truly be hurt, not today but in future years as there will be a large drop-off in production from those same fields because of under-investment and lack of routine maintenance.”
Edwards cited similar trends in Argentina and Colombia, where shoddy maintenance has severely cut production.
Perryman said Russia’s energy industry “is about the only thing keeping the wheels on for their economy.
“Even though many countries are boycotting Russian oil, China and India, among others, are taking advantage of price discounts and purchasing the crude,” Perryman said. “Boycotts and embargos are not particularly efficient ways to impact commodity flows.
“As a member of OPEC-Plus, Russia has also recently agreed to voluntarily reduce production in response to the group’s attempts to reduce global supply and therefore raise prices.”
Perryman said the other big factor is that the pipeline system in Europe virtually compels much of the region to rely on Russia for natural gas.
“This dependence is the true source of Russia’s geopolitical power,” he said. “Its global influence could be greatly limited by American efforts to increase domestic LNG production and exports to Europe.
“All aspects of the Russian industrial complex are challenged by the war and the global response to it has limited its economic capacity. In addition, some buyers of Russian oil and natural gas have been pursuing alternatives.
“Thus even if the war ends it’s unclear that the market for Russian oil will return to former levels.”
Perryman said China and India, with large populations and developing economies with expanding energy needs, “will likely provide a meaningful market for Russian energy, although at lower prices and margins irrespective of what Europe and other areas ultimately decide.
“Russia’s reserves are vast and keeping the energy sector viable is crucial to the country’s sustainability,” he said. “The economy is virtually entirely dependent on it.
“For the foreseeable future, selling at discounts and maintaining OPEC-Plus relationships are likely to continue. The most disruptive action to erode Russian influence over time is a concerted global effort to enhance LNG production and exports to Europe.”
Richards said the world’s sanctions on Russia “hit their oil and gas industry in ways most people aren’t aware of.
“The Permian Basin is the birthplace of innovation for the onshore oil and gas industry and it can be seen in the Russian oilfield,” he said. “While at a tank battery in one of Russia’s oldest oilfields years ago, I was amazed to see nameplates on equipment not only in English but from companies I knew well.
“The sophisticated production equipment on their site was built in Odessa by Sivalls and the vapor recovery units pulling methane from their tanks had been built by UMC in Andrews.
“The same held true a few years later when I toured one of Russia’s largest natural gas compressor stations, which supplied winter gas for much of Moscow. The major equipment was from across the globe and the critical compressors, turbines and electronics often bore European or American labels.”
Richards said that was the case last fall when Russia’s Nord Stream pipeline was almost shut down because of Russia’s inability to retrieve a German-made Siemen’s turbine that was sitting in a repair facility in Canada undergoing routine maintenance.
“In addition to U.S. manufacturers, much of Russia’s more sophisticated oilfield equipment is built in Canada, Germany and Italy, making trade sanctions bite with serious field implications to keep that equipment running and maintained,” he said. “The safety valve for Russian producers is probably the Chinese, whose factories now manufacture many of the critical repair parts and components for this equipment.”
Richards said oil revenues historically represent 30 to 35 percent of the total Russian budget, but its oil and natural gas revenues fell by over 30 percent in May and by 43 percent year over year in the first quarter of 2023.
“Western sanctions from the G7 Summit last year placed a cap of $60 a barrel on Russian crude,” he said. “Russia tried to make up the difference with higher production volumes but recently ran afoul of Saudi Arabia, the only producer with higher monthly exports than Russia, slapping their hand for breaking OPEC quotas.
“Russia’s ace in the hole, their natural gas sales to Europe, have also failed to save their revenue line. The combination of a mild winter, increased LNG exports from the U.S. and an impressive move by Norway to transform their natural gas production ratio has left Russia a secondary provider selling natural gas well below market.”
Richards said Russia’s huge drop in oil and gas revenues is impacting its overall economy.
“According to the Russian Finance Ministry, budget proceeds from oil and gas taxes fell 36 percent from last year,” he said. “Estimates for Russia’s growth rate in GDP have fallen from 4 percent to 1 percent, basically a maintenance level.
“With inflation rates running near 11 percent, the Russian government will find it harder to maintain increased military spending while providing all the subsidies and social spending that have kept it in power.”
Richards said China is the main beneficiary.
“China sells western-designed equipment and spare parts from its factories at a price premium to Russia, stockpiles Russian crude at prices even below the $60 price cap and uses its geopolitical leverage to place its interests above both Russia’s and the United States in the developing world,” he said.