Commodities 2022: Russian crude oil output expected to rise despite demand concerns

Russian oil output is expected to rise in 2022, although factors including the coronavirus pandemic and the release of strategic petroleum reserves, could lead OPEC+ to amend its production plans, according to analysts.

Analysts expect the OPEC+ agreement to continue to be the key driver of Russian output volumes, with potential changes to Western economic sanctions policy, as well as spare capacity volumes, also playing a role.

"We estimate a new drilling program will get Russian supply growth back in line with its OPEC+ quota hikes, allowing crude production to increase by nearly 500,000 b/d by June 2022 versus November 2021," Platts Analytics Paul Sheldon said.

Economic conditions have also underpinned Russia's approach to output volumes in recent years, with Russia comparatively resilient to oil price volatility compared to its OPEC+ allies. Current oil prices are significantly above levels included in Russia's state budget for 2022 of $44.20/b.

Prices for Russia's key crude grade Urals have risen significantly in 2021, reaching a high of $72.78/b on Oct. 26. S&P Global Platts assessed Urals at $72.78/b Dec. 10, up 33% on the first assessment of the year of $48.90 on Jan. 4

Output expectations

The Russian government, producers and analysts currently predict that Russian crude and condensate output will increase next year, with Russian officials predicting it will return to pre-pandemic levels by May 2022.

Outside Russia, OPEC's latest forecast includes predictions for Russian crude and condensate output at 11.78 mil b/d in 2022, up from 10.79 mil b/d in 2021. The International Energy Agency estimates Russia's 2021 liquids output at 10.87 mil b/d and 2022 production at 11.66 mil b/d.

The OPEC+ agreement does not include condensate output. The Russian government does not provide breakdowns of crude and condensate output, but condensate usually accounts for around 8% of production.

For crude specifically, Platts Analytics sees a steady increase in output in the half of 2022.

Platts assessed Russian crude production at 10.569 mil b/d in April 2020, the last month before the group introduced major output cuts in response to the coronavirus pandemic's impact on demand. It assessed output at 10 million b/d in November 2021, above its quota of 9.91 million b/d.

Supply constraints

Despite the forecasts for output growth in 2022, there are major concerns over demand next year, which could drive changes to OPEC+ policy. Platts Analytics is currently forecasting that OPEC+ will freeze February quotas at January levels.

Many analysts see the coronavirus pandemic, including the recent emergence of the omicron variant, as the key risk to output growth plans.

"The key barrier for Russian oil companies to increase production is the risk of other lockdowns and sharp production restrictions, both as a result of a decrease in demand, and as a result of cuts within OPEC+," senior consultant at Russia's Vygon Consulting Marina Mosoyan said.

Some analysts also estimate that Russia has almost used up its spare production capacity, after increasing output in 2021 in line with increases to OPEC+ quotas.

Platts Analytics estimated Russia's spare capacity at 240,000 b/d in November, the bulk of which is in its traditional production region of West Siberia.

In Q3 results conference calls, some key Russian oil producers confirmed they were producing close to capacity.

Drilling programs in 2022 are set to see production capacity increase, however.

"At the current Urals oil price of $70/b, about 72% of Russia's reserves are profitable, which indicates high potential for increasing production. In connection with the restrictions under OPEC+, companies have reduced the volume of contracted drilling services, but it will not be difficult to reconsider this decision," Mosoyan said.

Mosoyan said increases in production will primarily come from untapped reserves at fields in West Siberia, as well as large assets ready for commissioning in East Siberia.

"These reserves are enough to ensure an increase of up to 20% in 2022 on this year. However, there is a question over whether there will be demand for such volumes from consumers," she said.

Sanctions

Another potential constraint on Russian output volumes is the risk that the US may introduce harsher sanctions against Russia in response to escalating tensions with Ukraine. Current sanctions target technology used in offshore Arctic, shale and deepwater oil projects, as well as access to Western financing. US officials have said that new penalties under consideration would go further than sanctions imposed in 2014 in response to Russia's role in the conflict in Ukraine.

Analysts see negotiations on an Iran nuclear deal as potentially increasing demand for Russian crude, however.

"The call on OPEC+ would increase even more than currently assumed if an Iran nuclear deal is not reached in 2022, a scenario which could accelerate the need for Russian producers to ramp up new projects," Sheldon said.