The Future of Russian Oil
Move over, Saudi Arabia: the number one producer and exporter in the world is now the Russian Federation. Pumping out about ten million barrels per day makes them the biggest game in town, despite the fact that that number would provide only about half the oil the U.S. uses on a daily basis. One in eight barrels of oil used world-wide stem from the Motherland, and half of all the oil that is drilled is exported. For the past decade and a half, Russia has been cruising on a surging oil price following the ruble's historical low in Boris Yeltson's presidency of the 1990s, to the point where 40% of the current Russian economy depends on energy sales. Current president-for-life Vladimir Putin, frequently seen shirtless, has previously reaped the benefits of the economic growth, but oil as a commodity has crashed and burned (figuratively speaking) over the past six months, falling by about fifty percent. The lowered costs have brought the Russian economy down with them, with the International Monetary Fund predicting that Russian gross domestic product will shrink by nearly five percent in the 2015 year. What is the future of Russian oil in an increasingly energy-hungry world?
Anyone who has ever vacationed in Russia will tell you that lots of parts of the country look like they haven't been updated since 1991, especially the roads that are further out from the major cities. In many instances, that's quite true: the fall of the USSR changed plenty for the political realm, but it didn't change much in terms of the equipment used to get oil out of the ground and into our gas tanks. The majority of the fields that the Russians currently drill from were first established by the Soviet Union: few new oil fields have actually been prospected and tapped within the past three decades. Up until recently, there's been no need: the huge Siberian deposits provided a seemingly-endless supply of crude, while all the machinery needed was in place from the old communist regime. After a generation or two, however, the machinery has started to rust and the deposits are effectively pushed to their limit: it's not possible for Russia to produce more from their existing wells, unlike many Middle Eastern nations that limit oil taps in order to provide price certainty.
What's more, Russia doesn't have the infrastructure in place to tap oil sands or oil shale, both of which require different mechanisms for extraction that were invented after the collapse of the USSR. After all, up until now, there was never a need for it, and geologists only recently believed that oil sands could be profitable after the Canadian oil industry sunk billions and billions of dollars into the Alberta tar sands during the early years of the new millenium (of course, they were billions of Canadian dollars, so it probably wasn't all that much). Russia has no experience to speak of sifting oil sands, fracking into shale deposits, or tapping into the massive fields within the Arctic Ocean. Yet the choice today is stark: Russia must either drastically sink the funds to find and tap new wells, or they must suffer from having a nearly-maxed-out setup in which they can only grow production by a single percentage point or less each year.
Time and Space
If the difficulty ahead hasn't fazed the biggest oil exporters within the major oil companies like the state-owned Rosneft, it's because they know that supply isn't the problem -- nor, for that matter, is demand. First and foremost, Rosneft has a longer reserve life than any other western oil company, with at least twenty years estimated to remain. That beats out a host of global competitors, including
- ExxonMobile (15 years reserve life)
- British Petroleum (12 years reserve life)
- Royal Dutch Shell (11 years reserve life)
- Chevron (just 9 years reserve life)
Time is on Russia's side for one of two reasons. First, western oil companies have a monopoly on wells that runs out in a decade or less and will need to re-negotiate the contracts with their largest producers (an exorbitantly expensive prospect. Second, western oil companies are sitting on a number of wells that are ticking clocks -- get it while it's hot, because it's about to run dry.
All Pipes Lead To Moscow
When Russian production falters (and short of an economic miracle, it almost certainly will falter in 2015), it won't just be a crisis within their own borders. The United States will not feel much of a blip, since the majority of imported American oil comes from neighboring Canada and Mexico. Travel across the Atlantic, however, and you're sure to see the impact of Russian pipes flowing weakly. Europe depends on Russian oil (and natural gas) for the majority of their fuel needs; Germany alone requires three-quarters of a million barrels of Russian oil per day. The Druzhba pipeline is the largest in the entire world, funneling black gold 2500 miles from Ufa to Ingolstad, as it has since the taps were first turned on in 1964. Russian fuel has also been feeding the Chinese economic expansion which, while having cooled off from the red-hot 10% growth rate it has enjoyed for the past decade, will require five percent more energy each year going forward.
The Big Picture
Make no mistake: oil is the lifeblood of the global economy. It's tempting to pat ourselves on the back for watching the resurgant Russian nation falter, but what happens 10,000 miles away affects ourselves and our neighbors. Russian oil's inability to adapt means restricted production and lowered supply; a commitment to new drilling operations can mean the falling prices will fall further as new supply drops the market value. Those who are feeling bullish should invest in oil commodities; those feeling bearish should short oil futures. Those who want to really profit from the future of Russian oil should put their money in Rosneft stock -- you only need to travel to the Moscow stock exchange to do so.