Anxiety in Moscow as the US May Soon Overtake Russian Oil and Gas Production

Mikhail Krutikhin: Granny’s backyard

A short story in the Wall Street Journal caused tremendous excitement in the community of analysts in Moscow last week. It was an embarrassing revelation. The edition quoted two sources: the International Energy Agency and the Energy Information Administration of DOE, reporting that the United States would overtake Russia in terms of oil and gas production this year. 

In July the US was producing hydrocarbons at the daily rate of 22.2 million barrels of oil equivalent even as Russia was estimated to produce 21.8 million barrels. 

During the first six months of this year, Russia’s oil production averaged 10.8 million bpd, just 900,000 bpd more than in the US, and the gap is closing rapidly (it was 3 million bpd a few years ago), and last year the US produced more natural gas than Russia for the first time since 1982. It took the US five years to cut down gas imports by 32% and oil imports by 15%, and two years ago the country became a net exporter of refined petroleum products (depressing performance of European refiners along the way). 

Challenging predictions of an imminent peak, the North American trend looks upward. Oil production in Russia is expected to stay flat, and new Russian gas projects can barely compensate decline of ageing fields discovered in the Soviet era. 

Observers ascribe the US success to rapid development of unconventional reserves. While Russian politicians call fracking ‘a barbarian method’ and warn about ‘black water’ seeping from kitchen taps in American houses, operators from North Dakota to Texas keep improving their technique—and proving their safety. As the Oil & Gas Journal reports, ‘operational efficiency is increasing overall capacity to hydraulically fracture wells in the US without a corresponding increase in equipment.’ The technological break¬through goes on. 

Can Russia catch up with the US and launch wide-scale development of its vast unconventional reserves, such as the notoriously difficult Bazhenov formation? From a technological perspective this is possible, but there are some huge stumbling blocks on the road to the goal. 

Russia’s legislation of mineral extraction differs from the American one dramatically, and the contrast creates a great impediment for tapping unconventional reserves. Here is how Leonid Grigoryev, the chief advisor to the governmental Analytical Center, describes it: ‘The so-called Anglo-Saxon law does it. In the United States, everything on your land belongs to you right down to the molten magma. Your granny can invite drillers to her backyard and reap a fortune from selling oil or gas they discover’. 

The US owes its success in the advancement of upstream technologies to small companies that assume risks of experimenting and then sell their inventions to giant operators. And the ease of access to subsoil riches is a colossal advantage. In Russia, the megalomania of state-run companies and the government’s grip on subsoil are factors that lead to loss of positions in the global oil and gas industry.   

Mikhail Krutikhin

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.