The prospect of a deal between OPEC and its allies to increase production forces oil traders to study an area they do not know: free production facilities in Russia.
Within the framework of unprecedented cooperation with OPEC on reduction of production of the Russian Federation for the first time in its history deliberately stopped oil wells. She joined OPEC stabilizing producers, such as Saudi Arabia or Kuwait, but judging how much Russia can increase its production and in what time frame is much more difficult.
The size of Russia's free capacity "has become a critical issue affecting the stability of global oil markets," notes IHS Inc. "This is a new territory for them, they have never had a production that was intentionally held back," said Matthew Sagers, managing director for energy research at Russia and the Caspian in a consulting firm.
Scatter of estimates
Minister of Energy Alexander Novak wants 24 countries that have cut production since January 2017, have increased the production limit by 1.5 million barrels per day. Other members of the group have not yet agreed, but PJSC "Rosneft" has already started testing its capabilities to restore production. The volume of production of the Russian Federation grew to 11.09 million barrels per day in the first week of June, which exceeds the quota of the country within the OPEC + deal by approximately 140,000 barrels per day.
The spread of estimates of how much more Russia can increase production is significant. Analysts of IC Renaissance Capital estimated free capacity of 215 thousand barrels per day, while Goldman Sachs Group Inc. and PJSC Gazprom Neft - within 500 thousand.
There are also disagreements about the potential rate of increase in supply. Wood Mackenzie Ltd. believes that Russia can fully restore its decline in production of 300,000 barrels per day for three months, while the Goldman Sachs estimate of 500,000 barrels suggests six to nine months. IHS predicts an additional 300,000 for about two months, and 500,000 for six months, says Sagers.
This is much slower than in Saudi Arabia, which, according to the International Energy Agency, has an opportunity to increase production by 2 million barrels per day for 90 days, although it has never used all these capacities for a long period.
Part of the disagreement is due to the fact that Russian "free capacity" is not something that the oil market has become used to. Unlike Saudi Arabia, where increased production can sometimes only require the launch of an idle facility, in Russia this is not the case. The bulk of the production comes from aging Siberian deposits, where companies have to constantly drill, just to limit the reduction in capacity.
When in December 2016, Russia agreed to cut production by 300,000 barrels per day, the companies differently approached the implementation of cuts.
So, Rosneft, which pumps more than 40 percent of Russian oil, has slowed down the development of new projects. This means that the company can quickly increase production, if it is decided to curtail the reductions.
Meanwhile, most companies preferred to cut production at old fields, closing less profitable wells and lowering investments to compensate for the fall in production. It is unclear what proportion of these wells may or will be restarted.