Falling Oil Production
Feb 2022 - Alex Alejandre

Brazil is the only country in the world who expects to produce more in 5 or 10 years and is making the required investments. Elsewhere, there has been precious little capital expenditure (outside of fracking) for over a decade beyond what’s needed to maintain current production levels. Keeping production even requires a lot of energy and money - which hasn’t actually been going in very much. The super majors all plan to reduce production every year from now on. Some national oil companies are aiming at maintaining levels (or in Brazil’s case raising). Private US and Canadian companies are also planning to increase.

The past few years have been flush with articles talking about declining capacity. Russia is producing probably as much as it ever will right now, OPEC has failed to meet its production targets for months. Saudi Arabia can increase production by a few million barrels per day, and Iran can probably do 2.5 million total (but it’s suspected they’ve already been at over 1 million/day for a while, secretly to China, maybe even 1.5 so an extra 1 million barrels won’t mean much.) Iraq is about to decline, many smaller producers in Africa and S. America have declined by half in the past few years…

That is, a structural capacity gap has caused these exploding prices. Russian fears made a short spike of a few percent, but it’s otherwise irrelevant. If Russian capacity actually went offline, massive demand destruction would occur as oil spiked to $200 or so. (Russia can’t move most of its capacity East towards China, due to a lack of pipelines and necessary infrastructure. They can move some by rail, and they have limited infrastructure already, but this capacity is already used on long term contracts. It would probably bring 5 million barrels/day offline which can’t really be replaced otherwise. But, well, actually sanctioning Russian oil would be economic suicide, so it won’t happen.)

Investments in fracking aren’t long lasting either. In the 2014 spike, it just destroyed huge amounts of shareholder value and resulted in perhaps a trillion in nearly stranded (or simply massively mispriced) assets. Frack wells lose most of their productivity within about a year and the fields don’t have much life in them either. To reach current production levels, US producers have been exploiting and draining prepared wells that have been waiting for years, and have gone from 8000->4000 of them recently.


In 2013, OECD estimated Russia needed $100 billion per year until 2030 to modernize its energy grid, develop new oil and gas production sites etc. The following year saw sanctions imposed (although production did increase.)

That is to say, recent oil prices had nearly nothing to do with Russia. The issue’s that there has been nearly no capital expenditure (outside of Shale in north America) The first shale boom eviscerated capital, 600B for 500B of oil! or exploration for new oil fields. Wells have natural rates of decline, so to keep production you have to explore and drill new wells. That has not happened because of underinvestment. OPEC is now unable to increase production, many countries around the world have lower production each year. Russia’s own production can’t really increase further - and their stores are low due to this colder than average winter. Brazil is the only country with a substantial increase in capacity coming online.

February 11th: Chronic OPEC+ Undersupply

Russia hasn’t been “limiting” gas to Europe. They simply don’t produce unlimited amounts and were burning a lot themselves due to the colder winter. Previously, Russia tried to sign long term contracts so they could confidentially make the necessary capital expenditures to maintain specific contractual production levels, but European entities preferred to keep to the spot rates.

N.b. this article expands my comments here on February 22nd 2022, 2 days before.

Additional Reading

For a low case scenario (low oil prices and a continuation of sanctions), a substantial drop of Russia’s oil production in 2035, up to about 30%, could materialize.

Russian oil companies will cut spending on appraisal and exploration work by 20% to 250 billion roubles ($3.2 billion) due to low demand and to comply with Opec+ output quotas.

Energy Minister Alexander Novak said the country’s oil and condensate production may fall by 10% to 510 million tonnes (10.3 million barrels per day) this year compared with 2019,

Without new technology and state tax incentives, Russia’s crude output risks dropping 40 per cent over the next 15 years to about 6.8m barrels a day in 2035, according to energy ministry forecasts.

West Siberia, which accounts for more than half the country’s crude, has seen output slide 10 per cent over the past decade because of depleted conventional reserves and rising water levels.

Costs of per-ton production, fighting water levels and drilling have gone up, while average output per well is declining,

Russia’s 28 per cent oil-extraction factor, the indicator of a field’s efficiency, is far below the US’s 44 per cent and Norway’s 50 per cent, says the energy ministry.

Taxes remain the elephant in the room in Russia, which has some of the heaviest and most complex oil tax burdens in the world. The Russian state’s share in a West Siberian project’s net revenue reaches up to 90 per cent, double the state share in the US

It is now widely accepted, and this paper will assert once more, that Russian oil output is not about to fall and indeed should rise for at least two to three years following the end of any OPEC+ agreement. A more fundamental question is what will happen beyond the early 2020s, when the current pipeline of greenfield projects will be exhausted and new fields will be needed