As negotiations between OPEC+ participants concluded on April 12 with a decision to cut combined production by over 9.7 million barrels per day (mmbd) for two months with further reductions thereafter, questions arose as to how Russia would be able to fulfil its obligation, given the accelerated schedule for cuts.
Most of the country’s oil production comes from onshore fields from over 155,000 wells, where average productivity per well is just above 65 barrels per day (bd). New fields tend to have significantly higher productivities per well and advanced well controls. For example, Suzunskoye wells produce over 2,000bd initially and can be an instrument for a fast production cut to be reversed at later dates.
Figure 1 – Drop in fiscal take for 60 recent fields in Russia as a result of a price crash and OPEC+ cuts
Russia saw 60 new oil fields come online between 2016 and 2019, while the last two rounds of OPEC+ production cuts were in effect between 2016 and 2019. These fields have a combined peak capacity approaching 900,000bd and are designed to still grow production post-2020.
However, in light of the recent OPEC+ agreement and Russia’s commitment to cut over 20% of its crude production, these fields might be good candidates for cuts, given high productivity of wells. This is despite the fact that all fields in this group have remaining break-even price below $20 per barrel. Holding close to 6,000 million barrels in remaining reserves, these projects are still profitable under the current price conditions but will likely see production cuts under the new OPEC+ agreement.
Given the progressive nature of the Russian fiscal system, the government absorbed a large share of the downside from the oil price crash. The price crash decreased the state revenue from 60 recent fields by more than $3bn per year and close to $9.5bn over 2020-2022.
OPEC+ cuts will further decrease the fiscal take from these fields by another $3.6bn. Operators assume a smaller loss from the price crash than the state, but the losses still amount to over $1.5bn in 2020 and add up to $4.1bn over 2020-2022. Reducing production will decrease projected cash flows, just as operators begin to see returns from investments.
With all 60 fields following the OPEC+ reduction protocol for 2020-2022, the operators post-tax cash flow decreased by an additional $2.7bn for a total loss in cash flow of $6.8bn over three years.