“What falleth, that shall one also push”

Almost two months ago, in October 2016, I wrote that Russian oil companies could reduce their daily oil output by slowing down production growth at newly launched fields and by reinvesting less in mature fields, increasing their decline rate to a number high enough to translate into a decrease in the national output.

Now that Russia has confirmed that it is ready to reduce oil production by 0.3 mmbpd from the current rate of 11.2 mmbpd, letting mature fields decline faster than planned, through lower reinvestment seems the most plausible route for Russian oil firms. As Reuters reported in October, the latest round of Russian growth, from an average of 10.9 mmbpd in January through July to 11.2 mmbpd in October, mostly (but not entirely) resulted from new fields being put into operation. These greenfield projects appear to be supported by tax incentives, in contrast to most mature fields (see fig. 19 in this report). For an oil producer, it makes sense to cut down on output not by idling wells, but by drilling fewer new wells and performing fewer workovers on the existing well stock (see fig. 23).

In other words, the “cut” seems very much a matter of decline rate management – provided, of course, that all the major Russian producers agree, or are forced by the government to agree, on coordinated action to ensure that Russia fulfills its promise to OPEC. Although some producers responded to the price dips of 2008-9 and 2014-6 by allocating capital away from declining fields not eligible for preferential taxation, others did not and may not be prepared to do so. Besides, Russian companies, like their US counterparts, are improving efficiency at drilling, fracking and various workover activities, and the tax system is gradually changing, so choices made by oil producers in 2014 may not make sense in 2017 and vice versa.

Assuming full corporate compliance, I would guess the “cut” – a reduction in the daily production rate – will not be achieved overnight or even over several weeks, but rather over several months. When Russia said it would “cut” in the first half of 2017, the “soft” time frame probably reflected this complication, rather than merely a wait-and-see approach or other lack of commitment.

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