Russia bluffed during the oil war

US, WASHINGTON (ORDO NEWS) — For most of the post-Soviet period, officials in the Russian energy sector have opposed OPEC calls for cuts in production in order to support world oil prices. They referred to the fact that in the cold climate of Russia, it is simply impossible to do.

This week, faced with an overabundance of oil that cannot be sold and nowhere to store, the Russian Ministry of Energy announced plans to cut production by about a fifth and to conserve wells, many of which are located in the Arctic.

The Russian government, which did not want to share the burden of cuts with OPEC countries, has long insisted that it is much more difficult for Russia to reduce oil production compared to desert kingdoms. Wells that are drilled in permafrost cannot simply be mothballed because they freeze and will need to be drilled again if they decide to reopen.

Analysts have called statements about the cold climate one of the main geopolitical deceptions of the global oil industry, and Russian officials have resorted to this fraud for decades to evade the demands of OPEC countries to help them maintain oil prices.

“For the most part, this is nonsense,” said Thomas Reed, a Houston investor and former oil company manager with experience in Siberia, referring to statements about the cold climate. “Most often, oil wells can be mothballed without any problems.”

This point of view is confirmed by the fact that Russia has now begun to hastily preserve its oil wells. And it turned out that conservation of wells in Siberia and the Far East is not much more difficult than in other regions.

“The level of execution of the transaction will be 100%,” Russian Energy Minister Alexander Novak said in an interview with Interfax Russian news agency on Wednesday, April 29. Moscow promised to reduce production by about 2 million barrels per day, that is, about one fifth of the pre-crisis level.

According to Novak, the cuts began last week: “All companies have committed themselves to implementing the agreements.”

After the collapse of the Soviet Union, OPEC member countries tried to draw Russia into various agreements to reduce production, arguing that Russia, the world’s largest exporter of hydrocarbons, taking into account both oil and gas, is reaping the benefits of a pricing policy, not wanting to share burden with other exporting countries.

In response to this, Russia repeatedly resorted to the cold climate argument: according to official statements, this was the case after the fall in oil prices in 1998 and during the global crisis ten years later.

The topic of the cold climate reappeared in negotiations with representatives of Saudi Arabia in Vienna in 2014, as well as in 2016, when Russia initially refused to sign an agreement with OPEC, and then agreed to a slight decrease in production. Russian officials insisted that Russia did not support OPEC’s proposed cuts, not in order to maintain profit, but because of the cold climate in Siberia.

“We cannot work the way OPEC countries work,” said Igor Sechin, head of the Russian state-owned company Rosneft, at the International Petroleum Week forum in London in 2016, first citing the fact that in Russia, oil companies are private, and then mentioning the cold climate. He added that sometimes temperatures in Russian oil fields drop to minus 50 degrees Celsius. “We tried to explain this to our friends from OPEC,” he added.

According to experts, there is no doubt that the cold does entail a number of problems, but there are still no insurmountable obstacles.

Part of the Russian oil is naturally enriched with paraffin wax, and its temperature remains high enough so that it can flow. On the surface, this wax is separated from the oil and is discharged in large quantities around the deposits. In these fields, it will be necessary to clean the pipes before the wells are preserved, otherwise this wax will harden in one giant candle.

In the case of many other wells, engineers produce oil by pumping water through hundreds or even thousands of feet of permafrost to create pressure and push oil to the surface. When preserving such wells, engineers will need to make sure that these water columns do not rise to permafrost.

However, all these problems are compensated by the significant benefits that can be derived from well closure: since nothing has been extracted from it for a while, the pressure in the oil reservoir often builds up. And when this well is reopened, it begins to produce more oil than before its closure.

In fact, in Russia, as in other countries, geologists regularly conserve one or more wells in the fields to analyze the increase in pressure at the wellhead. There is no harm from this.

“I don’t think that there will be many problems,” said Alexander Burgansky, an oil analyst at Renaissance Capital Moscow Investment Bank. “Oil companies know how to do this.”

Even before the coronavirus pandemic brought down oil demand, demonstrating that Russia was still capable of cutting oil production, Saudi Arabia was skeptical of Russians’ statements about the cold climate. In 2014, the then Minister of Energy of Saudi Arabia, Ali al-Naimi, defiantly left the meeting after Sechin said that Russia could not reduce production. Al-Naimi wrote about this in his memoirs entitled “Out of the Desert”.

Michael Lynch, an employee of the Energy Policy Research Foundation in Washington, said the Russians “always resorted to the argument that they needed time to reduce production.” “I believe that this is 90% rationalization,” he added.


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