12.07.23 Review

Sovereign Drilling: Restricting access to Western technology may not affect the oil industry as much as previously thought

While the International Energy Agency predicts a decline in Russian oil production due to the loss of access to Western technology and equipment, Russia’s oil drilling in 2022 was at the highest level in more than a decade. Major oilfield service companies initially announced their departure from the Russian market following the onset of the full-scale invasion of Ukraine. However, a year and a half later, this exodus has not really materialised. Furthermore, experts have explained that Russian companies have increasingly relied on domestic resources in recent years. Although highly complex projects, particularly those in the Arctic shelf, are unlikely to proceed without Western technology, the industry appears to be able to manage without it in the medium term by replacing Western equipment and software with alternatives. While this will reduce extraction efficiency, it will not lead to a dramatic decline.

In the initial months after the full-scale invasion of Ukraine began, the members of the 'Big Four' oilfield service companies – SLB (formerly known as Schlumberger), Baker Hughes, Halliburton, and Weatherford – almost simultaneously pledged to immediately halt investments in the Russian market and curtail all activities as quickly as possible. In the latest version of the World Energy Outlook report, experts from the International Energy Agency (IEA) warn that, without access to advanced Western technologies, Russian oil production could decline by 2 million barrels per day by the end of the decade, nearly 20% below the 2021 level. When Russia announced voluntary production cuts in early 2023, European Commissioner for Energy, Kadri Simson explained, 'Russia simply cannot sustain production volumes because it no longer has access to the necessary technologies.' However, the forecasts of the IEA do not always come to pass. For example, as Bloomberg has pointed out, over the past decade, the agency has repeatedly predicted a supply crisis that never materialised.

In reality, Russian oil companies have so far maintained access to Western technologies. According to a study by the firm 'Yakov & Partners' (formerly the Russian office of McKinsey), SLB, Baker Hughes, Halliburton, and Weatherford were involved in approximately 20% of Russian oil production before the war. In 2022, Baker Hughes and Halliburton sold their businesses to former employees and officially exited Russia. However, the combined share of these two companies was only 6%. Meanwhile, despite announcing their departure, SLB and Weatherford, who had more Russian contracts, not only stayed in the country but also continued to take on new projects, thereby almost neutralising the effect of their competitors' departure.

However, even in the event of their departure, the gloomy forecast for oil production in Russia may not come to fruition, according to Vitaly Yermakov, Senior Research Fellow at the Oxford Institute for Energy Studies. He claims that, in principle, over three-quarters of Russian production is not dependent on international cooperation. Western oilfield service companies played an important role in restructuring the industry in the late 1990s and early 2000s. However, in the subsequent years, their Russian counterparts increasingly relied on domestic resources, engaging foreign partners only for the most complex tasks.

Advanced Western technologies are certainly essential for new highly complex projects, primarily in the Arctic shelf. However, this does not include 'Vostok Oil,' Rosneft's flagship project, which combines the largest oil fields in the north of the Krasnoyarsk region. And, in Western Siberia, a key region for the industry, reserves that Russian companies can develop without external assistance are expected to last for the next 20 years.

Nevertheless, Russian service companies are still using Western equipment and software. However, according to Yermakov, both the equipment and software can be replaced with analogues if necessary, although these would be less efficient.

According to official data, oil drilling volumes in Russia reached a record high in 2022, despite sanctions and the departure of some Western companies. Yermakov believes that this indicates the industry's resilience. Thus, although the IEA’s scenario of a significant reduction in Russian oil production is possible, another scenario seems equally plausible: a managed decline of 0.5-0.7 million barrels per day (as it stands now) followed by growth if external conditions are favourable.