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Russia Boom Despite Sanctions

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Despite US and European sanctions, Russian oil production has continued to rise, reaching 10.61 million barrels a day during September. The figure includes crude and condensate — an oil that yields more high-value fuels. Last month’s oil output for the nation rose to within 0.3 per cent of January’s post-Soviet record of 10.64 million barrels of crude and condensate.

The US and European Union sanctions are in place as a response to Russian President Vladimir Putin’s and his government’s alleged support of the separatist insurgency in eastern Ukraine, which Putin has always denied.

Sanctions Likely to Bite in 2015

The sanctions against the Russian oil industry have banned exports of some technology and equipment but have clearly failed to have much of an impact so far, said Ildar Davletshin, oil and gas expert from Moscow’s Renaissance Capital. Davletshin added that he does, however, expect the sanctions to begin to bite in 2015, when rising costs might limit Russian oil production by 0.5%.

Sanctions have already succeeded in halting a joint-project of Russian oil company OAO Rosneft and the American company Exxon Mobil Corp in the Kara Sea, where state-owned OAO Rosneft has said it may have discovered crude oil worth more than a billion dollars.

According to two people with insider knowledge who do not wish to be identified, the biggest oilfield services provider in the world today, Schlumberger Ltd, plans to send home its American and European employees because of the sanctions.

The most recent wave of sanctions by the US and Europe has targeted the energy, defence and banking industries, forbidding the provision of well-testing and drilling services in Russian deep water as well as Arctic exploration and production.

Brent Crude Oil Plummets

The price of Brent crude oil is a global benchmark and used to price the Russian export blend, Urals. Brent crude oil fell by sixteen per cent during the last quarter, and to its lowest figure in four years of below $85 per barrel in October, in contrast to June’s price of $116.

The chief economist at Alfa Bank in Moscow, Natalia Orlova, said that a drop in value of $10 per barrel of crude oil equates to a loss for the Russian economy of 500 to 600 billion roubles per year, or between USD $12.2 billion and $14.6 billion.

Russian oil companies are facing increasing capital costs because of the sanctions, so if oil prices plummet worldwide, the consequences for the Russian oil industry could be disastrous. Drilling costs are likely to grow, Davletshin said, because many international service companies intend to reduce their involvement in Russia.

Oil and its associated products contributed 46% of Russia’s budget revenues from January to August of this year, a fall of four per cent.

The most crude oil was produced in 1987 during the Soviet era, when 11.48 million barrels of crude and condensate were produced a day.

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