Russian Oil Production and Sanctions

Faced with unprecedented economic sanctions, the industry demonstrated adaptability by reorienting exports to Asian markets and fostering partnerships with alternative allies. Additionally, measures were taken to promote import substitution and develop domestic technologies, mitigating the negative effects of sanctions and ensuring the sector's long-term resilience.

Following the start of the Special Military Operation (SVO), the US, EU, UK, and G7 nations imposed unprecedented trade restrictions on Russia, targeting a wide range of sectors, including the fuel and energy complex. Specific measures included:

• A ban on investments in Russia's energy sector, except for nuclear energy;
• Restrictions against specific companies involved in oil extraction and transportation;
• A prohibition on the repair and supply of technological equipment for oil and gas refining;
• A complete halt to oil and other energy resource imports from Russia by the US and UK.

The most severe measures included an embargo on maritime oil and petroleum product deliveries to European countries, traditionally the largest buyers of Russian hydrocarbons. Nevertheless, Russia quickly adapted to the new conditions, tapping into new markets and increasing export volumes by 7% in 2022. This marked an unprecedented redirection of export flows to China, India, Southeast Asia, Latin America, and Africa.

Furthermore, the G7, EU, and Australia introduced a price cap on Russian oil exported by sea: $60 per barrel for crude oil. For petroleum products, a dual limit was set: $100 per barrel for high-quality products (diesel, gasoline) and $45 per barrel for low-quality products (fuel oil).

However, according to Bloomberg, in January-February 2023, Russian Urals and ESPO oil were sold at a discount to Brent ($13 and $8, respectively), with the average price of Russian oil around $74 per barrel.

The oil sector also suffered in 2022 from reduced production by operators of Production Sharing Agreements (PSAs). The withdrawal of foreign partners led to a 42% drop in oil output, or 7.1 million tons annually. The primary reason was ExxonMobil's exit as the operator of the Sakhalin-1 project in March 2022, halting oil production for months. In October 2022, the Russian government established a new operator under Rosneft's subsidiary, Sakhalinmorneftegaz-shelf, to manage investor rights in Sakhalin-1. The new operator began restoring production, reaching about 70% capacity by early January 2023. Reports indicated that Sakhalin-1 output could fully recover by the end of February 2023. Due to Exxon's departure, Sakhalin-1's 2022 production totaled just 4.6 million tons, a 59.2% decline from the previous year.

However, domestic oil producers managed to compensate for the loss. Rosneft's 2022 performance report noted that its total hydrocarbon output for the year was 5.1 million barrels per day, rising to 5.5 million by year-end, largely due to Sakhalin-1's recovery.

The fact that 2022 oil production was 5% lower than in 2019 could be interpreted as a sign of a more efficient and strategically positioned industry, returning to an optimal and sustainable productivity level.

A moderate and controlled decline in oil production has occurred over the past two years. According to ITAR-TASS, citing Deputy Prime Minister Alexander Novak, Russia reduced oil and gas condensate production by 1% in 2023, to approximately 530 million tons. In 2024, oil output fell by about 2.7% to 516 million tons, with exports at 240 million tons. Russia remains one of the world's leading oil producers and a key participant in the OPEC+ agreement to limit production, enabling swift market adjustments and supply-demand balance.

External constraints have accelerated the shift toward import substitution using Russian technologies. For example, in 2023, a project was launched to develop thermochemical technology for unconventional oil reservoirs, which could significantly increase hard-to-recover oil (HTR) extraction.

This step is crucial, as Russia leads the world in HTR reserves, accounting for over 60% of its proven oil resources. The total potential HTR output is estimated at a staggering 200 billion tons.

However, extracting HTR oil requires substantially higher financial investments compared to conventional methods, making it currently unprofitable. Yet, new technologies could unlock vast, previously untapped reserves. With traditional fields nearing depletion, domestic innovations in cost-effective HTR extraction will ensure Russia's energy independence and strong export prospects for decades.

By 2025, the share of domestic equipment in the oil and gas sector is expected to reach 80%, up from 60% in 2023 and just 40% in 2014, before Western technology restrictions were imposed.

Additionally, Russian oil companies are actively adopting digital technologies, automation, and robotics, along with remote monitoring and management systems like "Smart Field." These innovations enhance production efficiency through optimization and data analysis.

Another digital solution being implemented is Rosneft's "RN-Digital Core" software, which enables virtual modeling of rock samples to predict hydrocarbon content and select the most effective extraction methods to boost oil recovery.