Bloomberg: Russia’s oil drilling boom proves Moscow’s resilience to Western sanctions

Russia was on pace for a second year of record oil drilling in 2023, further evidence of the nation’s resilience to Western sanctions.

The boom in activity came alongside a recovery in the both volume and value of Russia’s oil exports, a stark illustration of how the country’s fossil fuel industry has been a crucial source of funds for President Vladimir Putin’s war in Ukraine, which is about to enter its third year.

In the first 11 months of 2023, Russia drilled oil production wells with a total depth of 28,100 kilometers, according to industry data seen by Bloomberg.

The frenetic pace of drilling — amid fairly static production — also offers an indication of some long-term problems that may be building up for Russia’s oil sector as a result of Moscow’s international isolation. The industry is working harder to maintain output from its oldest wells, while new projects that would sustain production in the coming decades must adapt to the country’s changed circumstances.

For 2023 as a whole, Russia’s production drilling is set to top 30,000 kilometers, according to analysts at intelligence firm Kpler and Moscow-based consultant Yakov & Partners. The increase comes despite Western countries’ pressure on the country’s energy industry, which is a key source of funds for the Kremlin’s war in Ukraine. The sector has been the target of sanctions ranging from import bans and price caps, to prohibitions on the export of technology.

Last year, the US sanctioned dozens of companies that produce drilling equipment and develop new production techniques, aiming “to limit Russia’s future extractive capabilities.” The European Union in 2022 imposed “comprehensive exports restriction on equipment, technology and services for the energy industry in Russia.”

Two of the world’s largest oil-service providers — Halliburton Co. and Baker Hughes Co. — sold their Russian units and withdrew. Two more giants, SLB and Weatherford International Plc, have said they continue operations in the country in compliance with sanctions.

The data indicate that these restrictive measures have largely failed.

“Only some 15% of the nation’s domestic drilling market depends on technologies from so-called unfriendly nations,” said Daria Melnik, vice-president for exploration and production at Oslo-based research firm Rystad Energy A/S.

The drilling record is a sign of Russia’s resilience to Western energy sanctions, but the pace of activity also carries a warning.

Over the years, the rise and fall of the nation’s drilling has moved largely in sync with changes in output, historic data show. Yet in 2023, the drilling boom came alongside production cuts that Moscow is implementing in tandem with the Organization of Petroleum Exporting Countries. That suggests the high level of activity is necessary simply to maintain output.

As of 2022, fields that had been in operation for more than five years accounted for nearly 96% of Russia’s total liquids production, according to a research paper from the Oxford Institute for Energy Studies. Many of those upstream projects are long past their peak output levels, the paper said.