Russia has found a way to protect oil exports

Alexey Gromov, Principal Director on Energy Studies of the Institute for Energy and Finance, gave a detailed commentary to the Vzglyad business newspaper on the prospects for creating a strategic oil reserve in Russia.

Russian President Vladimir Putin last week instructed the government to submit a plan by June 1 that includes expanding transport infrastructure to redirect hydrocarbons to the East. One of such projects could be the creation of oil storage facilities in Russia.

This idea began to be discussed back in 2020, when the demand for oil fell sharply due to the pandemic. “For the first time in its history, Russia has drastically reduced oil production. A number of wells that we shut down during that period never recovered. If there hadn’t been a crisis in Ukraine, we would now be discussing why Russian production is not recovering as quickly as it could under the OPEC + agreement,” Alexey Gromov says. The problem with Russian production is that, for example, if a well has been frozen for more than six months, then it is not always technologically possible to return it to production.

Why is the strategic oil reserve good for Russia? First, the presence of significant oil storage facilities would allow Russia to more easily get through periods of falling demand for oil. There have already been two such crises in two years. The first happened in 2020 due to the pandemic, the second this year due to Western sanctions. Russian oil exports are declining. Secondly, Russia could use its strategic oil reserve as an instrument of influence on the world market.

“For example, when there are unfavorable prices for sale on the market, we can, without stopping production, put part of the oil into the strategic oil reserve. When prices rise, we extract oil again and export it,” the source explains.

In his opinion, in order to be able to insure one's export volumes and exert a balancing effect on the world market, it is necessary to have a strategic oil reserve in the amount of 10% of annual production volumes. To do this, it is necessary to build a storage system for 50 million tons (360 million barrels).

“Russia produces about 520 million tons of oil, of which 220 million tons are exported. Storage facilities for 50 million tons will allow us to store almost a quarter of our exports. This volume will be quite enough to balance Russian exports,” the expert explains.