July 19, 2018 / 12:37 PM / 2 years ago

In sign of supply flexibility, Russia wields oil stocks to boost output

MOSCOW (Reuters) - Russia used stocks held in tanks at its oilfields to help boost crude production in June, three industry sources told Reuters, in a sign of supply flexibility as OPEC kingpin Saudi Arabia pushes other major producers to increase spare output capacity.

FILE PHOTO: A view shows facilities at an oilfield near the town of Kogalym, western Siberia, October 8, 2014. REUTERS/Olesya Astakhova/File Photo

Russian oil production last month rose by around 100,000 barrels per day from May. From July 1-15, the country’s average oil output was 11.215 million bpd, an increase of 245,000 bpd from May, two industry sources said. <O/RUS1>

Saudi Arabia increased its oil output by 458,000 bpd in June from May, pumping an average of 10.488 million bpd and selling even more, with some of that supply coming from storage, OPEC sources told Reuters.

The difference between the two countries’ numbers lies in the scale and sustainability of the increase: thanks to the geological structure of Saudi fields, state-run producer Saudi Aramco can quickly add and cut supply.

Such adjustments are harder to perform in Russia, where oilfields and production equipment in Siberia, for example, are beset by freezing temperatures. But the country does have some flexibility thanks to spare capacity in the Transneft pipeline system and in oil tanks at fields, sources say.

Oil production “has restarted so quickly thanks to stocks in reservoirs (tanks) in western Siberia. They belong both to Transneft and to the oil companies,” a senior oil executive told Reuters.

Another oilman and an industry source confirmed that Russian oil companies had boosted production partially thanks to their stocks. They did not say how much of June’s 100,000-bpd increase came from stocks.

According to the sources and an analyst, Russia has around 200,000 bpd in spare capacity that can be used to stock oil.

Last month, the Organization of the Petroleum Exporting Countries and other producers led by Russia agreed to ease global output cuts, adding around 1 million bpd to the market from July 1.

Of that increase, Moscow promised to contribute 200,000 bpd. Under an agreement that took effect at the start of 2017, Russia’s initial cut was 300,000 bpd.

In May, Saudi Energy Minister Khalid al-Falih said he was concerned about possible shortages of spare crude output capacity. “We certainly don’t feel we are where we need to be with complete market stability,” Falih said.

To view a graphic on Russia, Saudi Arabia Oil Production 2018 png, click: tmsnrt.rs/2L6ck2a


Transneft’s system can hold around 16 million tonnes of stocks, equal to about 11 days of Russian crude production, according to the state-controlled pipeline monopoly.

But much of that capacity is needed for pumping and mixing different types of crude, sources say, estimating that only a third can be used for stockpiling oil.

Igor Dyomin, an adviser to Transneft’s president, said in emailed comments to Reuters that the company’s inventory capacity was not used for long-term oil storage.

“The inventories capacity of Transneft is not used for long-term storage of oil, including from the oil companies. It is a part of the system which ensures the technological process of seamless oil and oil products transportation from the producers to the consumers,” he said.

“For the past three years these volumes have been alternating insignificantly on a monthly basis and are not related to the production curbs within the deal with OPEC,” Dyomin said.

Another two industry sources said Russian oil firms combined had storage facilities with a capacity of around 17 million tonnes located at their fields. These facilities house the mixture of mostly water and oil that producers extract from the ground.

Given that many oilfields in western Siberia have significant water content, such storage can stockpile 3-4 million tonnes of pure crude oil, according to estimates by Mikhail Sheybe, an analyst with Sberbank CIB.

This brings total spare capacity to as much as 10 million tonnes of oil, equal to 200,000 bpd. In June, Russian average oil output exceeded 11 million bpd for the first time since April 2017.

Saudi Arabia, by its own estimates, has 2 million bpd of spare capacity that could be deployed to help compensate for falling output in Venezuela and Iran.

One source said Russia’s oil storage was overloaded by the time Moscow negotiated an easing of global production cuts with Saudi Arabia and other crude-producing nations.

“The covers (on tanks) had been torn off at many (oil production sites),” that source said.

Not all of the increase in Russian supply came from storage, as oil companies were ramping up production following the easing of output curbs, the sources said. They did not provide a breakdown or identify the companies.

According to analysts, top Russian oil producer Rosneft was believed to be able to restore 70,000 bpd of output in just two days. Gazprom Neft promised half of that.

Lukoil, Russia’s second-biggest oil producer, has increased output by 29,000 bpd, Chief Executive Vagit Alekperov said on Wednesday, thanks to what he said was the restart of previously suspended wells.

Russia’s Rosneft, Gazprom Neft, Lukoil and the Energy Ministry did not immediately reply to Reuters requests for comment.

Additional reporting by Oksana Kobzeva, Vladimir Soldatkin and Maxim Nazarov in Moscow and Dmitry Zhdannikov, Ahmad Ghaddar in London; Writing by Katya Golubkova; Editing by Dale Hudson

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