Russia charts new course for oil and gas as Putin extends rule

President Vladimir Putin is headed for a new term in office at rubber-stamp elections this weekend with Russia set on a fundamentally altered course, defined by membership of the OPEC+ alliance, and isolation from former G7 partners of the country's energy industry.

The March 15-17 poll will formally allow Putin to hold power for the rest of the decade, but the run-up to the vote has been accompanied by unprecedented Ukrainian attacks on Russian oil refineries, alongside an EU and US sanctions campaign that Russia is trying to overcome, but that threatens the country's output as it loses access to technology and financing.

Putin in televised comments March 12 appeared to make light of Russia's deepening ties with OPEC, pointing out production cuts may give succor to the US shale industry -- long a target of Russian ire and dismissed by Putin for its "lack of prospects."

But if anything, Russia is growing more aligned with OPEC and a Saudi leadership that has become increasingly detached from its traditional allegiance with the US in recent years; the latest OPEC+ production cuts align Moscow more closely with the group, limiting its upstream production, over time, rather than merely export levels as previously.

Brazil's recent incorporation into OPEC+ as an observer underlines Russia's longstanding pursuit of alternative political and trade ties, with the Latin American country now a major recipient of Russian diesel, likely reciprocated by Brazilian agricultural supplies.

Russia until recently relied on oil and gas majors from the G7 countries particularly for more demanding oil and gas projects in locations such as Sakhalin and the Yamal Peninsula, partnerships that have now been ended. S&P Global Commodity Insights analysts now expect Russian output to enter gradual decline as soon as 2024, partly due to a lack of access to the best technology.

Russian divergence is also evident in its willingness to defy attacks by Houthi rebels on oil tankers in the Red Sea and continue to use the route for shipments of oil to Asia.

While Russian vessels have not been immune to attack, "the Russians seem to be unfazed and are likely to continue benefiting from the shorter Red Sea route on the expectation that their vessels won't be targeted again," George Voloshin, a Paris-based Russia analyst, told S&P Global Commodity Insights.

The Houthi attacks, which have forced many companies to send cargoes via a longer route around South Africa, also underscore an existing Russian effort to strengthen rail and pipeline routes for oil and gas into East, Central and South Asia.

While India has become a major buyer of Urals crude that previously went largely to Europe, loadings on Russia's Pacific coast of the ESPO crude grade hit a record monthly high of 926,000 b/d in February, according to vessel tracking data from S&P Global Commodities at Sea.

Infrastructure operator Transneft has highlighted its efforts to strengthen pipeline links from West Siberia to Kozmino on the Pacific, and reinstate rail links to the port that can also transport crude.

Less noticed is Russian support for new infrastructure in the Caucasus region being promoted by Turkey and Azerbaijan -- the so-called "Zangezur" rail corridor. The route has been fiercely opposed by Armenia as it would cross that country's territory, but is viewed as potentially strengthening Russian infrastructure ties with Iran.

Embattled industry

Despite officially lauded efforts to strengthen Russian resilience, the wave of Ukrainian drone attacks on Russian refineries and fuel depots in the run-up to the election is likely to be politically unsettling, and potentially disruptive to fuel supplies.

A March 13 attack on the 342,000 b/d Ryazan refinery is particularly sensitive as the facility is one of Russia's largest and supplies the Moscow region. There are also signs of technology sanctions inhibiting repairs after previous outages, notably at Lukoil's Norsi refinery in Nizhny Novgorod.

The Kremlin has tried to safeguard supplies by implementing a six-month ban on gasoline exports from March 1, but this has failed to prevent climbing product prices on the St. Petersburg Exchange. Faced with an FCC outage at Norsi and unplanned outages from previous drone strikes, Russian refinery throughput was already down 7% in February from the start of the year.

"It's too early to speak of any serious longer term damage to Russia's refining capability, but the latest drone attacks against Russian refineries and fuel depots up the ante significantly," Voloshin commented.

As for the upstream, there are signs of major Russian producers still investing in replenishing production. Gazprom Neft on March 6 announced new investment in the 12 billion barrel Chonsky oil field cluster in East Siberia, intended to replenish ESPO volumes.

Nonetheless, question marks remain over the progress of landmark projects such as Rosneft's Vostok Oil project, which could potentially divert crude away from the ESPO pipeline to a new Arctic port, but appears to be falling behind schedule, according to John Webb, director of S&P Global Commodity Insights' Eurasian Energy advisory service.

The Eurasian Energy unit "remains skeptical of the Russian oil industry's ability to replenish itself overall, and the base case is still for a steady decline of Russian oil production on an annual basis starting this year," he said.