OPINION: Three months into Moscow’s military invasion of Ukraine, Russia’s oil and gas industry has arrived at a crossroads of long-term options that are certain to affect its future operating environment for years to come.

International sanctions had not targeted Russian oil and gas exports at first, due to concerns about minimising supply disruptions.

However, President Vladimir Putin’s trenchant approach to the conflict and a growing realisation about their own high degree of unity, persuaded Western governments to move more decisively to end reliance on Russian energy and to curtail the oil revenues the Russian state uses to sustain its military might.

In the meantime, according to top Ukrainian officials , Moscow has completely changed its military approach, abandoning efforts to achieve quick gains and switching to a war of attrition.

While Western expectations that the Kremlin would quickly back down once tough economic sanctions were imposed, have simply not been met.

Moscow's strategy now involves continuous, massive shelling of Ukraine's infrastructure, cities and towns before Russian troops attempt to move in to capture them.

The war in Ukraine is now expected to last months, if not years, impacting energy prices and food supplies across the world.

Responding to this challenge, the new oil embargo that European Union leaders approved earlier this week looks to be much more than a temporary fix.

Continuing with their phased approach to sanctions, the EU is now also expected to discuss introducing a similar ban on Russian piped gas supplies.

Even the top buyers of Russian gas — Germany and Italy — have announced plans to free themselves of Russian supplies by the end of 2024, commitments that nobody could have imagined before February.

The loss of these prime markets for Moscow cannot be shrugged off by the country’s oil producers, despite optimistic pronouncements from the Kremlin that the industry will be able to survive by diverting shipments to India and other countries in Asia and Pacific regions.

To the extent that it is possible, the cost of diverting oil exports from Russian ports in the south and northwest of the country between March and May is considerable: about $35 to $45 per barrel on seaborne cargoes to reach distant markets, according to some estimates, and supported by Russian customs statistics.

While such discounts may still generate acceptable revenues at oil prices well above $100 per barrel, there is no guarantee that increasing global production allied to a forecast drop in demand for fossil fuels due to the energy transition will leave as much space in the market for Russian crude.

Lukoil co-founder Leonid Fedun broke ranks this week by proposing, in an open letter, that Russia's oil industry start a managed reduction in production as soon as possible.

According to Fedun, the industry will be poised for better for long-term growth if Russia cuts its current oil output of over 10 million barrels per day by 20%-30%.

This is the price the country must pay to maintain revenues, while also developing export routes beyond Europe and growing its tanker fleet, he said.

Fedun's words are probably what is needed to persuade his industry peers to stop treating sanctions as a temporary problem with a logistical solution.

Unless the call for action is heeded, Russia's oil and gas industry will soon find itself standing on feet of clay, supported only by oil prices above $100, and ready to collapse out of control.

(This is an Upstream opinion article.)

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