Leonid Fedun, vice president and co-founder of Lukoil, Russia’s leading privately-held oil producer, has called for a drastic cut in the country’s oil production in order to take the initiative over sanctions, the freezing of Russia’s foreign assets and disconnection from Western markets and capital.
In an opinion article published earlier this week in Moscow-based business newspaper RBK, Fedun proposed cutting oil production between 20% and 30% below a rate he said is currently still running at around 10.5 million barrels per day, despite sanctions and other boycotts against Russian oil.
Despite widespread predictions of a steep drop in Russian oil production and exports, Russian oil exports are believed to have actually grown in March and April, and fallen only moderately in April.
Such data, cited by Moscow news agency Interfax, could not be independently confirmed, but an increased frequency of Russian seaborne cargoes has been reported at export destinations in India and Asia, heavily discounted against western oil benchmarks to compensate for higher transportation and other related costs.
"Why should Russia maintain oil production of 10 million bpd if we can [more] effectively consume and export between 7 million bpd and 8 million bpd without losses [of revenues] to the state budget and domestic consumption?" Fedun wrote.
“Which is better — to sell 10 barrels of crude for $50 or seven barrels but for $80?” he argued.
Fedun believes that Russia is likely to remain under sanctions for long time, and should adjust its economy accordingly.
With the diversion of oil exports to Asia, current large discounts may turn permanent from being just temporary, he fears, with foreign players increasingly able to fix such discounts into their terms by introducing import tariffs on Russian oil, he warned.
According to Russian customs data for April, quoted by Moscow industry journal InfoTEK, some oil cargoes from thekey Russian export ports of Novorossiysk, Primorsk and Ust-Luga were were sold at below $60 per barrel.
The US Energy Information Administration, on the other hand was reporting average prices for spot cargoes of Brent blend in the North Sea at almost $105 per barrel during the same period.
With Russian oil from these ports usually priced against spot Brent cargoes, the data appears to suggest some cargoes were sold at over $45 per barrel discount to Brent, against a pre-war single digit discount.
Fedun argued that producing less oil and selling for a higher price while disconnecting from western states would generate higher returns and require less hard currency and debt, while preserving natural resources for future generations.
Fedun said his argument did not excluded the possibility that Russia will be able to increase oil production in the future “in coordination with members of Opec+ alliance”.
However, he said that the state should also fine-tune the existing tax regime to permit the oil industry not only to “survive but also to keep its potential to grow”.
With European market becoming inaccessible to Russian producers, he said investments should now flow into creating “alternative export corridors (to new markets) via Turkey, Iran and Middle Asia countries”.
At a meeting late Monday, European states agreed to an embargo aimed at closing European Union markets to Russian producers.
The rationale for the measures was described not only as ending European reliance on Russian energy but also as a means of diminishing the prices and revenues obtained from oil and gas, and thus reducing Russia's capacity to finance the war in Ukraine.