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If oil sanctions are lifted on Russia, will they increase production quickly? Doing so would mean violating OPEC+ targets even more, but that doesn’t mean they won’t. Still, the data suggests that they would be unlikely to increase without additional investment, which will take time to implement.

Recent statements by President Trump and Secretary of State Marco Rubio have implied that a relaxation of sanctions on Russia might be imminent. While negotiations are ongoing, the President would clearly benefit from a major diplomatic victory, as well as the effect that lower oil prices would have on inflation.

At present, Russia is subject to production ‘targets’ from its various agreements with the OPEC+ group which would theoretically limit how much they could raise production, assuming sanctions were lifted or relaxed. The latter is important because it seems as if the issue is not just whether sanctions are imposed on Russia but how carefully they are enforced. This was evident last month when the Biden Administration administered additional sanctions aimed at the fleet of tankers still being used to export Russian oil and prices rose, although its’ not clear the degree to which production will be affected.

Many were probably surprised to hear that additional sanctions were being applied, given the many sanctions already imposed. It sounds like Animal House’s Dean Wormer imposing ‘double secret probation’ on Delta House. But the truth is that the sanctions have only been partly successful.

The figure below shows Russian crude production over the past five years, including the massive reduction due to the Covid-19 pandemic, when production was voluntarily reduced by 2 million barrels/day (mb/d), before slowly increasing until March 2022, just before the invasion of Ukraine, by which time they had nearly reached pre-pandemic levels.

Russian Oil Production (thousand barrels/day)

The author from EIA data.

The second figure (with slightly different data from the IEA) shows Russian production from just before the war and since, alone with the country’s production targets from the OPEC+ agreements. Noteworthy is that Russian production, after an initial drop of 1 mb/d in April 2022 almost completely recovered in three months before beginning a long slide downwards. The implication seems to be that the country was able to evade sanctions for its oil sales, but sanctions on oil field services and equipment made it hard to maintain production.

Russian Oil Production and OPEC+ Targets

The author from IEA data.

The salient fact is the difference between the OPEC+ targets and actual production: from April 2022 to September 2023, Russian produced roughly 450 million barrels less than allowed which amounted to a loss of about $40 billion in sales using Brent prices. Since actual sales were often made at discounts of $10-20 per barrel during the period, the real losses were even higher.

And while Russia ultimately reached its allowed production targets, that was due to the lowering of those targets because of market weakness. Again, the implication is that insufficient investment, partly due to sanctions on oil services and equipment, kept Russian production suppressed. Presumably they didn’t meet their targets because they were unable, not because sanctions prevented them. As the figure shows, even before sanctions were imposed, Russia had not been able to meet its targets and while the slow decline in production might have been due to more effective sanctions, it looks much more like an inability to raise production, not to make sales.

This will suggest to some that Russian oil production has peaked and is in terminal decline, or at least a plateau, but the evidence is somewhat mixed. It is possible that the failure to raise production in early 2022 was temporary and would have been overcome had the war not started. The gradual decline since sanctions were imposed does suggest that Russian companies were either unable or unwilling to offset ongoing field decline.

Arguably, if sanctions on oil field services and equipment are lifted, that can be partly or largely reversed, but only with a lag. Then the question becomes whether the government will allow companies to raise production even more above the OPEC+ targets. Since the group has repeatedly delayed relaxing those targets, and the market is not expected to tighten this year, any production increase will take Russia that much more above its target, raising the threat of retaliation by the Saudis and others. That might deter companies from attempting to increase production, but history suggests they are more inclined to cheat as much as possible.

So, the upshot is that an end to sanctions, de facto or de jure, should see more Russian oil on the market, but not until upstream investment rises. At least some of the recent decline can probably be reversed fairly quickly with maintenance, although the increase is likely to be gradual. Such a trend could be like the parable of the frog in a pot that heats so slowly the frog doesn’t notice it’s being cooked until too late, except that OPEC+ has very good thermometers. If the group isn’t relaxing its voluntary cuts and Russian production and exports rise steadily, expect a lot more tension in the group up to and possibly including a new price war.