The slow demise of Russian oil

The toll of the war and Western sanctions have made extracting oil out of Russia’s already shrinking reservoirs harder. Some projections point to at least around a 10% drop in output by the end of the decade, putting the Kremlin’s economy—and the petrodollars it is built on—in peril.

Since the start of the war in Ukraine, Moscow has kept oil production and exports relatively stable by focusing on the maintenance of existing fields rather than the exploration of new ones. But the longer-term outlook is bleak. Up to one-third of Russia’s budget revenue comes from the profits of the energy sector and that proportion is likely to shrink as production slows.

Even before the war, many of Russia’s Soviet-era fields, mainly in Western Siberia and the Volga-Urals region, were starting to run low, leaving oil companies to turn to the harder-to-recover crude in its Arctic and Siberian fields.

To improve their odds, Russian majors planned to tap shale formations in Siberia using techniques developed in Texas and North Dakota but the war prevented them. Sanctions prohibited access to the necessary extraction technology and the government raised taxes on oil companies to shore up its war effort. Workers were enticed to the front by lucrative packages for soldiers, while others of fighting age have died in battle or left the country, all factors creating shortages of skilled specialists in the industry.

President Trump has stepped up pressure on the Kremlin to stop its invasion of Ukraine. But even an unlikely swift end to the war and sanctions, which analysts say have already set the sector back years, wouldn’t solve all of Russia’s problems.

“Getting oil out of the ground is harder and more expensive but the deteriorating resource base means you have to run faster every year just to stay in place," said Matthew Sagers, Russia expert at S&P Global Commodity Insights. “It’s essentially a long, slow goodbye for Russian oil."

Depleting resources

The share of the country’s oil reserves described as hard-to-recover will rise to 80% by 2030, from 59% now, according to Russia’s Energy Ministry. “This means that both capital and operating costs to bring this resource out of the ground will grow," Deputy Energy Minister Pavel Sorokin said at a conference last year.

“The golden era of Russia’s giant conventional oil fields is in the past," said Daria Melnik, vice president upstream research at consulting firm Rystad Energy.

Lacking tools

Developing oil sites, extracting and transporting crude requires a huge range of highly specialized equipment, many of which Russia lacks because of sanctions.

It doesn’t have the latest software to analyze data from rocks and wells to figure out where and how much oil there is and how to get it out of the ground. Even if Russian oil companies possess such computer programs, since 2022 many have been barred from updates, rendering them unusable in many cases, analysts say.

Russian operators are also missing certain sensors built into the drill that transmit real-time information about rock layers, fluids and the drill’s position. Last year, Aleksandr Dyukov, chief executive of oil producer Gazprom Neft, said that the company was missing around 200 items needed to extract and refine oil. The company has set itself a goal to eliminate the shortage by 2027.

Nor does Russia have enough ice-strengthened tankers capable of moving Arctic oil and gas because Western export controls have choked off access to foreign-built ships, key components and technology. Some Asian shipyards, including in South Korea, the world leader in the industry, have canceled Russian orders for such vessels and domestic yards have so far been unable to replace that capacity quickly.

Rising costs

As Russia’s crude reserves diminish, the price of extracting each barrel goes up. That is because what is left in the reservoirs becomes physically harder and therefore more expensive to reach.

But that is just the geology.

The war has exacerbated the costs. Western sanctions mean acquiring equipment—often via third countries—is more expensive. The labor crunch has pushed wages of oil workers for instance, as well as solid materials such as sand that are pumped into a fracked well to keep the cracks open to allow oil or gas to flow out.

“Everything is more expensive," said Sagers. “All these pressures at home make it very hard for Russia to raise production even in the near term."

Write to Georgi Kantchev at georgi.kantchev@wsj.com, Daniel Kiss at daniel.kiss@wsj.com and Ming Li at ming.li@wsj.com