In the 1980s, the Western Siberia region, also known as the Russian Core, made the Soviet Union a major world oil producer, allowing for peak production of 12.5 million barrels per day in 1988. Following the collapse of the Soviet Union in 1991, Russias oil production fell precipitously, reaching a low of roughly 6 million bbl/d, or around one-half of the Soviet-era peak. Several other factors are thought to have caused the decline, including the depletion of the countrys largest fields due to state-mandated production surges and the collapse of the Soviet central planning system. A turnaround in Russian oil output began in 1999. Many analysts have attributed the rebound in production to the privatization of the industry following the collapse of the Soviet Union. The privatization clarified incentives and increased less expensive production. Higher world oil prices (oil prices tripled between January 1999 and September 2000), the usage of technology that was standard practice in the West, and the rejuvenation of old oil fields also helped raise production levels. Others partially attribute the increase to after-effects of the 1998 financial crisis, the subsequent devaluation of the ruble, and the fall in oil prices.

By 2005 Russian total liquids production averaged almost 9.5 million bbl/d (9 million bbl/d of which was crude oil)--a 2.5 percent increase over 2004. This growth rate was down from annual growth of roughly 10 percent in 2004 and 2003. These production levels have made Russia the worlds second largest producer of crude oil, behind only Saudi Arabia. The short-term outlook for Russian oil production growth is particularly unclear due to a lack of good seismic data and a lack of exploration in major potential producing areas during the last decade. Government taxation of production and export revenues along with the continued lack of clarity concerning the ownership of subsoil resources has also contributed to lower forecasts for 2006. Russias large oil resource base (President Vladimir Putin says it is much larger than the oft-cited 60 billion barrels) should enable the industry to increase production during a high price environment. However, even the Russian Ministry of Industry and Energy and Ministry of Economic Development and Trade have both reduced their outlook for oil supply growth from 4-5 percent per year in 2006 to 2-3 percent. In the last year, major energy agencies as well as the investment community have become increasingly pessimistic about oil supply growth in Russia. Increasing export and production taxes continues to hinder upstream development and decreases returns from applying new technology onto old fields. In the upcoming decade, a few major oil fields will contribute to most of Russias supply growth and others will contribute to decreasing production from mature fields. Production from mature oil fields has a major role in the recent slowdown in Russian oil supply growth. Some of these fields are listed in Table 1 below. Pre-peak fields, which have come online in the last decade, can add between 0.9-1.5 million bbl/d to Russian supply according to a recent analysis of Russias oil supply. New field developments will produce almost all of Russias annual oil growth in the next five years and will likely produce more than half of the countrys oil in 2020. In the next 5 years, new field developments at Lukoils Middle Caspian project (at Kurmangazy in 2006), the Sakhalin Island projects, the Shell Joint Ventures West Salymskoye project, Lukoil/ConocoPhillipss TimanPechora project, Rosneft/Gazproms Prirazlomnoye project, and Rosnefts Vankorskoye and Komsomolskoye will help stem production losses at older fields. In the past, private firms have led much of the upstream development in Russia; but as the state nationalizes these firms, sustained improvements to exploration and development become less certain. Achieving continued growth at post-peak fields will become more problematic as oil companies run out of easy and less costly opportunities to manage the rate of decline.

Russia has 41 oil refineries with a total crude oil processing capacity of 5.44 million bbl/d. However, many of the refineries are inefficient, aging, and in need of modernization. With Russian domestic demand of 2.6 million bbl/d in 2004 (preliminary estimate), refining capacity far outstrips local demand for refined products. Because Russian refined product exports have a lower average price than crude oil, the Russian government reduced export taxes during the mid 1990s to allow for greater volumes of product exports. Russian oil exports to the U.S. (click for data table) have almost doubled since 2004, rising to almost 500,000 bbl/d of crude oil and products. Political pressures to maintain refinery operations, the need to pay for refinery modernization, and higher international oil product prices provide an incentive for Russian oil companies to continue favoring product exports. According to the draft plan for economic development during 2005-2008, the reconstruction and upgrading of refineries so that the refineries can convert a higher level of crude will be a priority for future oil refinery development. The draft forsees continued increases in the production of high quality light oil products, catalysts and raw material for the petrochemical industry. As production of fuel oil is reduced, local refineries are only meeting about half of the countrys demand for high octane gasoline. Consequently, Russia must import the remainder.

Over 70 percent of Russian crude oil production is sent directly abroad for export, while the remaining 30 percent is refined locally. According to the latest data for November 2005, roughly 1.4 million bbl/d of Russias oil exports are sent via the multiple-branch Druzhba pipeline to Belarus, Ukraine, Germany, Poland, and other destinations in Central and Eastern Europe (including Hungary, Slovakia, and the Czech Republic). The remaining crude oil exports are sent to maritime ports in the Black Sea and Baltic Sea and are sold on world markets. Also, because of higher world oil prices recently, almost 170,000 bbl/d of Russias oil is transported via railroad (see Fig. 2). Most of Russias product exports consist of fuel oil and diesel fuel, which are used for heating in European countries and, on a very small scale, in the United States.