Russia has made more money than Saudi Arabia from the production cut pact this year, while the Saudis have reduced output three times the volume Russia has cut, Bloomberg reported on Friday, citing estimates from the International Energy Agency (IEA).
Saudi Arabia and Russia, the leaders of the OPEC and non-OPEC groups in the OPEC+ coalition, respectively, have been leading the cuts since January 2017, aiming to rebalance the market and prop up oil prices.
The current agreement expires in March 2020 and apprehension starts to build ahead of the OPEC+ meeting in the first week of December, which is expected to discuss how the OPEC+ group should proceed with their oil market-managing efforts next year.
Saudi Arabia has been eager to show it is leading by example, over-complying with its share of the cuts by more than 400,000 bpd in recent months—except for in September due to the attacks on its oil infrastructure when it cut even more.
Russia, on the other hand, has been slow to comply, pumping slightly above its quota in recent months, and missing its production target in October yet again despite promises that it would fall in line for October. Related: U.S. Natural Gas Production Has Hit An All Time High
But Russia’s imperfect compliance record has caused it to rake in more money from crude oil—even more than OPEC’s kingpin Saudi Arabia, the driving force behind the cuts. And this windfall highlights the precarious situation OPEC would find itself in if Russia refuses to play along when the group meets in December.
According to the IEA’s estimates, Russia’s gross crude oil revenues this year have averaged US$670 million a day, up by US$170 million daily compared to Q4 2016, just before the OPEC+ cuts began. Saudi Arabia—while slashing production by more than 700,000 bpd in recent months—has earned US$630 million a day in gross crude oil revenue so far this year.
That’s an US$125-million-a-day income jump compared to revenues in Q4 2016, the IEA’s estimates show.
While Saudi Arabia desperately needs higher oil prices ahead of Aramco’s IPO, Russian companies, including the biggest, Rosneft and Lukoil, have been criticizing the OPEC+ deal, arguing that the cuts give more market share to U.S. shale and hinder Russian firms’ production expansion plans.
By Tsvetana Paraskova for Oilprice.com
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Russia didn’t have to cooperate with OPEC and cut production in support of the oil price since the Russian economy can live with an oil price of $40 a barrel or less compared with OPEC members needing an oil price ranging from $85-$100 a barrel to balance their budgets. In fact, Russian oil companies including the biggest, Rosneft and Lukoil, have been criticizing the production cut agreement arguing that the cuts give more market share to US shale oil and hinder Russian firms’ production expansion plans having invested huge sums of money in increasing Russian oil production. Russian production costs range from $15-$20 a barrel (almost $40 in the Arctic) compared with $10 for Saudi Arabia.
Yet by joining OPEC in its production control drive, Moscow has put itself into a position where it can ask for favours in return, notably from Saudi Arabia, which has already pledged sizeable investments in Russian energy projects, including in oil and LNG.
Still, by cooperating with Saudi Arabia to engineer the production cut pact, Russia has helped stabilize the oil price and put a floor under it in the face of the trade war between the United States and China which has been the biggest bearish factor in the market for almost two years.
Russia’s alliance with Saudi Arabia and its cooperation with OPEC are enabling it to have a very big say in the global oil market and also OPEC’s oil policies.
If Russia has made more money from the production cut pact than Saudi Arabia, it is because Saudi Arabia has made bigger cuts than Russia.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London