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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Does Russia Really Need The OPEC Deal?

Putin

OPEC and Russia are coordinating the first joint OPEC/non-OPEC deal to curb oil output since 2001, but the apparent unity in the face of lower-for-longer oil prices doesn’t disguise the fact that the cartel and Russia have separate agendas for production, expansion, and global market shares.  

Earlier this week, in its latest Monthly Oil Market Report, OPEC revised down its forecast for Russia’s oil supply growth by 70,000 bpd for 2018. This means an anticipated net increase of 60,000 bpd for Russia’s oil output in 2018.

OPEC didn’t change its forecast for Russia’s quarterly oil supply at 10.98 million bpd for 3Q17, 4Q17 and 1Q18, assuming production of 300,000 bpd below October levels. This leads to expectations of 30,000 bpd growth this year, when OPEC projects average Russian production at 11.12 million bpd.

The expected growth figures are a tiny fraction of the production of the world’s biggest oil producer.

Non-OPEC Russia, like OPEC’s de facto leader Saudi Arabia and most of the other cartel members, entered the joint deal at a very high level of production, which took much of the sting out of the cuts. In the last quarter of 2016, Russia’s production hit a post-Soviet era high, while year over year in 2016, production grew to 10.96 million bpd, from 10.72 million bpd in 2015.

Russia’s pledge in the OPEC/non-OPEC deal is to shave off 300,000 bpd from the October 2016 level, which was the highest in almost 30 years. Related: OPEC Production Falls Despite A Dip In Compliance

Meanwhile, Saudi Arabia committed to cut nearly 500,000 bpd (486,000 bpd, to be precise) and is fulfilling its promise. In the first months of the deal, it was eager to show the market that it was leading by example and over-complying with the cuts. But a few months later, exasperated by non-complying OPEC members, the persisting glut, and the lower-than-expected oil prices, and faced with higher oil demand at home in the summer, Saudi Arabia abandoned the overcompliance and is now merely complying.

Russia is also complying with its promises. The energy ministry’s website features a statement by Energy Minister Alexander Novak that said in August 2017, Russia had cut 344,900 bpd from its October level. Russia’s oil production last month dropped to a one-year low, to 10.91 million bpd from 10.95 million bpd in July, due to Gazprom Neft suspending output at Russia’s only Arctic production platform to carry out maintenance. In the winter months, it was severe Siberian weather that helped Russia ‘cut’ its production. Then there was the spring maintenance at some fields, and now it’s the Arctic maintenance. So Russia’s oil producers are not shouldering the whole 300,000 bpd of cuts; maintenance schedules also help Russia boast conformity with the deal, cutting from record high production levels.

But while it’s leading the non-OPEC nations’ party in the production cut pact, Russia hasn’t abandoned its plans to continue to pursue Arctic exploration, and has not given up on boosting its market share in the biggest demand growth nations—oil-hungry China and India.

Developing its Arctic resources is one of the priorities in Russia’s energy policy for the medium and long term. Despite the Western sanctions that prohibit the export of goods that might help Russia’s biggest oil firms to develop Arctic offshore projects, the Russian companies continue their exploration. The biggest oil producer, Rosneft, struck first oil in the Laptev Sea in the Eastern Arctic in June.  

Just recently, Russia signed a strategic deal with the somewhat mysterious CEFC China Energy Company for the joint development of oil and gas projects in Siberia. Last week, CEFC China Energy Company also bought a 14.16 percent stake in Rosneft from Glencore and Qatar Investment Authority. Related: Can Putin Bring Peace To The Korean Peninsula?

Last year, Russia overtook Saudi Arabia as China’s biggest supplier of crude oil, thanks in large part to increased demand from independent refineries. And now Russia is securing more oil trade with China as part of the CEFC-Rosneft deal, further solidifying its top-supplier spot and poaching Saudi Arabia’s coveted market share.

Russia claims that it can ‘live forever’ on US$40 oil, and Rosneft is preparing for such levels next year. Meanwhile OPEC hopes for oil prices at around US$60 per barrel in order to bring balance to budgets.

Even if OPEC’s estimate for Russia’s oil output growth next year of just 60,000 bpd turns out to be accurate, Russia’s strategic push for deals with Asia to sell its oil would leave it much less scathed—if at all—by the OPEC/non-OPEC production cut deal, regardless of whether it’s extended beyond March 2018.

By Tsvetana Paraskova for Oilprice.com

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