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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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Russia Is The Biggest Winner In The OPEC+ Deal

OPEC has been the most important actor in global oil markets with the ability to influence prices for decades. The shale revolution in the U.S. has brought much uncertainty for traditional producers due to the vast amounts of oil and gas that are flowing from the American energy heartland in a short period. The looming threat is so big, that erstwhile competitor Russia agreed to align its policies with the cartel's. Moscow, however, is eager to squeeze all it can from the agreement, leaving little for Saudi Arabia in particular who risks losing much more due to the particular phase of the country’s economic development.

OPEC’s changing balance of power

Over the years, (geo)political and economic developments have transformed the power balance between the organization’s members. One factor, however, that determines influence more than any other is production capacity. In this context, Saudi Arabia has been the undisputed king for decades.

The level of professionalization of national oil company Saudi Aramco has made it into a formidable energy behemoth that controls the world’s second-largest conventional oil reserves. While Venezuela's reserves are bigger, Aramco's low production costs, continued Western (and in particular U.S.) political support, and relative political stability have gradually increased and maintained OPEC’s largest production capacity.

Influence, however, is not only derived from how much one can produce but more specifically from how much one chooses not to produce. Spare capacity is the defining factor behind leverage over price development. In this area, none is bigger than Saudi Arabia's. The geography and type of wells make it possible for Aramco to ramp up and bring down production relatively quickly. On average, the Arab country has usually kept 1.5 - 2 million barrels per day (mbpd) of spare capacity on hand, which is 1.5 – 2 percent of global oil demand before the Covid-19 pandemic. Related: Will U.S. Shale Finally Reward Shareholders?

OPEC is dead, long live OPEC+

The unprecedented threat of the U.S. shale industry drove Moscow and Riyadh into each other’s arms in 2016. The first time an agreement was struck, the participants agreed to cut production by 1.8 mbpd (1.2 from OPEC and 600,000 from non-OPEC). Despite some friction and disagreements, the OPEC+ format has survived for years. Related: Will France Abandon Nuclear Power?

However, the disparity in interests and share of dependence on oil revenues is a continuous source of instability. According to Ronald Smith, a Moscow-based analyst at BCS GM, “as long as oil is $45/bl or below, it is pretty easy to get everyone in OPEC+ on the same page and cut production. And when it is $65-70/bl, everyone agrees it is time to put oil back on the market. But between $50/bl and $60/bl, that is where the interests diverge.”

The price of oil currently is hovering around $55, which means that Riyadh finds the alliance with Russia more important than the other way around. The IMF estimated that Saudi Arabia's fiscal breakeven oil price for 2021 is at $68/bl. Russia, in contrast, is $46/bl. Furthermore, a larger share of the Saudi production is exported while Russians consume more of their produce domestically. Also, the economy of the latter is more diversified which gives it another trump in its negotiations with Riyadh.

Another advantage in the hands of Russian producers and the Kremlin is the weak ruble while the riyal in Saudi Arabia is fixed against the U.S. dollar. Oil is traded internationally in dollars meaning the export from Russia earns producers a handsome fee when exchanged into roubles. Saudi Arabia does not enjoy the same benefit and won’t any time soon either.

The low production costs in the Arab country give it an advantage over competitors such as shale producers in the U.S. Riyadh expects demand for oil to return later this year when vaccination against Covid-19 kicks-in. Therefore, policymakers in the Kingdom think they'll claw back customers when oil becomes more scarce.

Recently, Saudi Crown Prince Mohammed bin Salman announced that Aramco may offer additional shares to the market in the next dew few years. This shows the necessity for Riyadh to voluntarily lower production by 1 mbpd while Russia will increase by 130,000 bpd. Saudi Arabia is in a rush to modernize and diversify the economy by earning much-needed petrodollars while it still can.

By Vanand Meliksetian for Oilprice.com

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Leave a comment
  • Steven Conn on February 02 2021 said:
    When mentioning US shale one must always be aware that even at WTI price of $50, a large share of shale producers do not make any profits, and actually incur losses. Shale expansion has been fueled by massive low interest borrowing, not by profitability of the production. This is in contrast to Russian, Saudi, Iranian, etc. producers.

    And in the sphere of LNG, can US shale gas compete with Russian piped and LNG exports without the use of political pressure and sanctions blackmail, in other words based on market competition?

    In 2020 ExxonMobil and BP reported very large multi-billion dollar losses, as did ConocoPhillips, the holder of many shale assets.
  • Mamdouh Salameh on February 02 2021 said:
    With the cooperation between OPEC led by Saudi Arabia and non-OPEC members led by Russia, everyone is a winner including the global oil market, crude oil prices and above all the global economy. The only exception is US shale oil.

    Both the global economy and global oil demand owe OPEC+ a great debt of gratitude. Only OPEC+ stood between the COVID-19 pandemic and a complete collapse of the global oil market. This success has only been possible as a result of the cooperation between OPEC and Russia. Furthermore, this cooperation has enabled Russia and Saudi Arabia to exert the greatest possible influence on the stability of the global oil market and prices in their capacities as the world’s largest crude oil producer and the world’s largest crude oil exporter respectively.

    However, as prices start to rise, Russia’s and Saudi oil strategies will diverge. Saudi Arabia needs an oil price above $80 a barrel to balance its budget while Russia’s economy could live with an oil price of $40 or even less because Russia is a highly advanced and diversified economy while the Saudi economy is virtually totally dependent on the oil export revenues.

    Another significant difference is that the lifting cost per barrel of Russia’s largest oil producer, Rosneft, is $2.5 compared with $2.8 for Saudi Aramco. This is due to the falling ruble against the dollar. Russian oil companies earn dollars and other hard currencies for their exports but pay for their operations in ruble. The lower the ruble slides against the U.S. dollar, the lower the production costs of Russian oil companies. This and lower breakeven price for Russian oil are the reasons why Saudi Arabia lost the price war in March 2020 against Russia.

    In the final analysis, Saudi Aramco’s credibility, IPO and its standing in the global oil market hinge on the actual size of its proven crude oil reserves.

    Since the introduction of the production quota system by OPEC in the early 1980s in defence of oil prices, I have been doggedly assessing Saudi oil reserves.

    My research and assessment indicate that Saudi proven reserves stood at 47 billion barrels (bb) at the end of 2020 and not 264 bb as the Saudis are claiming. Moreover, Saudi Arabia has no spare capacity.

    Saudi crude oil production peaked at 9.64 mbd in 2005 and has been in decline since then. Saudi Arabia can at best produce some 8.0-9.0 mbd with another 700,000 b/d to 1.0 mbd coming from storage. Current Saudi production comes from five giant but aging and fast-depleting oilfields discovered more than 71 years ago.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment




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