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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Russia’s Wealth Fund: Oil Price War With U.S. Would Hurt Russian Economy

Russia shouldn’t try to bring U.S. shale production down with an oil price war, because Moscow would also be hurt in such an event, according to Kirill Dmitriev, chief executive at the Russian Direct Investment Fund (RDIF) and the first Russian official to publicly hint three years ago that there might be an alliance with OPEC to lift oil prices.

“For U.S. shale production to go down, you need oil prices at $40 per barrel and below. That is not healthy for the Russian economy,” Reuters quoted Dmitriev as saying at the World Economic Forum in Davos on Wednesday.

“We should not take competitive action to destroy U.S. shale production,” the head of the Russian wealth fund said.

Although Russia doesn’t need as high an oil price as does Saudi Arabia to balance its budget, a stable price at around $60 is preferable for Moscow.

At the end of last year, Russian President Vladimir Putin said that Russia is comfortable with $60 oil, as its budget is balanced at $40 oil price, and for 2019, that budget-balance oil price is calculated at $43 a barrel.

Dmitriev said in Davos on Wednesday that Russia should not try to undermine U.S. shale and should stick instead to the OPEC/non-OPEC production cuts, even if those cuts mean losing market share in the medium term.

Russia leads the non-OPEC group of producers who are part of the production cut deal which is removing a total of 1.2 million bpd from the market until June 2019, to rebalance the oil market and lift oil prices. Related: IEA Chief: EVs Are Not The End Of The Oil Era

Thanks to the output cut deal with OPEC in place since January 2017, Russia’s revenues have increased by around US$110 billion because of the higher oil prices that resulted from the cuts, Dmitriev said, as carried by Reuters.

The United States has also benefited from those higher oil prices with shale drilling resurging last year and U.S. oil production setting records. The shale boom has made the U.S. the world’s top oil producer ahead of Russia and Saudi Arabia. Russia’s oil production hit a post-Soviet high of

11.421 million bpd in October last year. Under the OPEC+ deal, Russia will be cutting 230,000 bpd from October levels to 11.191 million bpd, and reduction would be gradual, as it was in the previous round of cuts. 

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on January 23 2019 said:
    Russia is right in saying that a price war with the US would hurt its economy. Such a discredited strategy has been tried before by Saudi Arabia in the aftermath of the 2014 oil price crash when Saudi Arabia prevailed upon OPEC and flooded the global oil market with the purpose of undermining US shale oil production. That strategy failed miserably and inflicted heavy damage not only on Saudi and OPEC members’ economies but also on the economies of oil-producing nations around the world including Russia’s.

    However, a massive diversification drive since 2014 has enabled Russia to reduce the dependence of its budget on oil and gas revenues from 68% in 2014 to just over 40% now. Russia’s economy can now live with an oil price of $40 a barrel or less compared with a price much higher than $80 for Saudi Arabia.

    And whilst US shale oil production is sensitive to low oil prices with breakeven prices ranging from $60-$70 a barrel, it has survived so far low oil prices. Still, what it will eventually lead to the demise of US shale oil is not price but geology. It is the best ally of Russia and OPEC against US shale oil.

    The Achilles heel of US Shale oil is that its wells suffer precipitous depletion rates estimated at 70%-90% soon after a well is completed. After an initial burst in output, wells see a rapid decline in production. This necessitate the drilling of more than 10,000 new wells every year at an estimated cost of $50 bn just to maintain production adding to their outstanding debts.

    Never a day passes nowadays without new reports about a slowdown in US oil production. These reports from the Wall Street Journal (WSJ), International oil service companies such as Schlumberger, Baker Hughes and Haliburton and other authoritative organizations including MIT are all talking about declining well productivity, slowing drilling activity, plunging US rig count, a huge backlog of drilled but uncompleted wells (DUCs), rising drilling costs and also rising breakeven prices and therefore can’t be ignored.

    The writing is on the wall for the US shale oil industry. Its demise is neigh probably within the next 5-10 years.

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

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