Depending on who you ask, energy markets would likely be better off without more Saudi-Russia oil and gas cooperation, which will amount to greater clout in the Middle East as U.S. influence in the region wanes. After all, it’s been a cleverly orchestrated cohesive Saudi-Russian agreement, albeit the fledgling but increasingly powerful OPEC+ cartel, that reigned in an historic oil market overhang over the last two years, put a floor under global oil prices and returned OECD to five-year levels.
This well-timed oil production agreement saw prices rise from a dismal dip below $30 per barrel in January 2016 to breaching $85 per barrel earlier this month. Though some of those gains have been pared the last few weeks, Brent oil is still hovering in the mid-$70s level, allowing oil producers and oil companies to recoup years of profit losses.
This same oil production group, which could be formalized soon, is ushering in a new era of Saudi-Russian oil market domination, perhaps in ways even stronger than what OPEC did for decades as it largely dictated global oil supply and corresponding prices. Saudi-Russian oil production cooperation has removed or at least vied with U.S. shale oil production momentum as the top energy market story of the decade.
Now, that cooperation will extend to liquefied natural gas (LNG) markets. Saudi Energy Minister Khalid al-Falih told Ekhbariya TV on Thursday that Saudi Arabia wants to invest as much as 30 percent in Russia’s pivotal and capex intensive Arctic LNG project. He called it a “very ambitious project,” and the biggest example of cooperation between the Saudi private sector and Russian companies. The disclosure comes just two few days after the head of Russian Direct Investment Fund (RDIF), Kirill Dmitriev, said at the controversial Saudi Arabian investment forum that Riyadh is ready to invest $5 billion in LNG project in the Russian Arctic.
Pivotal LNG project
Arctic LNG 2 will be a massive project on the Gydan Peninsula in Northern Siberia with a production capacity of approximately 19.8 million tons per annum (mtpa), placing it as one of the larger LNG projects on a global scale. It is set to unlock over seven billion barrels of oil equivalent (boe) of hydrocarbon resources in Russia’s onshore Utrenneye gas and condensate field. A fleet of ice-class LNG carriers, which will be able to use Russia’s Northern Sea Route, will deliver LNG cargoes destined for Asian markets, which makes up more than 70 percent of global LNG demand with that amount to increase going forward amid insatiable Chinese gas demand. Related: Is The Oil Supply Glut Set To Return?
The project, along with Russia’s Yamal LNG project that came on-stream a few months ago and the Sakhalin project which became operational in 2009, will help Russian President Vladimir Putin’s goal of the country becoming a major LNG player. There are several other large Russian LNG project proposals pending. However, with Qatar projected to have an annual liquefaction capacity of 110 mtpa within five or six years, it’s unlikely that Russian will be vying for the top LNG exporter spot any time soon.
Saudi-Russian gas cooperation is also a brilliant move for Riyadh on numerous fronts. First, it strengthens ongoing bilateral ties between Riyadh and Russia, while also helping the kingdom diversify its international investments. It will also help it move away from oil export revenue reliance.
If the Saudis intend to also sign long term off-take agreements with Arctic LNG, it will help the kingdom’s energy planners use gas to replace oil in its electric power generation sector. The de facto OPEC leader burns an average of 700,000 bpd of oil for electricity to keep the population cool in the hottest summer months from May to August, official figures showed. As more oil used for power generation is displaced with gas, it becomes available for export, albeit without the kingdom having to increase production or in times of a market crisis tapping into its questionable spare production capacity.
The move for Russia is also just as beneficial as Moscow seeks ways to offset restrictive U.S. sanctions on its energy sector. Also, stronger bilateral ties between Riyadh and Moscow could create a wedge between the U.S. and Saudi Arabia, particularly in times of crisis between the two sides, including the current roil over the killing of prominent Saudi journalist and U.S. resident Jamal Khashoggi in Turkey at the beginning of the month.
The danger for Washington is manifold. If the U.S., particularly a growing and assertive anti-Saudi sentiment in both the Senate and House, force President Trump’s hand over harsher rhetoric and possibly economic sanctions against the Saudis, this will give Moscow considerable leverage. Though Trump has insisted that he wants to safeguard billions of dollars of arms sales to Saudi Arabia, if indeed those arms sales were halted, Russian could easily fill the void with its own military hardware sales.
By Tim Daiss for Oilprice.com
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