Russian Oil: Cutting Against Projected Growth

Russia has pledged to OPEC and other Non-OPEC countries to cut its oil output by 300,000 bpd in the first six months of 2017 in a joint effort to reduce the global oil glut by almost 1.8 million barrels a day. However contradictory and ambiguous statements made recently by the Russian Ministry of Energy and Russian oil companies raise some doubts as to whether the Russians are really able to carve out a joint course of action.

According to the announcement made by Russian Energy Minister Alexander Novak last week, the production cut will be implemented gradually, and the cutting ratios will be apportioned to oil companies in line with their production volumes.

The senior executives of a few of the Russian leading oil-producing companies appeared to share a belief in making deals with each other as an essential tool to implementing the strategy .

According to Ravil Maganov, Vice –President of Lukoil, no set unified quota on an output reduction per producer have been established yet. “Each company will have to decide for itself in accordance with its share on the market. The companies shall curtail their output taking into consideration their specific position on the market,” stated the executive to press.

The Head of Gazpromneft, Alexander Dukov expressed optimism concerning the ability of the Russian oil producing companies to work out an agreement on specific reduction quotas with one another. “There are always options of making deals between the companies. The most important thing, is that the total output of Russia gets reduced by 300 thousand barrels a day, but we can sort the reduction scheme out between ourselves”, said Dukov.

It is noteworthy that despite Russia’s commitment to reduce output, Gazpromneft still forecasts the company’s production to grow in 2017. The company expects the 2016 results to reveal an 8 to 9 percent year on year production growth compared to 2015, with the projected output to rise from 79.7 mln. tons to 86-87 mln. tons.

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Transneft President, Nikolai Tokarev stated to TASS agency: “We will certainly feel the pinch, but the volumes are not so exorbitant for us to get put out”.

Tokarev also pointed out that the reduction of oil output under the deal reached with OPEC does not imply any tangible cuts in Russian oil exports. “The point here is the output reduction. A far as the oil exports are concerned, we are going to ship as much as specified in delivery contracts, however, I do not suppose that the exports cuts will be substantial,” he announced.

As has been agreed at the non-OPEC meeting in on December 10, Russia will cut the daily output of oil by 200,000 bpd in March, raising the cut to 300,000 bpd in April, 2017, with the ultimate production figure not to exceed 10.947 million bpd

However, as Reuters reported, despite the joint curtailment agreement with OPEC, the overall Russian oil production forecast for 2017 is not going to be revised, as Novak pointed out at the meeting last week. The Russian Ministry of Energy maintains the same forecast on production growth to reach 548 – 551 million tons (11.01 -11.07 million barrels per day) in 2017.

Novak made it clear that the long-term contracts signed by companies and mentioned in intergovernmental agreements ‘’will not be subject to the reduction agreement with OPEC", although he did note that the joint Russia-OPEC agreements would be implemented in full as the reduction of oil output would not be significant.

The Ministry has also reported that a special committee of Russian oil companies on monitoring the output reduction has been set up. According to the Ministry, entering into an agreement on output reduction can be only voluntary; there are no plans for imposing a penalty on companies who choose not to implement output cuts. Neither any compensation of losses is envisaged for the companies that do implement output cuts.

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Despite some optimistic assessments of the Non-OPEC/OPEC deal, some experts remain quite skeptical with regards to the ability and intentions of all the reckoning countries to keep their end of the deal; moreover OPEC countries are quite known for having broken off the agreements reached in the past several times.

Thus, the Head of Strategic Developments Center, former Russian Minister of Finance Alexey Kudrin views the recent OPEC-NON OPEC agreement on output reduction as “quite a rational measure”, although he doubts that all the undertaken obligations under the agreement will be fulfilled. “This unfortunately, is already an existing problem with OPEC: the promises made were not always kept. I do not believe in long term ability of this measure to impact the oil prices. Its impact is limited to one and half to two years.” RIA-Novosti reported Kudrin as saying.

By Ekaterina Pokrovskaya for Oilprice.com

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