Rus­sia poised to gain from oil pro­duc­tion freeze

The Myanmar Times - - International Business -

WITH its oil out­put at record lev­els and state cof­fers run­ning low, Rus­sia has lit­tle to lose and much to gain from agree­ing a deal with the OPEC car­tel on lim­it­ing pro­duc­tion.

Ahead of an OPEC meet­ing set for to­mor­row in Vi­enna, Moscow – which is not a mem­ber of the Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries – is push­ing for an agree­ment to be fi­nally reached af­ter sim­i­lar talks in Doha col­lapsed ac­ri­mo­niously in spring.

Rus­sia is one of the big­gest oil pro­duc­ers in the world, along with Saudi Ara­bia and the United States, and has paid dearly for the col­lapse in prices over two years of re­ces­sion, ex­ac­er­bated by Western sanc­tions over Ukraine.

While OPEC plans to re­duce pro­duc­tion quo­tas for its mem­bers, Pres­i­dent Vladimir Putin said last week that Rus­sia was ready to “freeze pro­duc­tion at the level it is at cur­rently”.

“For us to freeze pro­duc­tion is no ef­fort at all,” Mr Putin said.

En­ergy Min­is­ter Alexan­der No­vak said that OPEC had asked oil­pro­duc­ing coun­tries that are not mem­bers of the car­tel to cut pro­duc­tion by 500,000 bar­rels a day.

Rus­sian oil pro­duc­tion in re­cent months has not stopped grow­ing and now ex­ceeds 11 mil­lion bar­rels per day, the high­est since the col­lapse of the Soviet Union.

The po­ten­tial for fur­ther growth is “limited”, said Emily Stromquist, an an­a­lyst at Eura­sia Group.

A freeze “re­quires lit­tle to no ef­fort on the part of Rus­sian oil com­pa­nies” while Rus­sia “would ben­e­fit im­mensely from any deal, how­ever vague, that can help bump oil prices up”, Ms Stromquist said.

The rel­a­tive re­bound in oil prices since win­ter shows the mar­ket is ex­tremely sen­si­tive to any step – even with­out a con­crete re­sult – taken in con­junc­tion by the ex­porter coun­tries that up to now have com­peted for mar­ket shares and pro­duced more and more oil.

Rus­sia’s pro­duc­tion has grown by 50 per­cent since 2000 thanks to the re­launch of Soviet-era oil­fields.

In re­cent years this growth has been sus­tained by new hor­i­zon­tal drilling meth­ods that pro­longed the life of cer­tain oil­fields, par­tic­u­larly in western Siberia, as well as by the launch of new projects that were ap­proved when the price was higher.

The ru­ble’s plunge in 2014 has par­tially off­set the ef­fect of the falling prices once the sales rev­enue is con­verted from dol­lars into rubles.

De­spite Western sanc­tions on cer­tain types of tech­nol­ogy trans­fers and busi­ness part­ner­ships, Rus­sian com­pa­nies have man­aged to main­tain com­fort­able sales and are drilling ac­tively.

Af­ter Rus­sia and Saudi Ara­bia in Fe­bru­ary be­gan to dis­cuss lim­it­ing pro­duc­tion, “this fac­tor en­cour­aged com­pa­nies to work on drilling and pro­duc­ing more”, said Valery Nes­terov, an an­a­lyst at Sber­bank CIB.

Com­pa­nies want to en­sure that “if Rus­sia signs up to a freeze, their obli­ga­tions will be set at a higher, more com­fort­able level that will not bur­den oil com­pa­nies or the bud­get”, Mr Nes­terov said.

Oil earn­ings made up half of the govern­ment’s bud­get rev­enues dur­ing the years of high prices.

The fall in prices forced the govern­ment to tighten its belt and pushed the bud­get deficit to al­most 4pc of GDP. It also dan­ger­ously drained re­serves built up when the price topped US$100 per bar­rel.

The 2017 bud­get, which is now be­ing de­bated by law­mak­ers, in­cludes new spend­ing cuts on ed­u­ca­tion and even de­fence.

The Com­mu­nists have con­demned it as “anti-so­cial” while busi­ness cir­cles crit­i­cised it as de­rail­ing hopes for an eco­nomic re­cov­ery next year.

The draft bud­get was based on a bar­rel cost­ing $40 and each ex­tra dol­lar in the oil price will rep­re­sent 130 bil­lion rubles of bud­get rev­enues, said Natalia Orlova, an econ­o­mist at Alfa bank­ing group. –

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