Russia poised to gain from oil production freeze
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. –