Call for tran­si­tion after out­put curbs

Ros­neft chief says Riyadh and Moscow must work to­gether to avoid glut

Financial Times USA - - MARKETS & I NVESTING - GUY CHAZAN — BER­LIN

The head of Rus­sia’s state-run oil com­pany Ros­neft said col­lab­o­ra­tion be­tween Rus­sia and Saudi Ara­bia, the world’s two big­gest oil pro­duc­ers, will have to ex­tend well be­yond the of­fi­cial end to Opec-led pro­duc­tion cuts to man­age the tran­si­tion back to a nor­mal crude mar­ket.

Speak­ing in Ber­lin yes­ter­day, Igor Sechin said the pro­duc­ers need to dis­cuss how to engineer a “smooth tran­si­tion” after the Opec-led out­put curbs ex­pire to en­sure the “mar­ket doesn’t suf­fer”.

He said a re­lease of large vol­umes of oil on to the mar­ket could lead to such volatil­ity that “con­sumers will be hit hard”. He said pro­duc­ers needed to pre­vent “dra­matic con­se­quences for the mar­ket”.

Opec and Rus­sia, to­gether with other pro­duc­ers out­side of the car­tel, agreed late last year to cut out­put by al­most 1.8m bar­rels a day in the first six months of 2017, in a bid to shrink ex­cess stock­piles that had put pres­sure on prices.

Prices re­cov­ered slightly but hit a ceil­ing after in­ven­to­ries re­mained bloated and US shale pro­duc­ers started pump­ing more oil. Brent crude, the in­ter­na­tional bench­mark, fell below $47 a bar­rel ear­lier this month, eras­ing the gains since global pro­duc­ers agreed the sup­ply deal.

Saudi Ara­bia and Rus­sia this week backed an ex­ten­sion of the out­put curbs un­til March, say­ing they would do “what­ever it takes” to re­duce oil stock­piles and bal­ance the mar­ket. The move has to be of­fi­cially agreed at next week’s meeting of Opec min­is­ters in Vi­enna.

The state­ment from Saudi Ara­bia and Rus­sia’s en­ergy min­is­ters sur­prised oil mar­ket ob­servers, send­ing oil prices up by 4 per cent to above $52 a bar­rel. Most oil in­dus­try watch­ers had only ex­pected an ex­ten­sion un­til the end of 2017.

Mr Sechin, a long­stand­ing ally of Pres­i­dent Vladimir Putin, has tra­di­tion­ally been scep­ti­cal of Opec, and ar­gued that Rus­sia should stick to its own strat­egy and pro­tect its mar­ket share.

Last year he told an en­ergy con­fer­ence in London that he op­posed the idea of Rus­sia work­ing with the pro­duc­ers’ car­tel to try to bol­ster prices through co­or­di­nated cuts in pro­duc­tion.

But he has changed his tune over the past year. Yes­ter­day he said Ros­neft would com­ply with the agreed pro­duc­tion cuts and was “com­fort­able” with the nine-month ex­ten­sion.

The com­pany would ap­ply the curbs to green­field sites and leave out­put at its older fields un­changed, he said, adding re­duc­ing pro­duc­tion there risks lead­ing to a loss of pres­sure in the reser­voir which could cause “a loss of resource”.

Mr Sechin said Ros­neft would have more cash for div­i­dends in three to four years’ time, after it com­pleted in­vest­ment pro­grammes such as mod­ernising its re­finer­ies. He said a higher div­i­dend, cou­pled with the lift­ing of western sanc­tions against the com­pany, would raise its mar­ket cap­i­tal­i­sa­tion to $130bn-$150bn. It is cur­rently about $55bn.

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