Hours before Opec’s announcement in late September that it will cap its production, Russian oil companies poured cold water on talk of an end to the strategy of maximising output to support earnings at low prices.
“We think that it is impossible to agree ... No one trusts anyone, everyone has been just ramping up production,” a source in state-controlled Rosneft, Russia’s largest oil company accounting for 40% of its output, told Reuters.
Following the cartel’s surprise move, deep skepticism remains about its ability to agree specific quotas at the November 30 meeting, with a likelihood that production level disputes, especially between Saudi Arabia and Iran, can kill the initiative in the cradle. Opec will hold an informal meeting in Istanbul next week to try to prepare a deal.
Meanwhile, as a non-Opec member Russia can afford to welcome the undertaking, knowing that it can freeze its own production at the current record level, and be seen helping to keep the price of Brent crude at around $50 per barrel. Playing safe, the Russian government already drafted a $40 oil price into its 2017-19 budget plans.
Opec's manoeuvrings brought some extra fringe benefits for Russia in the short term, with the ruble extending its gains as the best performing Emerging Market (EM) currency following the bump in the commodity markets from the cartel deal, according to Bloomberg data. The currency gained 0.5% to RUB62.35 versus the US dollar by the end of the trading on October 5. This made the increase of 2.4% over six trading sessions, accompanying the 13% gain in Brent oil to $51.9.
“This is indeed positive for the whole market,” Russian Energy Minister Alexander Novak said of the Opec decision. Russia is ready to cooperate on limiting output, but will maintain its previous guidelines for keeping output at current levels, he added. The country will reveal proposals to cap its own output after Opec sets individual limits in November, Novak said.
Behind the scenes, though, the tone is increasingly less accommodating. “Production is breaking new records ... It would be stupid to freeze production, let alone cut it,” a source close to the energy ministry told Reuters, reminding that the state budget needs oil revenues and that large companies are launching new long-term projects to develop new fields.
According to some reports, privately-owned Lukoil, Kremlin-affiliated Surgutneftegaz, state-owned Gazprom Neft and Tatneft still plan to raise output by an average of 1.6% in 2017.
Rosneft is also said to have opposed the freeze since it was first attempted in early 2016, with its influential head and ally of President Vladimir Putin, Igor Sechin, doubting Opec’s ability to strongly influence the market due to internal differences. (Rosneft, meanwhile, is set to consolidate more than 50% in Russia’s crude output with the addition of Bashneft, after it was formally approved by the government on October 6 to bid in the company's privatisation in a closed deal later in the month.)
Netherlands-based ING bank warned not to read too much into the planned Opec production cut before details are agreed. “This is still only a plan, and no final agreement has been made,” the bank said, adding that even modest cuts are not assured, since Iran, Nigeria and Libya have campaigned for exemptions, which would mean members such as Venezuela and Saudi Arabia would have to agree to larger cuts. Higher prices “are possible within the coming weeks to next few months, although limited”, it noted.
The price of Brent oil has nudged towards $52 in recent days, buoyed also by reports that US fuel inventories may have fallen for a fifth straight week. But contracts remain near the $50 marker that many traders currently see as fair for crude.
Previous miscalculations of industry experts show that Russia will remain the wild card in production forecasts. In December 2015, Opec predicted a decline in Russian output for 2016, while the International Energy Agency (IEA) anticipated “largely flat” output. In the event, Russian production broke through the 11mn bpd level in early September, and, with the launch of several new greenfield projects, gained around 200,000 barrels per day last month to hit a post-Soviet record of 11.18mn barrels per day by September 20.
“Although this booming rate of output gains cannot be sustained; slow, steady production increases from these levels will remain the norm at least until 2020,” Citigroup’s senior Russian oil and gas analyst Ronald Smith wrote in a comment published in the Financial Times, forecasting a peak output of 11.5mn bpd in about five years’ time.
Smith also notes Russia’s standoffish approach to Opec efforts to cap production. “While the increase in any given year is unlikely to be large enough to move the needle on global oil markets, neither can other global producers look to Russia for help in reining in output to boost the price of oil,” he wrote.
Wasting no time, officials in Moscow have now said Russia will this year boost crude production on the Arctic shelf to 21.3mn tonnes. “As of now we expect an over 2.2mn tonnes increase in 2016, which will enable us to add more than 11% to [Arctic] production, outpacing Russia’s average output growth rates,” Deputy Energy Minister Kirill Molodtsov said on October 5.
Regarding long-term prospects for Russia’s hydrocarbons industry - and rebutting comments by Sberbank head German Gref that fossil fuel stocks in Russia may be depleted by 2028-2030 - Molodtsov said separately during the St Petersburg International Gas Forum, “We have hydrocarbons for at least 40-50 years”.
This does nothing to break Russia’s traditional and, as two years of plummeting prices showed, hazardous, dependence on oil and gas revenues. But that too will change over the next decade as the economy matures, predicted former finance minister and the head of the Centre for Strategic Research, Alexei Kudrin.
“One of the parameters, which, I think, will be achieved in 10-12 years - is the fact that non-oil-and-gas exports from Russia will exceed oil and gas exports. I think it is necessary and only then we can talk about hopping off the ‘oil needle’,” Kudrin said.
Analysts are also cautious about the longer-term trajectory of the Russian oil industry. “Although the country’s oil growth potential remains significant thanks to recent and upcoming launches of a number of greenfields, low oil prices, strained public finances, swelling tax takes, regulatory hurdles, a lack of large fields in the state reserve fund and declining exploration make the future of the Russian oil sector beyond the next few years somewhat uncertain,” Sberbank CIB analysts wrote.