Each time oil takes a dive, the idea ofRussia allying with OPEC to shore up prices gets an airing.
It happened in the months after 9/11 and again during the 2008 financial crisis. Now it’s back on the agenda. Russia’s top two oil officials are in Vienna today to meet OPEC nations before this week’s meeting maps out the group’s response to this year’s tumble in prices.
In many ways it’s a natural alliance. Like the countries that make up the producer group, Russia depends on energy exports for the bulk of state revenue, and at 10 million barrels a day, or more than 10 percent of global output, it has the scale to make a difference in the world oil market.
Little ever results from the talk though -- even a 2002 agreement for Russia to hold back exports unraveled after a few months. This time probably won’t be any different for several reasons: a lot of oil in Russia is pumped by private sector companies beyond the reach of state edicts, and the extreme cold of Siberia’s winter makes it difficult to turn wells off and back on quickly. In addition, cutting supply would be financially painful for a Russian economy battered by sanctions and a crash in the ruble.
“We are not Saudi Arabia, which has the ability to reduce production quickly, ramp up quickly,” Russian Energy Minister Alexander Novak said in a TV interview yesterday.
Cutting Production
Moscow daily Kommersant reported this week that Russia was considering cutting production, which has run at just above 10 million barrels a day since 2012, by 300,000 barrels if OPEC decided to cut production at a meeting in Vienna this week.
While a small decline is possible as lower prices make some marginal wells uneconomic, a deliberate cut of that scale isn’t likely, said Alexander Kornilov, an Alfa Bank energy analyst in Moscow.
“Russia will produce as much oil as it can,” Kornilov said. “Any cuts are possible only because of natural reasons, not on purpose to influence the market. Any statement beyond this is bravado.”
OAO Lukoil (LKOD), Russia’s second-largest oil producer, sees its Russian output falling by about 30,000 barrels to 1.71 million barrels a day next year at $80 a barrel prices, Chief Executive Vagit Alekperov said on Nov. 21. Lukoil will cut spending next year on drilling on some of its older fields.
Slight Decline
The press service at OAO Rosneft (ROSN), Russia’s largest oil producer, didn’t give an output forecast for next year. Its production declined slightly in the first nine months of the year, to 3.84 million barrels a day in October from 3.9 million barrels a day in December, according to the Energy Ministry.
Russia’s potential offering of a reduction to OPEC may be an attempt at “making a virtue of necessity,” said Julian Lee, an oil strategist at Bloomberg First Word.
Novak and Igor Sechin, the former deputy prime minister who now runs state oil producer Rosneft, travel to Vienna today for meetings with OPEC minsters before the group meets to set production targets on Nov. 27.
It’s the continuation of several Russia-OPEC diplomatic meetings in recent days.
Iranian President Hassan Rouhani and Russia’s Vladimir Putin agreed to cooperate together in the oil market, the Iranian oil ministry’s news service Shana said today. Similar statements were made last week after Russian officials held talks with Saudi and Venezuelan delegations.
