1. Russia’s OPEC bear hug may not last, as history shows: Gadfly

Russia’s OPEC bear hug may not last, as history shows: Gadfly

Beware the friendly Russian bear. While the world's biggest oil exporter has offered growls of support for a hard-won OPEC accord to cut output, that will probably amount to no more than mere noise.

By: | Published: October 16, 2016 3:18 PM
(L-R) Russian President Vladimir Putin, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping leave after a group picture during BRICS Summit in Benaulim, in the western state of Goa. (Reuters) (L-R) Russian President Vladimir Putin, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping leave after a group picture during BRICS Summit in Benaulim, in the western state of Goa. (Reuters)

Beware the friendly Russian bear. While the world’s biggest oil exporter has offered growls of support for a hard-won OPEC accord to cut output, that will probably amount to no more than mere noise. And without Russian participation, the agreement may lack teeth.

President Vladimir Putin threw his weight behind the cartel’s push for cuts to hasten the rebalance of oil supply and demand, saying in Istanbul last Monday that Russia is willing to consider a freeze or even a cut.

But Rosneft President Igor Sechin asked “why should we do it?” when questioned late Monday on whether the producer of 40 percent of Russia’s oil might cap output. Leonid Fedun, billionaire vice president of Lukoil, the country’s second-biggest producer, said Tuesday he had “no doubt” there would be a freeze or cuts, and “I’m sure everybody will join” any action the government agrees.

By Wednesday Putin had backtracked, saying in Moscow that the world would benefit from an output freeze at the current level, but that “there’s already no point” in considering an output cut.

To be fair, Russia has always preferred a freeze to a cut — not surprising, when multi-year investments in new fields are just beginning to bear fruit. National output averaged a post-Soviet record of 11.1 million barrels a day in September, and is already 100,000 barrels a day higher than that so far this month.

It’s still a curious turn of events. As Gadfly’s Liam Denning noted, the government has strong incentives to undo the collapse in prices of oil and gas, which have undermined its finances, the ruble and foreign-exchange reserves.

But if history is a guide, OPEC shouldn’t expect much from Russia.

Back in 2002, the group agreed to cut its output by 1.5 million barrels a day, but only if non-member countries cut their production by 500,000. Russia pledged to support the agreement and offered to reduce exports by 150,000 barrels — although from what baseline, it didn’t specify. Despite export limits, the flow of crude oil from the country still rose by 2 percent in the first half of 2002, while production increased an annual 8.4 percent. Perhaps not the level of support OPEC was hoping for.

It’s hard to see why this time will be different. Russian companies have long argued it’s impossible to shut production in the permafrost of Western Siberia. Most of the wells need pumps to draw oil to the surface. Shutdowns in the depths of winter increase the risk they’ll seize up, perhaps making restarting them too expensive to be economically viable given the low flow rates and high water cut — the share of unwanted water that flows to the surface — at many of the country’s large, old fields.

Added to that, national champions Rosneft and Gazprom, along with privately-owned Lukoil, are ramping up output from new fields that they will be reluctant to forgo. No company would willingly halt output from an asset that it had been spending large amounts of money on developing for the past five years, and that is as true in Russia as anywhere else. With the cost of maintaining output from ageing legacy assets in West Siberia rising, these new fields in the Arctic and the Caspian Sea represent the future for Russia’s oil companies.

But they’re not cheap. Fedun said companies need about $80 a barrel to go ahead with long-term plans.

Russia’s involvement in steering the oil markets, as one of the largest and, perhaps more importantly, fastest growing, non-OPEC producers has become almost totemic. Without it, OPEC’s flirtation with broader collective responsibility for managing the market will come to a juddering halt. It could still engineer a rebalancing on its own, as it’s done for most of the last 30 years. But the group decided two years ago it no longer wanted to play that role, and now, the message would be greatly weakened without Russia.

All in all, OPEC will be lucky if Russia’s contribution goes much beyond warm words of support. And support is very different from participation.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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