The OPEC+: Russia and Saudi Arabia’s confrontation or cooperation?

March 18, 2020 8:03 PM

The oil-producing countries have had their own self-inflicted problems with declining prices and their budgetary calculations coming under stress which they could ill afford any further.

The war of the Titans will take a huge toll on the global economy. (Reuters)

By Ambassador Anil Trigunayat

Even though the Corona Virus epidemic has virtually brought the world to a halt it has not been able to dent the deep manipulations and geopolitical competition. The most recent one witnessed was during the OPEC+ meeting on March 9, which saw the divergent approaches and assessments of the Saudi led Oil Producing Countries’ Cartel and their hitherto cohabitation with another major oil producer partner in Russia. The agreement to stabilise price and production has been held rather well since 2016  by OPEC+ countries so far. Given the fact that a huge adverse Corona impact on economies of major hydrocarbons consuming countries like China and India led to reduced and depressed demand for petroleum products, the Saudis wanted to cut the production to maintain the price stability. But more than expected production cuts i.e. additional cuts of 1.5 mbpd was unacceptable to Russians. Possibly they could have agreed to extend the existing curbs until the end of 2020.The oil-producing countries have had their own self-inflicted problems with declining prices and their budgetary calculations coming under stress which they could ill afford any further. This is further accentuated by their armed interventions, proxy wars, misadventures and regional competition from Yemen to Lebanon that costs a lot to their economies.  Hence, they wanted to keep oil production at lower levels to hold the prices steady.

But Russia thought otherwise since it did not want its market share to drop further. It wants to regain and retain its market share and destinations.  In recent years the whole Oil dynamic has changed as the USA, with its increasing Shale production by 4.5 mn barrels a day, has become a real competitor to all other producers. Russia has faced increasing US unilateral sanctions and isolationism subjecting its economic woes to further accentuate. It also lost its status as the largest oil producer in 2018 which it intends to regain. Moreover, its political problems and Ukraine issue with the West has cast an economic shadow which it intends to overcome. Recently President Trump was critical of the German -Russia pipeline project and even threatened sanctions on that.  President Putin decried and urged that ”  US Sanctions against #NordStream should be lifted. There are no grounds for imposing them. If the sanctions remain, it will mean that there is only one motive -to ensure competitive advantage for their LNG. It is done at the expense of European consumers”. Just last week the US sanctioned a subsidiary of Russian Rosneft for working with Maduro regime in Venezuela.

For Russia Western European markets including Germany, Netherlands, Poland, Belarus and Finland is very important and it supplies over 70% of its oil and gas production to them. Next market increasing in importance has been China which gets over 10% of Russian exports through secured fast pipelines like the Eastern Siberia Pacific Ocean Pipeline. Although China imports a great deal from Iran and Saudi Arabia and some other countries its strategic dependence on Russia for energy supplies is a given

This spat and the decision did have a direct impact on the global oil prices that went down by $ 11 to  $35 a barrel which was the biggest drop in prices in a day since 1991. In order to get back at Russia, the Saudi Aramco was asked to enhance production by one million barrels a day taking it to 13 mn barrels per day and they made diplomatic outreach to assure larger supplies to their traditional markets  including India.

Although Russia maintained that it can withstand oil prices of up to the US $ 25-$30 per barrel for a decade or so the Gulf countries usually budget for US$ 60 a barrel.  Although the Russians depend on the oil exports to the tune of 36 per cent of their budget compared to Saudi’s oil revenue share of nearly 65 per cent,  in budgetary requirements Saudi oil production cost is barely $3-5 the lowest that along with huge sovereign wealth and reserves give them an edge.  Similarly Brent Crude fell by 25% and the American WTI crude hit its lowest to US$29 per barrel. It wreaked havoc on the markets globally in the ensuing price war as Saudi Arabia offered discounts of US$6-8 to secure a larger market share by aggressive outreach to dispense with its spare capacity.  The global production is far outpacing the demand and hence a huge glut in the market and competition even to replace the more expensive US shale share. In fact, the US Shale producer companies have been hugely debt-ridden and it is difficult for them to compete with traditional oil & gas supplies especially when the price and cost of production differential is nearly 50 per cent. US shale companies may be forced to cut production due to price differential. Major US oil companies also saw their shares slashed down and a repeat of 2014-16 appears to be on the anvil. Americans have got the message and their Energy Department claimed that the “State Actors” are trying to manipulate and shock the oil markets and urged the Russians to work for orderly energy markets.

Russia, which has regained its influence in the Middle East post-Syria, had developed a cosier relationship especially with Saudi Arabia and UAE due to changing geopolitics and US induced hiatus and apparent disinterest in the Middle East, will have to perhaps somehow recover the bonhomie since Saudis are also trying to diversify their economies as per Vision 2030 of Prince Salman (MBS) where Russians and Chinese have much more to gain through collaboration

The situation is somewhat favourable for the emerging economies as their oil import bills in the short term will be significantly reduced providing them with a breather from the downturn in their economies. But their export markets especially in the oil-rich stressed economies will see a depressed demand. In several cases this may impact the expat labour and workforce coming especially from India and other Asian countries as they might see further layoffs. Moreover, the uncertainty and volatility in the medium and long term is not good for the producer countries either as their target markets will look at more reliable and cost competitive options in renewable and alternate energy options. India has already placed a huge emphasis and carved out a plan through its Solar mission and International Solar Alliance initiative to   produce clean and green energy. Besides, there is a greater emphasis on Electrical Vehicles. In any case the Reliance Industries, which has a strategic partnership with Aramco, has decided to lift an additional 2mn barrels. India could well use the surplus cheaper available crude for its strategic reserves while the bounty lasts. It would be an opportune time for the consumer countries like China, India, Japan, South Korea and some European countries to join hands to create either a Buyer’s Cartel or an informal grouping so that their negotiating position and predictability increases.

The war of the Titans will take a huge toll on the global economy which is already in a downturn and hence efforts are on to bring about some sense among the key stakeholders to reinitiate the dialogue between OPEC and Russia and perhaps the US – the new kid on the block. All will have to devise understandings so that a healthy competition does not lead to a free for all scenarios where all will be losers. Meanwhile, signs of a thaw are missing among the OPEC+ even though the sides maintain that their “doors are open”.

(The author is Distinguished Fellow, VIF. Views expressed are personal.)

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