It is well known that the Russian economy is heavily dependent on its hydrocarbon industry, as shown from many economic indicators so deeply bonded to oil prices. As a result, the fall in the price of crude since late 2014 had significant consequences on Russia both from an economic and a political perspective. What is interesting to notice is that, despite the two years’ recession caused by the drop in crude prices, the Russian oil industry has been remarkably resilient. Oil production grew by 2,2% in 2016, to levels not seen since the highs reached in the Soviet era in the late 1980s.
The rapid growth in oil production, especially during the second semester of 2016, could be seen as the Russian attempt to maximize output (to levels impossible to maintain during the whole year) before signing a potential agreement with OPEC members, to curb production, rebalancing the market. After the defeat experienced in Doha, when after drafting what appeared to be a final agreement with OPEC members, the Saudis decided to pull out at the very last minute, Russia understood that there was little trust left in OPEC, since its members were not able to overcome their divergent interests.
Since then, significant efforts have been made to restore relationship between Saudi Arabia and Russia. President Putin has been extremely assertive when it came to re-discuss the possibility of an agreement about output stabilisation.
From an economic and political point of view it is clear why Putin was so favourable to the deal: ahead of presidential election year in 2018, with low oil prices, the budget deficit could be as high as 2017 and 2016. Although there are few doubts he will be re-elected in March 2018, he would probably prefer doing it with major consensus and high levels of popularity, rather than a stagnant economy and a struggling federal budget.
If it is true that an oil price above 50$ per barrel could provide a very important help to budget revenues, but Russia’s historical interactions with OPEC do not support the idea of great confidence on the production agreements.
Russia’s relationship with OPEC in the post-soviet era includes a constellation of agreements and promises not or only partially fulfilled. Before 2016, Russia And OPEC tried to finalize production agreements in 1998, 2001 and 2009, all ending up with very little success.
The implementation of production agreement seems extremely difficult to reach, especially if we consider that, in the end, Russia and Saudi Arabia, the de facto leader of OPEC, are fierce competitors, playing to conquer from each other’s hands a huge market: the Asian one.
In December Russia agreed to reduce its output by a maximum of 300,000 b/d from October 2016 levels, but the cut itself will have a very limited impact on 2017 production overall for two main reasons.
Firstly, the cut itself will only be implemented in stages, with the 300,000 barrels cut probably be reached by the end of April 2017. If so, considered that the agreement will expire in June, the full cut will only be in place for 2 months. On the other hand, normally Russian production is stable or declining during the first two quarters of the year, both because of weather conditions and maintenance wor
This is because in January temperatures can be so cold, some of the facilities must be shut down in order to protect the workers. On the other end, the maintenance work has to be carried out before temperatures rise and ice starts to melt otherwise it becomes too difficult to provide services in the tundra.
As a result, the overall impact of the OPEC cut in itself is reduced, considering that part of that same cut would have happened anyway for “technical reasons”. The more deliberated decline (if any) will then take place during the second quarter of 2017 when Russia will have to catch up with its cuts pledges.
Finally, it is not clear if all Russian oil companies will comply with the cuts until June. The Energy Minister, Alexander Novak, made clear that the cuts will be voluntary and will not be aggressively monitored by the government. Another problem highlighted by the Minister was that Russian oil companies have different growth trajectories and output plans for 2017, so it seems illogical to ask to all companies to cut by the same percentage.
This is one of the main differences between Russia and the OPEC members: in OPEC countries, there’s usually a state firm that obeys government directions on oil production, but in Russia there are different companies listed involving private investors. In conclusion, is there more room to cynicism or optimism about a rigorous compliance to the agreement coming from Russia?
The Russian side is probably hopeful to enjoy an oil price above the 50$ per barrel for at least 2-3 months, without having to engage too strictly in the effort.
It is difficult to believe that Russian oil companies will stop drilling in 2017, especially now that thanks to the rouble devaluation are seeing the cost base of the industry dropping, while a flexible tax regime, that protect them from oil price fall, is allowing them to increase their production, stemming the risk.
OPEC countries and oil markets observer are keeping a close eye on Russia’s crude output and they will keep doing so until the end of semester, as there is no guarantee that they are will move towards the same direction.
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