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Moscow hopes for gain without pain from Opec deal

30 Sep 2016 18:47 (+01:00 GMT)
Moscow hopes for gain without pain from Opec deal

The Russian government has praised Opec's plan to cut production, but is prepared only to freeze its own output

London, 30 September (Argus) — Russia hopes that a tentative agreement by Opec ministers to cut output will ease uncertainty over oil prices — Moscow's most vital revenue stream.

Opec's Algiers deal is a "truly positive signal", Russian energy minister Alexander Novak says. Russia hopes that the group's proposed production cut results in "prices in a $50-60/bl range… that will satisfy the interests of producing and consuming countries", he says.

Novak attended the International Energy Forum summit in Algiers on 26-28 September, where during a meeting with Saudi Arabian counterpart Khalid al-Falih, he reiterated Moscow's support for an output freeze to rebalance the market. Under the Opec deal, members would cut production to 32.5mn-33mn b/d from 33.44mn b/d in August. But the group would also look to Russia and other non-Opec producers to commit to constraints of their own.

Moscow expects to hold talks with Opec members in the next couple of months, Novak says. But Russia is open only to an output freeze, not a reduction, he says. "We are thinking in terms of keeping production at the level already achieved," Novak says. And he suggests that any measures implemented could be maintained for perhaps six months.

Russia's past interactions with Opec have shown that the wording of Moscow's public statements warrant close examination. Freezing production at the "level already achieved" could give Russia a lot of room for manoeuvre. It could, for example, take January 2016 as a starting point — as it did when offering to freeze production as part of a wider effort to rebalance the market ahead of April's ill-fated meeting in Doha, Qatar. January output of 10.87mn b/d was Russia's highest since the break-up of the Soviet Union.

Russia would have effectively been able to increase output by almost 2pc this year compared with 2015, had a deal been struck in Qatar. If Moscow took January as a starting point in any future deal with Opec and other producers, it would still have scope to increase output beyond the 10.81mn b/d produced in January-August. And a six-month timeline would allow new field developments to press ahead, such as private-sector firm Lukoil's 1.1bn bl Filanovsky, in the Russian sector of the Caspian Sea, and state-controlled Rosneft and Gazpromneft's 1.5bn bl East Messoyakh, in the far north of the country.

All in this together

"The Russian strategy is to maintain our production flat, never mind that demand will keep increasing. We will not put additional pressure on the market," Novak says. "But this is in the short term. In future, we will have to think about how to satisfy the shortfall" in supply that will result from lower upstream capital expenditure in the past year, he says.

The Opec deal comes at a delicate time for Russia. Presidential elections are scheduled for March 2018 and Moscow is anxious to avoid economic shocks in the run-up. President Vladimir Putin and those close to him are well aware that if oil prices do not rise, the elections will probably coincide with intensifying financial strain on the government, which could take the gloss off his inevitable victory. The finance ministry is weighing up the need for higher taxes on the oil and natural gas sector, while Moscow is seeking to make up some of its budget deficit through the privatisation of an additional stake in Rosneft and its 50.08pc holding in oil producer Bashneft.

Russia can only hope that it will benefit from Opec's vaunted return to market management — as it did in 1999-2014 — without enduring too much pain from its own efforts to support prices.