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Russia follows up on Vienna output deal: Update

15 Dec 2016 09:58 GMT
Russia follows up on Vienna output deal: Update

Adds new details on implementation of output cut and participation of oil companies

Moscow, 15 December (Argus) — The crude production cut being offered by Russia for the first half of next year as part of a 10 December agreement between Opec and non-Opec producers is starting to look like less than the 300,000 b/d that was originally on the table.

Russia aims to achieve a crude output reduction of 200,000 b/d by the end of the first quarter, energy minister Alexander Novak said in an interview with German and Austrian newspapers on 13 December. This will be followed by a decrease to 300,000 b/d "at a faster tempo", to be maintained until the end of June, Novak said. He added that the output cut agreement could be extended into the second half of the year, depending on the results of the first-half agreement.

Transneft president Nikolai Tokarev said on 14 December that a 300,000 b/d cut will be reached by April. Tokarev, along with officials from 12 oil firms, was at a meeting on the cut held by Novak. The latter will also discuss cuts with Russia's partners in its three production-sharing agreements — the ExxonMobil-led Sakhalin 1, Gazprom-led Sakhalin 2 and the Zarubezhneft-led Kharyaga.

Novak said "technical limitations" prevent Russia making an immediate 300,000 b/d cut, given the large number of new wells being drilled. "It will take 20-25 days to complete the drilling of these wells. Some will only be put into operation in January, which means time is needed to review the process," he said. Leading firms are bringing a number of new fields on stream, output from which is meant to offset declining production in west Siberia.

Russia will reduce production by "around 200,000 b/d" from October levels in the first quarter, Novak said at the 10 December meeting in Vienna. In the immediate run-up to the meeting, Russia talked about gradually reducing output by 300,000 b/d during the first half of next year, as fast as "technical abilities allow", although it earlier said it was ready to cut by this amount without caveats.

Output hit a new post-Soviet era high of 11.18mn b/d in October, well above the January-November average of 10.9mn b/d and higher than an earlier 11mn b/d forecast by Novak for 2017 output. So the cut outlined by Novak gives Russia room for manoeuvre. Well maintenance in spring could result in a temporary drop of 150,000 b/d, with the same amount coming from reducing output at low-margin wells with high water cut, Lukoil vice-president Leonid Fedun said this month.

Russia is setting up a committee of oil firm representatives to monitor Russian compliance with the deal, Novak said in Vienna, adding that participation by companies "would be entirely voluntary". Russia's output reduction pledge is the biggest contribution to a non-Opec commitment to cut 558,000 b/d — while Opec and non-Opec producers have agreed a combined cut of almost 1.8mn b/d.

Willing and not so willing participants

Lukoil president Vagit Alekperov on 9 December reiterated his firm's readiness to join the output cut. But the positions of other top Russian producers are not so clear. Gazpromneft general director Alexander Dyukov hinted in October that his firm hoped it would not be told to reduce output more sharply than firms that face natural production declines. Gazpromneft output is rising, supported by greenfield growth, and it expects this to continue into 2017. Russian firms could potentially agree cuts among themselves, as long as the 300,000 b/d target is hit, Dyukov says.