Russian producers see benefits in Opec cuts

Leading Russian oil producers see benefits to their country's cooperation in the production cut agreement with Opec, even if they have little choice in the matter.

Russia and Saudi Arabia hashed out a market management pact in 2016, paving the way for a broader production cut agreement between Opec and non-Opec producers. The most recent round of cuts for January-June incorporates a pledge by Moscow to rein in Russian output by 228,000 b/d from the October 2018 baseline of 11.42mn b/d.

"The implementation of the Opec+ agreement is the domain of the Russian energy ministry," Lukoil chief executive Vagit Alekperov said yesterday at the IHS-CERAWeek conference in Houston.

"We are following the parameters set by the government," Alekperov said.

Lukoil, the leading private-sector Russian producer, has seen two consecutive monthly production declines in January and February, even though the output in that period was still 2pc higher on the year.

Gazpromneft, the third-largest producer in Russia, also cut output in January-February.

"It is more painful for us compared with other companies, given our larger growth potential," Gazpromneft head of strategy and innovation Sergey Vakulenko told Argus on the sidelines of the conference. The company is hoping to grow output by 2-3pc/yr through 2030.

"But we recognize that the deal has influenced the market positively in our favor — not in the sense of moving prices higher or lower, but removing volatility, which may benefit traders but not producers or consumers," Vakulenko said.

"Knowing that such a stabilizing mechanism exists in the market makes it easier to commit to long-term projects. As long as this is the case, and the agreement is working, temporary constraints on output growth are a reasonable price to pay for a calmer long-term operating environment."

Alekperov praised the production cut agreement for removing "speculation" from the market.

"The guiding principle for Opec is not the price, but the inventory glut. Reducing that [glut] allows to remove speculators from the market," Alekperov said. "Given the situation in Iran and Venezuela, the price could have reached $100/bl. Now that we do not have speculators, the price is $60/bl. This gives us stability and a degree of comfort."

Not every Russian producer shares the long-term perspective. The largest Russian producer by volume, state-owned Rosneft, has plans to grow production by 3-4.5pc this year, based on the assumption that production cuts will expire in June. Rosneft has consistently argued it would need something in return from the federal government if the company has to continue reining in output.

Russian crude production cuts in February averaged 97,000 b/d, said energy minister Alexander Novak. The minister said the cumulative cut rate for January-February was 118,000 b/d, leaving another 110,000 b/d to be cut in March alone, if Moscow is to fulfil its promise to meet its 228,000 b/d cut before April.

Less than full compliance with ongoing pledges by Russia is not a concern, Saudi oil ministry adviser Ibrahim al-Muhanna said today. "We know their system — they cannot cut immediately like Saudi Arabia or Kuwait. They will take three months to cut to adhere to what they promised to do."

But Riyadh expects Russia to reach the pledged cut level, al-Muhanna said.

"We look at their commitment. If Russia says it will cut 300,000 b/d, they should cut 300,000 b/d."