Opec's new partner
Russian producers grudgingly adhered to the cuts and a stronger oil price helped perk up the economy
Russia made some unusual strides in its energy strategy in 2017. After agreeing to the supply pact with Opec at the end of 2016, it
came good—surprising some—on its pledge to cut 300,000 barrels a day of output. Then, as the year moved on, its relationship with Saudi Arabia deepened further, becoming a broad investment and geopolitical alliance.
The unorthodoxy wasn't to everyone's taste: many of Russia's own energy majors bristled at the Opec cuts, which forced them to shelve a number of greenfield projects in Siberia.
By October, after the Saudi king's visit to Moscow and deals between the countries worth $3bn were agreed, it seemed the producers would have to get used to the new state of affairs. Although Igor Sechin, head of Rosneft, remained an Opec sceptic, saying the cuts had given the market a mere "breather", President Vladimir Putin went on record to say he supported an extension of the pact with Opec—even to the end of 2018.
No wonder. In part thanks to the cuts and their price support, Russia's economy, in which energy accounts for more than a third of the government's revenue, emerged from a two-year recession in 2017. GDP grew at its fastest pace in five years.
Analysts said the recovery remained fragile, though, and eventually the Opec deal could have a negative effect, undermining the operational performance of oil producers—themselves another source of income for the treasury.
Rosneft, for example, which accounts for about 40% of Russia's crude production, had to defer the launch of several new projects rather than cut output from brownfields.
Indeed, most of the fall in Rosneft's output came from those new capex-heavy projects, like Vankor and Suzunskoe.
Lukoil, Russia's second-biggest producer, decreased its crude production at a number of its brownfields in Western Siberia.
And despite the perkier economy, Russia still spent 2017 dipping into its rainy-day Reserve Fund to cover the federal budget deficit. By late October, the fund looked like it might run dry sometime in 2018.
In part thanks to the cuts and their price support, Russia's economy emerged from a two-year recession in 2017
Aside from the bromance with Opec, 2017 was a year of opaque deal-making too. Rosneft was the focal point. In late September, for example,
CEFC China Energy announced it would buy a 14.16% stake for $9bn from a consortium of Glencore and the Qatar Investment Authority (QIA).
The odd part was that Glencore and the QIA, which will together retain a 5.2% stake, had only bought a 19.5% stake in Rosneft in December 2016 as part of a rushed privatisation. Some analysts thought Russian state funds might have been involved in the original transaction.
Rosneft was also in the courts, filing a $3bn lawsuit against the conglomerate
Sistema over alleged asset-stripping. It all dismayed investors, some of whom drew parallels with the dismemberment of Yukos, the oil giant owned by oligarch Mikhail Khodorkovsky, earlier in the Putin era.
Rosneft's claim covered alleged damage to oil producer
Bashneft, which privately owned Sistema until 2014, before the state reclaimed it and sold it to Rosneft—another peculiar "privatisation". Sistema's assets were frozen by the courts and the group defaulted on its debt.
And then there were more sanctions, imposed by the Trump administration. Their effectiveness was disputed. Despite the measures,
Gazprom pushed on with export projects, especially to Europe, although it admitted some headwinds had emerged in its plans to build Nord Stream 2 (to Germany) and Turkish Stream.
Elsewhere in the Former Soviet Union, Azerbaijan and Kazakhstan faced some problems. A
banking crisis and defaults, feared analysts, could spread and affect plans to spend money on new upstream developments.
Both countries were signatories to the Opec deal. Kazakhstan, though, said towards the end of the year that it wanted to revise its terms of participation—mindful of its wish to crank up output from the long-delayed Kashagan project. The country's output rose by 10% between January and July, to 1.72m b/d, exceeding its quota of 1.7m b/d. And much more output growth was forecast for 2018.
Azerbaijan, which committed to hold back 35,000 b/d, appeared to be fully compliant—if only because its oil sector continued its steady decline anyway. In September,
BP agreed with the government to extend to 2050 its contract to develop Azeri-Chirag-Guneshli complex of fields, which accounts for about 75% of Azerbaijan's output. But a reversal of the country's fortunes was not imminent.
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