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Russia weighs up future of Opec+

New developments may get priority over production cuts

The chances of extending the Opec+ oil supply agreement hang in the balance, not just because of a US decision in late April to end waivers on Iranian oil supply, but also because Russia had already seemed lukewarm, at best, about the idea.

The current agreement between Opec member states and key non-Opec producers including Russia — the so-called Opec+ grouping — runs for six months until the end of June 2019. Under the pact, they agreed to reduce their total oil production by 1.2mn bl/d to support oil prices and to consider extending it through the second half of the year if necessary.

Opec countries account for two thirds of the cuts, while Russia agreed to reduce production by 228,000bl/d from its October 2018 level. However, in March, energy minister Alexander Novak said Russia had only achieved a cut of 140,000bl/d, raising doubts over whether it would make the full reduction.

Shaky ground

Russian leaders' comments on a possible extension have leaned towards the ambiguous in recent weeks, raising doubts over the country's continued participation in the deal.

At the International Arctic Forum held in St Petersburg in early April, Russian president Vladimir Putin said that, while Russia was ready to cooperate with Opec, it was uncertain whether further cuts were necessary — a meeting to discuss any extension could take place in June. Meanwhile, Novak has said there may be no need to extend the Opec+ agreement if the market looked likely to remain in balance during the second half of the year.

Putin also said he would not want to see an uncontrollable upward spiral in oil prices that would hurt Russian oil companies.

Turning a profit

Russian firms have generally done well out of the higher oil prices generated by supply caps agreed between the states now part of the Opec+ group. The firmer oil price contributed to a 38.2pc rise in the value of Russia's oil exports to $129.05bn in 2018, even though export volumes increased by only 2.9pc, according to customs data. Russian oil production rose to an annual average 11.16mn bl/d in 2018 from 10.98mn bl/d in the previous year — both were post-Soviet era records.

Several Russian firms, including Rosneft, have expressed concerns that further caps on supply could jeopardise new developments designed to build on this renaissance. For Russian oil producers, production volumes are just as important as the oil price in their view of the business, says Alexei Kalachev, an analyst at Moscow-based investment firm Finam.

The impact of new oilfield developments could boost Russian oil production to around 11.2mn bl/d in 2019, rising to 11.25mn bl/d by 2022, before declining below 11.2mn bl/d again by 2024 as existing reserves in Western Siberia, the Urals, and the Volga region become depleted, according to one model produced by the country's economic development ministry. Russian firms will not want to put on hold projects intended to offset those projected declines.

Meanwhile, Russian oil is relatively cheap to produce, enabling producers to make a profit at lower prices than in some Opec member states. That means they don't necessarily need higher oil prices to prosper, Kalachev says.

Russia may still choose to back further Opec+ cuts, if only to provide a united front with Saudi Arabia and others in the face of competition from US oil exports. However, the US decision to end waivers in early May that had allowed China, India, Japan, South Korea and others to buy Iranian oil, despite US sanctions, may test the resilience of all Opec+ members, including Saudi Arabia.

Ending the waivers will remove further Iranian supply from the market and boost demand for oil from elsewhere. Indeed, part of the rationale for the Opec+ agreement was to counteract the impact of greater than expected Iranian oil supply resulting from the US waivers.

Responding to the US end to waivers, Saudi energy minister Khalid Al Falih said in late April that, while Saudi Arabia would not allow the oil market to become unbalanced, it would not necessarily seek to boost supply immediately.

With both Russia and Saudi Arabia mulling whether curtailing supply over coming months will be necessary, an Opec+ pact extension looks far from a sure thing.

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