As we have been reporting, Saudi and OPEC’s Gulf States are not the only countries pursuing a market share defense strategy amid the price downturn. The world’s top oil producer, Russia, is as well. Russia’s decision to maintain post-Soviet record high production- at more than 10.7 M/bpd- concretely reflects this strategy.
Thus far, in January-October, official data show that Russia derived ~$76.1 billion from oil and gas sales- that’s 12.6% less that the targeted amount, Reuters reports. As Russia receives half its revenues from these sales, and relies on them to finance its military spending (which has seen a marked uptick since the Syrian incursion), Moscow has a vested interest in not cooperating with other oil producers in curbing production- particularly in light of its current geopolitical commitments.
Ahead of OPEC’s meeting on December 4 in Vienna, it is also important to closely keep an eye on what the world’s top non-OPEC oil producer is up to. Here are some of the latest key developments:
1. Novak’s Bags Are Packed But No Invitation Yet
On Friday, Energy Minister Alexander Novak said that he was prepared to attend consultations in Vienna on December 3- a day before OPEC’s meeting- but that Russia will not participate in the December 4 meeting.
Russian Energy Minister Alexander Novak
“We gave our confirmation that if the meeting is held, we will come. We were supposed to meet not on the 4th but on the 3rd of December, to hold consultations on the level of experts. But we won’t go there for the summit,” TASS reported him as saying. He added, “We are discussing the situation, the prospects, the value of oil production, the balance of supply and demand.”
2. Russia Oil Production At Post-Soviet Highs
Rosneft CEO Igor Sechin said at the Eastern Economic Forum in September that Russia seeks to boost oil production by a third to more than 14 M/bpd in the next 20 years. As noted above, oil production currently stands at a record post-Soviet high of ~10.7 M/bpd.
Analysts cited by Reuters say that Russian O&G firms have proven resilient amid the falling prices of Russia’s top crude oil grade- Urals blend- which have dropped from their June 2014 peak of over $111/bbl to just over $40/bbl now.
Bank of America Merrill Lynch recently said in a report, “Despite the recent fall in oil prices, Russian production continued to accelerate as oil producers remained profitable even in the lower oil price environment, helped by the effect of the weak rouble on costs and lower taxes, which decline in a lower oil price environment.”
3. Rosneft’s Sechin Probably Won’t Be Going To Vienna
Rosneft CEO Igor Sechin said in October that Saudi Arabia has been reducing prices to secure new markets such as Poland, thus positioning itself in direct competition with Russia as an energy exporter in key European markets.
He said at the October Eurasian Forum in Verona, Italy, that Saudi’s strategy to maintain its market share and expand in Europe will not work. “The strategy that Saudi Arabia has chosen doesn’t bring any significant victories…More likely the opposite,” Bloomberg quoted him as saying at the time.
Russian President Vladimir Putin (left) and Rosneft chief Igor Sechin
Prior to last year’s November OPEC meeting, Sechin met with representatives of Russia’s non-OPEC peers. No agreement on cuts was reached as a result of those talks. At the time, expectations that OPEC would cut its 30 M/bpd recommended production ceiling were a lot higher than they are now.
In an indication of how the “oil climate” has changed over the last year, a Rosneft spokesman told Reuters that there were so far no plans for Sechin to go to Vienna next month ahead of the December 4 meeting.
4. There’s Discord At Home Too
In early October, President Vladimir Putin announced a radical shift in economic policy moored in his recognition of the likelihood of “lower for longer” oil prices. And Russian Energy Minister Alexander Novak said that his country is not to blame for the global supply glut.
Driven by a much more competitive ruble, Putin said Russia will ration funds for the O&G sector and depend instead on a revival of farming and manufacturing.
He told a group of investors at VTB Capital’s ‘Russia Calling!’ forum in Moscow on October 13, “We have to have prudent forecasts. Our budget is based [on] very conservative assumptions of oil at around $50 a barrel…It is no secret that if the price goes down, investment peters out and disappears.”
Russian Finance Minister Anton Siluanov said at the same forum that over reliance on O&G over the last decade had been a fundamental error, leading to an overvalued ruble and the slow demise of other industries in a “textbook case of the Dutch Disease,” the UK Telegraph reported. He said, “We should stop caring so much about the oil industry and leave more space for others. We have to take very tough decisions and redistribute our resources.”
Russian Finance Minister Anton Siluanov
The new paradigm has prompted the Russian government to jettison a series of budget commitments and stop topping up the pension reserve fund. O&G taxes comprise half of Russia’s state revenue, and nearly 70% of the country’s exports.
Unsurprisingly, Rosneft’s Sechin was not pleased, and accused the Kremlin of abandoning the energy industry, adding that his giant company is being hurt by high taxes. He also warned that the Russian energy sector will slowly contract unless a change of policy is enacted.
5. Russian O&G Firms Face “Negative Free Cash Flow”
Sechin said Russia’s oil firms are confronted with “negative free cash flow,” and an erosion in production of up to 6% over the next three years as Western Siberian oilfields go into decline. “You have to maintain investment,” he said.
Rosneft is the world’s largest traded oil company. It currently faces taxes and export duties that total a marginal rate of 82% on revenues. “This is enormous, it’s unbelievable. The attractiveness of the oil industry is all about tax rates,” he said.
Sechin openly criticized ministers sitting next to him at the VTB Capital forum. “We have lots of models but unfortunately we are failing to see any actual growth,” he said. Sechin also noted that Russia faces significant competition from Saudi Arabia, which, as noted above, has started to export oil into the Baltic via the Polish port of Gdansk, thereby taking local market share from the Russians.
Sechin said the “game changer” is US shale, which has replaced Saudi Arabia as the fundamental global price-setter. The immediate future of the global oil industry currently depends on whether shale producers have adequate hedging contracts to last beyond the end of this year, he observed.