Russia: Feeling Good After Algiers

Russia left Algiers last week after talks with Opec members with a set of stronger ties to the producer group and especially its kingpin, Saudi Arabia -- and potentially a bigger voice in the oil market. The specific gains or losses Russia might see by participating in an Opec-led production ceiling scheme remain to be seen, however. The stabilization of oil prices at around $50 per barrel would be a win, allowing Moscow to narrow its budget deficit. But the price to pay could be a slight loss in market share. The preliminary agreement Opec struck in Algiers to reduce the group's output by 250,000-750,000 barrels per day to a ceiling of 32.5 million-33 million b/d was not openly contingent on non-Opec also participating -- despite Saudi Arabia's long insistence that action to rebalance markets required non-Opec to sign up too (EC Sep.30'16). But Saudi Energy Minister Khalid al-Falih nonetheless seemed confident of Russian cooperation. "For the first time we have the active, pragmatic and constructive participation of key non-Opec producers led by Russia sitting on the same table talking about the same concepts, which is exercising responsibility and bringing a balanced market," he said at a joint press conference in Algiers with his Russian counterpart, Alexander Novak. But against the backdrop of a post-Soviet record 11.11 million b/d of production last month, thanks to the commissioning of new fields that added some 200,000 b/d to the tally, Moscow could face questions over its willingness to cap output. Novak, however, said that new volumes were the result of investments made in previous years -- and were ultimately aimed at keeping overall Russian output steady amid annual decline rates of 3%-5% in West Siberia. "This all fits the general concept of keeping production at approximately the same level," he claimed, adding that, "if we agree on a production freeze, we will find mechanisms, instruments, to keep our production at a certain level." Novak didn't say how sustainable the September output level would be. "Much depends on the activities of specific companies. We will see how things develop further," he said last week. His deputy, Kirill Molodtsov, has been more bullish, however, claiming Russia could increase its output further, a view shared by many experts who believe Moscow shouldn't risk losing market share for supporting Opec. Oil prices rising above $50/bbl and pushing up US shale oil production is another concern that's been voiced, including by Lukoil boss Vagit Alekperov. But Russian President Vladimir Putin's support for joining in with Opec action means these arguments will likely be ignored. And signaling his readiness to obey an output directive from the Kremlin, Alexander Dyukov, the head of Gazprom's oil arm Gazprom Neft, has confirmed that the company would technically be able to reduce production by 5%-10% -- even as its 15.8% year-on-year output jump in September made it one of Russia's fastest-growing producers. That makes Gazprom Neft the first Russian company to support earlier statements by Molodtsov that Russia has the ability to trim production by 5% -- with other producers insisting that harsh operating conditions made cuts impossible (EC Apr.29'16). Meanwhile, it remains unknown what role, if any, Russia played in persuading Iran to become more flexible during the talks in Algiers. Energy ministers from both countries discussed Russian firms' participation in Iran's upstream, but Putin claims that Moscow doesn't interfere in relations between Iran and Saudi Arabia. Testing the Limits The stronger Russian-Saudi ties apparent in Algiers were built partly on the back of talks between Putin and Saudi Deputy Crown Prince Mohammed bin Salman on the sidelines of the G-20 summit in China early last month, where the two sides signed a bilateral pact aimed at finding solutions to stabilize oil prices through a new joint committee (EC Sep.9'16). Syria remains a sore point between the two, with Moscow backing Syrian President Bashar al-Assad's regime and Riyadh insisting on his departure. Moscow is also still waiting for Saudi investments to materialize after the kingdom pledged some $10 billion last year (EC Jun.26'15). "If Riyadh wants some concessions from Moscow it needs to show money first," one Russian oil industry expert says. But ties could nonetheless find scope for improvement amid new tensions in US-Saudi relations on the one hand (related), and plunging US-Russian relations on the other (related). In Algiers, Moscow and Riyadh set up a working group to support the pact agreed in China that also touched on collaborating in technology and energy equipment, as well as power generation and renewable energy. According to Novak, meetings will take place every week from this month, while he also speaks regularly with al-Falih by phone. Concrete projects could be discussed at the next meeting of the intergovernmental commission between the two, expected by end-year. But Novak played down oil stabilization efforts under the pact, saying steps to do so didn't "depend on Russia" since Saudi Arabia wants wider non-Opec cooperation in any production cap, with al-Falih saying the proposal would be made to "quite a big number of non-Opec countries." Novak also denied there were any plans to set up a new organization focused on market regulation under the pact agreed in China. "I hear of such an idea for the first time," Novak told Energy Compass. Nelli Sharushkina, Moscow, with Tom Pepper, London Compass Points • SIGNIFICANCE: In confirming its intention to cooperate with Opec, Moscow stands to benefit from higher oil prices and from building trust with Riyadh as a major player in the Middle East, where Moscow's role is growing. • CONTEXT: Moscow is not counting on production cuts or freezes, and is still basing next year's budget calculations on $40/bbl oil, Russian Finance Minister Anton Siluanov said. • NEXT: Just what Moscow will be expected to sacrifice for its close ties with Opec remains to be seen. The producer group has yet to agree on concrete mechanisms for freezing and monitoring production among member states (related). Only then will proposals be presented to Russia and other non-Opec countries.