Saudi Arabia and Russia ready to ease oil curbs

A worker checks a valve of an oil pipe in Iraq. (Reuters)
Updated 25 May 2018
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Saudi Arabia and Russia ready to ease oil curbs

  • Saudi Energy Minister Khalid Al-Falih: “Two years ago we pulled supply. I think in the near future there will be time to release supply.”
  • Russian Energy Minister Alexander Novak said on Thursday that restrictions on oil production could be lifted “softly” if OPEC and non-OPEC countries see the oil market balancing in June.

LONDON: Saudi Arabia and Russia, two of the world’s biggest oil producers, expect to ease output curbs “in the near future,” in the wake of rising prices and concerns on tightening supply. 
Brent crude futures fell 3 percent on the news, the first firm signal of a modification to 2016’s landmark agreement between OPEC, Russia and other non-OPEC producers to limit production to cut oversupply in the market.
Russian Energy Minister Alexander Novak, speaking at the St. Petersburg Economic Summit, said on Thursday that restrictions on oil production could be lifted “softly” if OPEC and non-OPEC countries see the oil market balancing in June.
A producer summit is slated for June 22 in Vienna to review the cuts agreement, known as the OPEC+ accord. The reduction in output has seen prices recover from below $30 a barrel in early 2016 to as high as $80 a barrel earlier this month. Prices have been bolstered by US President Donald Trump’s decision to reimpose sanctions on Iranian oil and other goods, and the collapse in exports from crisis-hit Venezuela and, to a lesser extent, Mexico.
“Two years ago we pulled supply. I think in the near future there will be time to release supply,” said Saudi Energy Minister Khalid Al-Falih at a panel discussion at the St. Petersburg event. 
“It’s likely that it will happen in the second half of this year. We’ve had intensive discussions (with the Russian energy minister), and I think we’re aligned on that.
“Whether it’s a million barrels (or) more or less, we think we’ll have to wait until June before making that announcement,” he said.
While producers have cheered the recovery in prices, concerns are growing about supply shortages in the market, especially given developments in Iran and Venezuela. 
“If for the sake of argument (this is not a forecast) Iran’s exports were to fall by about the million barrels a day, the same as they did last time around, and with another several hundred thousand barrels possibly lost from Venezuela, you are in a situation that unless there are compensating increases from elsewhere the market will tighten very, very rapidly indeed,” Neil Atkinson, head of the oil industry and markets division at the International Energy Agency told Arab News.
He said the signs from St. Petersburg were that this was recognized, and that at some point in the future, “they will crank up output by an as yet unspecified amount … to avoid (consumer) demand destruction.”
Atkinson said US shale production was increasing markedly, but “on its own” wouldn’t be enough to replace lost production from elsewhere.
Producers need to decide whether to stick to the OPEC+ accord until the end of 2018 — as agreed last November — or signal a winding down of the agreement to avert a supply crunch that could see prices rocket to more than $100 a barrel again, according to some analysts interviewed by Arab News.
Richard Mallinson, co-founder of Energy Aspects and a research associate at the Oxford Institute of Energy Studies, told Arab News that he believed the newly established oil alliance between Saudi Arabia, OPEC and Russia would likely continue in some form.
“The Saudis and Russians have been talking about aligning their goals and achieving a long-term impact,” he said. “(They) want a long- term co-operation agenda, not just a short deal.”
“Whenever it does begin to be unwound, the plan and intention of the producers is to do that in as orderly way as possible, to maintain their influence on the market.”
Shakil Begg, global head of oil research at Thomson Reuters, told Arab News: “We know GCC countries are considering how to replace lost Iranian barrels. They could maintain the output agreement, but quotas for the individual countries could change. Or they could choose to abandon it altogether.”
The signals were that they still wanted to maintain some sort of co- ordinated agreement, he suggested.
Mallinson said one important takeaway was that the world had woken up to the fact that “we are no longer in an oversupplied market … the mantra of lower for longer has been disproven,” he said.
The change from surplus to deficit had restored much of OPEC’s influence, he noted.  “A couple of years ago people were writing off the group as irrelevant because US shale production was surging. Now OPEC is back in the spotlight,” he said.
But the realization that it still had significant influence over the market meant it will come under pressure to lay out how it will respond to price increases. “It will also need to show how it will deal with any supply disruption from the reimposition of US sanctions on Iran and ongoing declines in output from Venezuela,” Mallinson said.


Russian oil industry now self-reliant enough to weather US ‘bill from hell’

Updated 18 August 2018
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Russian oil industry now self-reliant enough to weather US ‘bill from hell’

  • Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad
  • Russian gas exporting monopoly Gazprom has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017

MOSCOW: Stiff new US sanctions against Russia would only have a limited impact on its oil industry because it has drastically reduced its reliance on Western funding and foreign partnerships and is lessening its dependence on imported technology.
Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad or use Western technology to develop shale, offshore and Arctic deposits.
While those measures have slowed down a number of challenging oil projects, they have done little to halt the Russian industry’s growth with production near a record high of 11.2 million barrels per day in July — and set to climb further.
Since 2014, the Russian oil industry has effectively halted borrowing from Western institutions, instead relying on its own cash flow and lending from state-owned banks while developing technology to replace services once supplied by Western firms.
Analysts say this is partly why Russian oil stocks have been relatively unscathed since US senators introduced legislation to impose new sanctions on Russia over its interference in US elections and its activities in Syria and Ukraine.
The measures introduced on Aug. 2, dubbed by the senators as the “bill from hell,” include potential curbs on the operations of state-owned Russian banks, restrictions on holding Russian sovereign debt as well as measures against Western involvement in Russian oil and gas projects.
While the rouble has fallen more than 10 percent and Russian banking stocks have slumped 20 percent since the legislation was introduced, shares in Russian oil firms have climbed 2 percent, leaving them 27 percent higher so far in 2018.
“The main driver of the Russian oil industry’s profitability is the oil price denominated in roubles and it is currently posting new records as the rouble is getting weaker. Hence the sanction noise often even has a positive impact on Russian oil stocks,” said Dmitry Marinchenko at Fitch Ratings.

 

The prospects for the latest US sanctions bill are not immediately clear. It would have to pass both the Senate and House of Representatives and then be signed into law by President Donald Trump.
To be sure, Washington could really hurt the Russian oil industry if it introduced Iran-like measures forbidding oil purchases from the country. But given Russia produces more than 11 percent of global crude, such a measure would lead to a major spike in oil prices and hit the US itself hard as it is the world’s largest oil consumer.
Russian gas exporting monopoly Gazprom, for example, has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017, securing a 34 percent share of EU markets amid rising demand.
But of all Russian oil and gas companies, it is the only one to have borrowed significant sums from the West — about $5 billion in 2017 and $3 billion in 2018 so far — using Eurobonds and syndicated loans.
What’s more, those amounts are only equivalent to a small proportion of Gazprom’s annual capital spending of $22 billion. The rest of the Russian oil industry invests a similar amount each year as well, mostly without Western funding.
That represents a major departure from the years prior to the sanctions when the lion’s share of Russian oil industry’s borrowing came from Western banks or export-backed facilities with trading houses and major oil companies.
In 2013, for example, a year before the first Western sanctions, Rosneft alone borrowed more than $35 billion from Western institutions to buy smaller rival TNK-BP and to fund its capital spending.
There has been a similar shift in joint ventures between Russian and Western companies.
A decade ago, dozens of projects were planned but the number has shrunk to just a few ventures, which are important but not critical to help Russia maintain its output growth.
US oil giant Exxon Mobil and Italy’s Eni, for example, have dropped plans to help Russia develop offshore fields and US company ConocoPhillips sold out from Russia’s biggest private oil firm Lukoil.
The key remaining ventures involving Western companies are three projects between BP and Rosneft in East and West Siberia and a gas venture between Rosneft and Exxon Mobil on Sakhalin island.
Also on the gas front, Royal Dutch Shell and France’s Total have been considering new liquefied natural gas projects with Gazprom and Novatek, as well as a new pipeline to Europe under the Baltic Sea.
But to put the projects in perspective, the combined cost of all of them is about $50 billion — less than a 10th of the Russian oil industry’s investment program for the next decade.
And if Western institutions are wary of lending to Russia, other countries such as China have been prepared to step in. Novatek and Total, for example, launched the $27 billion Yamal LNG plant this year with Beijing’s financial support.
WEAKEST LINK
The weakest link in the Russian oil industry in the face of sanctions has traditionally been high-end Western technology such as complex drilling, hydraulic fracturing or IT, said Denis Borisov, director of EY’s oil and gas center in Moscow.
Russia’s drilling and oil servicing market is worth about $20 billion a year and the share of the market held by Western service companies has remained fairly steady over the last few years and at about a fifth.
“But the process of replacing foreign equipment with local production has gathered pace,” said Borisov.
Rosneft, which produces 40 percent of Russian oil, has recently tested its own simulated hydraulic fracturing technology — the extraction technique that spurred the boom in US shale oil production.
The technology first came to Russia mainly via major Western oil services firms such as Schlumberger and Halliburton .
Companies such as Schlumberger are still doing a lot of complex drilling work in the Caspian Sea and West Siberia for Lukoil, as well as working on the world’s longest extended reach well for Exxon and Rosneft off the Sakhalin island.
But Fitch’s Marinchenko said the reliance of Russian oil firms on Western technology has declined since 2014 thanks to imports from China and local production of drilling equipment.
Since 2014, Rosneft’s own drilling subsidiary has doubled its market share to 25 percent, meaning the company has become almost self sufficient.
“It is clear that new wide-scale sanctions on technology will not become the start of an end for the Russian oil industry, especially if Europe doesn’t join them,” said Marinchenko. “But it will complicate the development of hard to extract or depleted deposits.”

FACTOID

Ratings agencies, consultants see limited impact from bill / Russian oil firms have reduced borrowing from West / Spending funded by own cash flow, state banks and China / Technology seen as weakest link as dependence significant