Neither an economic downturn nor a collapse in revenue has yet been enough to convince Russian President Vladimir Putin that it’s time to join with OPEC and cut oil output to enhance prices. His reasons might be pragmatic instead of political.
Russia’s Energy Minister Alexander Novak and his Saudi Arabian, Venezuelan and Qatari counterparts agreed to freeze output at January levels . The earth’s second-largest crude producer faces numerous obstacles to the deal that will actually cut production, even if Putin decides it’s in the national interest. Reducing the flow of crude might damage Russia’s fields and pipelines, require expensive new storage tanks or simply take too long.
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Prior to Tuesday’s agreement, Novak had said he could consider reductions if other producers joined in. Yet Igor Sechin, chief executive officer from the country’s largest oil company Rosneft OJSC and a close Putin ally, has resisted, saying last week in London that coordination would be difficult because no major producer seems prepared to pare output.
“The history of relations with OPEC shows that Russian companies are not keen to cut production,” James Henderson, an oil and gas industry analyst in the Oxford Institute for Energy Studies, said by phone. “There know practical difficulties, and also the companies would rather somebody else did that, plus they may benefit when the price rises.”
Brent crude, the international benchmark, rose around 6.5 percent because the four producers held closed-door talks in Doha. Prices pared gains after Saudi Arabia’s Oil Minister Ali Al-Naimi said freezing output at January levels is going to be “adequate” and the nation still really wants to meet the need for its customers. Futures were 1.4 per cent higher at US$33.84 a barrel at 12:03 p.m. in London.
In Siberia, Russia’s main oil province, winter temperatures will go below -40 C . This is a challenge for anybody thinking of turning off the taps.
The oil and gas that flows from wells always contains water, so once pumping stops, pipes may freeze, Mikhail Pshenitsyn, that has helped more than 10 years in the Russian oil industry, said by e-mail. The issue disappears in summer, there is however still the chance of a long-term decrease in output because a halted reservoir can become polluted with salts and residues, he said.
Production from a shut-in well might never be restored entirely, Maxim Nechaev, director for Russia at consulting firm IHS Inc., said by phone.
Russia could reduce exports to global markets without cutting production by simply putting more crude into long-term storage. Trouble is, the country has not enough facilities.
The bulk of onshore storage capacity in Russia is owned by pipeline company AK Transneft OAO and already entirely use to ensure steady flows to refineries and ports, Vladimir Feigin, head of the Moscow-based Institute for Energy and Finance, said by telephone.
Building the massive new reservoirs necessary to store a substantial proportion of production to have an longer timeframe would cost billions of dollars and couldn’t be done quickly, he explained.
While crude could be stored in vessels moored ocean going, Russia has “only seven tankers — four products and three crude — in floating storage,” Antonia Mitsana, marketing manager at London-based Drewry Maritime Advisors, said by e-mail. Their total capacity is just over 643,000 metric tons, based on Drewry, or about 0.1 per cent from the nation’s production last year.
Chartering foreign vessels to store significantly more oil could be expensive. Freight rates are in the short-term tanker market and ships in limited supply, Mitsana said.
Russia’s government needs methods to increase revenues in the energy industry, which generates more than 40 percent from the national budget. Finance Minister Anton Siluanov suggested cutting the cost threshold for oil exempt from production taxes to $7.50 a barrel from $15, according to a study from RIA Novosti, a domestic news agency.
Russia ran a financial budget deficit of 2.6 per cent in 2015, its highest in 5 years. The measure could raise revenue by as much as 1.08 trillion rubles (US$13 billion) if implemented at an average oil cost of US$30, according to estimates by Alexander Kornilov, an gas and oil analyst at Aton investment bank. That will help fill government coffers and could encourage companies to limit output at older wells with higher operating costs.
Yet changing the tax regime is really a slower process than the “emergency” response Venezuela had been seeking.
“Usually such big tax changes would come into force from January of the next year” if they were included in the annual draft budget due in October, Sergei Likhachev, associate director for tax practice at Moscow-based law practice Goltsblat BLP, said by phone.
