MOSCOW - Russia kept its observer's status at this week's summit conference of
the Organization of Petroleum Exporting Countries (OPEC), and avoided taking
the plunge into membership of the international oil cartel that was hinted at
by the Kremlin last week.
At the same time, the Kremlin is playing a siren song to attract greater
coordination of the international gas trade when the cartel of gas producers
meets in Moscow next Tuesday, December 23.
The OPEC cut of 2.2 million barrels per day (bpd) in output quota announced
this week will not be supplemented by a fresh Russian cut, although Igor
Sechin, the deputy prime minister in charge of the oil sector, announced at the
OPEC meeting in Algeria that if
crude prices did not start to recover next year, Russia would cut export
volumes by another 320,000 bpd, following the 350,000 bpd export cut in
November.
The projected cut looks likely to occur whatever Sechin says, because falling
prices have reduced incentives to produce among the smaller Russian producers,
and the majors are also cutting back on field expansions, while delivering more
of their crude to domestic refineries, instead of to the ports for export as
crude.
The Russian move was considerably less than the 400,000 bpd cut OPEC members
had sought. Also, Russia has not agreed to a specific cut by a specific date,
as the OPEC countries have done. Industry sources note that it is more
difficult for Russia, compared with leading OPEC members like Saudi Arabia, to
close down producing wells, as the harsh operating conditions in Siberia make
it difficult to recommission the wells later.
Russian President Dmitri Medvedev had triggered speculation that Russia might
join OPEC, when he said last week that the country must defend its interest in
an era of higher oil prices, noting that this could include "a decrease in oil
production, or have participation in currently existing [or new] exporters'
clubs".
The interpretation that Russia was getting ready to end 48 years of
independence of OPEC was implicitly denied by Medvedev: "Let me repeat: What is
on the agenda is the source of income for our country, the development of our
country ... It's about our national interests. We will do what we think is
necessary."
Industry sources acknowledge that Russia's current interest is in line with
OPEC's to halt the oil price slide and rebuild state revenues at about $70 per
barrel. The Kremlin's policy instruments to achieve that with Russian producers
are a combination of tax relief and pipeline access. Avoiding OPEC constraints
has been Moscow's traditional policy because the Kremlin has always viewed the
organization as driven by a pro-US orientation, and Medvedev's remarks
reiterated that.
Sechin's remarks at the OPEC meeting were a gesture of solidarity in OPEC's
direction, without a significant change in Russian policy. As Russian company
cash flows are squeezed, oil revenues fall and costs including taxes remain
high, all the domestic oil majors have cut oilfield spending and will do so
even further in 2009. This means a minimum loss of 200,000 bpd and a maximum of
500,000 bpd by end-2009. Sechin did little more than split the difference, and
offer that to OPEC as the Russian contribution.
From the geopolitical point of view, the Kremlin calculates that it has
preserved its cooperative relationship with OPEC, and encouraged member states,
which are also gas producers, to join in next week's round of gas output and
pricing talks in Moscow. At the same time, the Kremlin has sidestepped
accusations from the European Union and the US Congress that it is an
unreliable supplier of energy.
On the gas front, the Kremlin's strategy is less reticent, not least of all
because, through Gazprom, Russia controls far more of the world's gas reserves
and export flows than it does of crude oil and petroleum products.
Russia, Iran and Qatar, together, hold 69% of the world's gas reserves. This
year they agreed to form a tripartite organization to meet regularly for talks
on gas export, transportation and pricing policy. Russia exports the fuel at
present in natural gas form through pipelines, and has yet to commence
liquefied natural gas (LNG) shipments, though these are planned to start next
year from Sakhalin Island. Iran is planning both pipeline and LNG shipments,
while Qatar exports primarily in LNG form, plus a small volume of natural gas.
In addition to this gas troika, Russia is building the seven-year-old, hot-air
talking shop called the Gas-Exporting Countries Forum (GECF). Founded in
Tehran, the forum counts 14 regular country members, plus five intermittent
members and one observer, Norway. The last summit meeting of gas ministers was
held in Doha in April 2007. Moscow plays host next week.
Before the Doha meeting, when Russian confidence was buoyed on the rising price
of oil and gas, and burgeoning energy revenues, then-president Vladimir Putin
toured Saudi Arabia and Qatar to endorse the idea of cartel mechanisms for
application by the GECF.
Represented at Doha by Energy Minister Victor Khristenko and Gazprom chief
executive Alexei Miller, the Russian delegation pushed through an agreement to
create a study group for evaluating gas pricing mechanisms currently in use,
with the objective of devising a single standard, delinked from crude oil and
incorporating the different forms in which gas is traded in the market.
Russian industry analysts believe the gas troika cannot have much impact on the
global demand-supply balance for gas, or on gas export pricing, until a
majority of the GECF members agree to shift from signing long-term take-or-pay
gas contracts, which provide for less volatile export prices and guaranteed gas
deliveries. A unified gas pricing mechanism will be hard to set as Gazprom
exports natural gas via pipeline and there is no tradable exchange instrument
for natural gas, such as the Brent market for crude oil.
Other GECF members, especially in the Persian Gulf, prefer to export LNG, for
which prices are volatile and set differently from Gazprom's natural gas
contracts.
Breaking up - that is, delinking between oil and gas - is hard to do. But
winter helps, or at least that is Gazprom's hope now, as contracts for current
and first-quarter deliveries lose the price link they have to the crude oil
price peak of mid-2008.
Gazprom's recently released production and export cuts suggest it believes that
a warm winter in Europe may add to the demand reductions already dictated by
recession. However, at the same time, the dominant gas supplier to Europe is
wagering that it can achieve higher spot-market gas prices if the weather turns
unexpectedly cold.
According to a recent briefing by deputy chief executive Valery Golubev, this
year's expected gas output from Gazprom will be 20% to 25% below that of a year
ago, with December volume of 39-42 billion cubic meters (bcm) as low as the
summer monthly average. The production cut forecast is deeper than domestic
power generation, which fell 7% in November, compared to November of 2007.
While Golubev did not issue a new export forecast, Gazprom is signaling that
unless it cuts back more sharply on export shipments than domestic supplies, it
will face downward price pressure from pre-winter stocking of gas supplies, and
from low spot-price buying by European consumers. Gazprom is hoping that a cold
spell across Europe could trigger a sudden spike in demand, and spot deficits,
thereby encouraging a more sustainable price after the first-quarter contracts
expire, and new ones, linked to much lower crude oil prices, must be
negotiated.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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