Thursday, January 12, 2017
Production Cuts or Recharging for Growth as Russia, Azerbaijan, and Kazakhstan make statement in concert with OPEC, says GlobalData
Anna Belova, Ph.D., GlobalData’s Senior Analyst covering Oil and Gas, states:
”At the November Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna, Russia delivered many surprises. Not only did the country broker an agreement between rival Saudi Arabia and Iran, but Russia also committed itself to substantial production cuts. For almost a year, Russia signaled that it would only freeze its ever-growing production as part of an OPEC-led production stabilization scenario. The decision to cut 300,000 barrels per day (bd) of crude output in the first five months of 2017 was a noteworthy departure from Russia’s earlier strategy and was much welcomed by markets sending global crude prices climbing. By mid-December, Russia and Saudi Arabia persuaded an additional 10 non-OPEC countries, including major former Soviet Union (FSU) producers Kazakhstan and Azerbaijan, to participate in the deal with additional 258,000 bd of committed production cuts.
”The production cut deal was a year in the making, driven by the energy ministers of Saudi Arabia and Russia. However, the Russian side of the deal required a commitment from many distinct industry participants. The fact that Russia’s oil industry ownership structure significantly differs from that of Saudi Arabia and many OPEC members complicates the implementation of output cuts. Instead of a traditional national company, Russia’s industry is dominated by large publically-traded companies, with the Russian state holding majority interest in several giants such as Rosneft and Gazprom. After a decade-long push for consolidation of Russia’s oil and gas industry under the state control, most other public and private oil companies opted to align themselves with the state. President Vladimir Putin personally discussed production cuts with Russian oil and gas companies and 12 major companies – responsible for over 90% of liquids production – committed to reducing output. Production cuts will be in proportion to individual company’s production share of Russia’s output in October 2016.
”Production cuts are scheduled to be gradual with a 50,000 bd reduction in January 2017; Russia’s output will be reduced by 200,000 bd by March and by a committed target of 300,000 bd by May 2017. Overall, the country’s production is targeted to be cut to 10,947,000 bd, which will still allow Russia to significantly outproduce Saudi Arabia, which has committed to 10,058,000 bd after a 600,000 bd reduction. Russia’s post-cut target, while representing a steep reduction from its December 2016 production of 11,208,000 bd, is only slightly lower than the country’s average production for the year reported at 10,965,000 bd. Furthermore, since the agreement only covers production and not exports, Russia can easily maintain its current export level of 4,723,000 bd, at about 43% of all produced liquids, protecting its market share, while accommodating production cuts through domestic reduction in demand.”
For a full version of this analysis, please visit the GlobalData Energy website.