By November 28, 2017 0 Comments Read More →

Russia’s Mixed Feelings on Extending Production Deal

For Mr. Putin, the deal with OPEC has lifted oil prices, liquidated a global oil glut, and paid dividends in the form of improved relations with Saudi Arabia, boosting Russia’s real and perceived influence in the Middle East. At this juncture, however, the benefits for Russia and thus Mr. Putin may be more fleeting. The expected deal to extend production cuts would further postpone significant Russian production capacity increases, especially for the influential Rosneft. On balance, we believe the deal will be extended, perhaps in phases, but Russian producers will increasingly resist compliance, leading to its eventual unraveling in 2018.

One year ago, President Vladimir Putin’s personal involvement brought Russia into the OPEC-non-OPEC production agreement. It is noteworthy that in the weeks leading up to the original deal, Rosneft CEO Igor Sechin, who in the past has often been entrusted with sensitive issues in Russian energy relations, opposed Rosneft and Russian production cuts. Other Russian producers including Lukoil, Surgutneftegaz and Novatek encouraged the deal. Mr. Sechin has again spoken out against prolonging the deal, but, like last time, his position is unlikely to prevail, at least in the beginning.

Developments at a handful of Rosneft greenfield projects makes Mr. Sechin’s opposition to prolonging the deal understandable. For Rosneft, the longer Russia freezes production, the more disruptive it will be to the development of these projects. For example, there are five Rosneft greenfield projects that together should add 260,000 b/d of new production in the 2018-2019 time frame. The chart below highlights pre-December 2016 production, current production and targets planned for either 2018 or 2019…


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