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Russia: production cuts or recharging for growth

22nd January 2017

According to Anna Belova, Ph.D., GlobalData’s senior analyst covering oil and gas, at the November OPEC meeting in Vienna Russia delivered several surprises.

Russia committed itself to substantial production cuts
Russia committed itself to substantial production cuts

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 signalled that it would only freeze its ever-growing production as part of an OPEC-led production stabilisation scenario.

“The decision to cut 300,000 barrels per day (bpd) 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,” Belova said. “By mid-December, Russia and Saudi Arabia persuaded an additional ten non-OPEC countries, including major former Soviet Union (FSU) producers Kazakhstan and Azerbaijan, to participate in the deal with additional 258,000bpd 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 per cent 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.”

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