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Page added on November 21, 2014
Russia to Cooperate With Saudis on Oil
Russia said it’s willing to cooperate with Saudi Arabia on the oil market, while avoiding a commitment to limit output to reverse plunging prices.
The two countries also sought to overcome differences on Syria during the first ever talks in Moscow between their foreign ministers, marking a thawing of ties between the world’s two biggest oil exporters.
Oil has collapsed into a bear market this year as the U.S. pumps crude at the fastest rate in more than three decades and demand shows signs of weakening. Russia, which depends on oil and gas for about half its revenue, is on the brink of recession amid U.S. and European sanctions targeting its energy and financial industries.
Saudi Arabia and Russia, which together produce 25 percent of global oil, agreed the market “must be free of attempts to influence it for political and geopolitical reasons,” Russian Foreign Minister Sergei Lavrov said after the talks today. Where supply and demand are “artificially distorted,” oil exporters “have a right to take measures to correct these non-objective factors.”
Lavrov and Saudi Arabian Foreign Minister Prince Saud Al-Faisal said in a joint statement that they’ll coordinate on “issues” affecting the energy and oil markets, without giving more detail.
Stable Production
The Organization of Petroleum Exporting Countries, which includes Saudi Arabia but not Russia, meets Nov. 27 in Vienna to discuss its production ceiling. Russia’s Energy Minister Alexander Novak and Igor Sechin, the head of state-controlled OAO Rosneft, have meetings in the Austrian capital early next week.
Last month, Rosneft’s spokesman, Mikhail Leontyev, said that Saudi Arabia was engaged in political manipulation of oil by offering price discounts.
As oil trades near a four-year low, OPEC must decide whether to hold output and allow prices to keep falling to deter rival output growth, or to make a cut and boost prices. Venezuela, where Rosneft has its biggest overseas projects, has sought Russian support in calling for measures to boost prices.
Market Share
“If OPEC wants to reduce output, it only makes sense if other oil producers outside of OPEC do the same,” said Elena Suponina, a Middle East expert and adviser to the director of Moscow’s Institute for Strategic Studies. “Otherwise you just lose market share.”
While the Russian government discussed it, there are no current plans to reduce oil output to arrest the price decline, according to Novak. The economy depends on oil and, unlike Saudi Arabia, Russia is technologically unable to increase or decrease output quickly, he said today in Moscow.
“We expect annual oil production levels of 505 to 520 million now and in the future,” Novak said. That’s as much as 10.4 million barrels a day, less than the 10.6 million Russia produced in October. Saudi Arabia’s output was 9.75 million barrels a day last month, according to Bloomberg estimates.
As well as oil, Lavrov and Al-Faisal discussed the three-and-a-half year civil war in Syria and the U.S.-led attempt to fight Islamic State.
“We don’t always share the same views but we can reach an understanding,” Al-Faisal said at the start of the meeting.
Russia, a Soviet-era ally of Syria, has supported President Bashar al-Assad through weapons sales and by blocking punitive action against him at the United Nations Security Council. Saudi Arabia has pushed for his removal.
In their joint statement, Lavrov and Al-Faisal said that the stalled Geneva peace talks, which aim to agree on a transitional government, should remain the “basis of resolving the Syrian problem.”
The fact that the Saudi foreign minister came to Moscow “shows there is a real narrowing of positions but in practice it will be very hard,” Suponina said.
The oil price is another area where Russian and Saudi views may diverge. Russia needs its benchmark Urals export blend to trade at $100 to balance the budget this year and $90 next year, according to Finance Minister Anton Siluanov.
Russia’s economy is set for zero growth next year because of the sanctions, lower oil prices and inflation, according to the central bank.
The U.S. and Europe have barred oil-technology exports to Russia and blocked access to financial markets, threatening to delay frontier and hard-to-recover projects that Russia will need to maintain output in the longer term as traditional fields in West Siberia age.
Russia can keep production at about 515 million metric tons in 2015-2016, and possibly through 2018 if drilling increases, Dmitry Lebedev, managing director of Canada-based REnergyCo, said in an e-mail.
“If a real political drama starts in Russia, the output decline may reach 10 percent to 15 percent a year,” Lebedev said.
14 Comments on "Russia to Cooperate With Saudis on Oil"
Plantagenet on Fri, 21st Nov 2014 12:35 pm
Russia wants high oil prices, KSA is driving them lower.
Russia supports Assad and the shia Muslims, KSA is a leader of the Sunni Muslims
Russia supports Iran’s nuclear program, KSA is Iran’s arch enemy.
Its hard to see anything Russia and KSA agree on, except their mutual disdain for Obama.
penury on Fri, 21st Nov 2014 2:40 pm
The only agreement on oil between Russia and SA which is vital to U.S interests will remain the “petro dollar” if they ever agree that it is no longer needed the end of the petro dollar is assured,
rockman on Fri, 21st Nov 2014 3:24 pm
“Its hard to see anything Russia and KSA agree on”. I would imagine they would both agree on disliking the loss of the many tens of $BILLIONS each will suffer as a result of the drop in oil prices. Seems like a bonding moment to me. LOL.
nony on Fri, 21st Nov 2014 3:35 pm
They have reasons to form a cartel and have had previous discussions. I just see us shale as the marginal cost barrel. Shale stopped us from going to 150. And pulled us down to the 70s now. Even if they had a good non competing cartel us shale pl roduction would just grow.
All the peakers were DRASTICALLY wrong when they said shale would be insignificant.
Mark Ziegler on Fri, 21st Nov 2014 5:37 pm
Thank the Peakers for creating the “Drill Baby Drill” buzz Causing oil prices to drop. (Keep Drilling!)
Davy on Fri, 21st Nov 2014 7:53 pm
From what I have read on other sites Russia is not in a position to regulate its production like other countries. Russia must keep the oil pumping because it lacks storage and its infrastructure being in a cold harsh climate can’t stop and start like other producers. I am not a board expert on hydrocarbons but this is what I have read and it sounds reasonable. So Russian talk is just talk for MSM consumption.
shallowsand on Fri, 21st Nov 2014 8:59 pm
Davy. Assume Russian oil depletes. Wouldn’t they be able to effect a cut by announcing a specific decrease in CAPEX and sticking to it? I admit I know little about Russian production, so maybe this isn’t doable.
Davy on Fri, 21st Nov 2014 9:38 pm
Shallow, I imagine they can effect changes in the short term but not without economic costs to their oil infrastructure. It is one thing to cut production with a production system that has flexibility but another to damage a system not designed for production cuts. I also imagine longer term marginal fields could be mothballed and new fields delayed. From what I have read Russia does not have the flexibility in the short term to effect supply like KSA. In the longer term with economic coordination across the oil sector I imagine there is flexibility. I am talking out of my ass right now so I wish someone with Russian oil sector knowledge would speak up.
Solarity on Fri, 21st Nov 2014 10:22 pm
Maybe KSA is extending feelers to Russia regarding a potential invitation to join OPEC. If so and it occurs, OPEC would once again control nearly half of world production.
rockman on Fri, 21st Nov 2014 11:04 pm
Davy – “Russia must keep the oil pumping because it can’t stop and start like other producers”. Actually Russia can reduce production from a mechanical perspective just as easily as any other country just by “chocking back” their wells. A flowing oil well passes thru a valve with a “choke” in it…a small plate with a hole in it typically specified as so many “64ths”. Such as a hole 14/64″ in diameter. Want to reduce the production rate: replace that choke with a 12/64″ or a 10/64″ choke: the smaller the hole the lower the flow.
For a pumping well the production rate is determined by how many “strokes per minute”. A stroke is the rod on the pump jack going down and back up in a full cycle. So a well might be pumped at 10 stks/minute. Want to produce less oil: adjust to 7 stks/minute.
And there are other mechanical moderation devices. So Russia can physically reduce oil production as much as they like. But the question is how much can the financially afford to reduce production.
Which gets back to finding the marketing “sweet spot”: reducing production might increase oil prices but the income might be less if not enough bbls are sold at that higher price. Selling 10 bbls for $90/bbl provides more income then selling 8 bbls for $100/bbl.
Makati1 on Sat, 22nd Nov 2014 12:22 am
And in other news… http://oilprice.com/Energy/Oil-Prices/Russia-Can-Survive-An-Oil-Price-War.html
Food for thought.
Davy on Sat, 22nd Nov 2014 7:05 am
Rock so there is no truth to production in a cold climate being an issues? This is what I am reading that the oil will freeze up. The same is true of Alaska’s production isn’t it? I also have read some fields can’t be shut down without hurting the field’s productive mechanics. I have also read Russia does not have the ability to store oil within its system optimally. These are just things I am reading and as we know here must be taken as a grain of salt. These were not on MSM sites.
ghung on Sat, 22nd Nov 2014 7:59 am
Yeah, Davy, oil pipelines and pumps have a minimum flow rate and temperature, or the oil gets too viscous and won’t flow without over-pressurising the pipeline/pumps. This varies with the weight of the oil, ambient temperature, pipeline length and construction,, all that; usually described as the MOL for that pipeline. Some data on the Alaska pipeline:
http://www.alyeska-pipe.com/assets/uploads/pagestructure/TAPS_Operations_LowFlow/editor_uploads/LoFIS_Summary_Report_P6%2027_FullReport.pdf
The concern was that the oil was cooling too much at the lower flow rates as production slowed. Heating stations along the pipeline can be added, but this, of course, affects the net EROEI somewhat. Dilutants can be added to reduce the viscosity (weight) of the oil as well. If the whole system cools too much, it must be a bitch to warm things up and get it flowing again; wait for warmer weather I guess.
ghung on Sat, 22nd Nov 2014 8:08 am
Additionally…. Some oil may have higher concentrations of water and wax that increase the minimum temperature/flow they can pump at. Wax gums up the works and water freezes, damaging pipeline components. Read the first section of the link, above, for a summary.