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Russia, Saudi coordinated production cuts unlikely

Later in 2016, Russia might be more open and more ready to commit to a production cut, an UralSib expert says

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Russian Energy Minister Alexander Novak said on January 28 Saudi Arabia has proposed oil production cuts of up to 5% by each country. “This is a subject for discussions, it’s too early to talk about,” Novak said.

Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe on January 28 that a coordinated production cut is not a likely outcome. “I don’t think Russia is ready at this point to accept a 5% reduction in output,” he said, estimating that would mean probably shutting down 10,000 out of Russia’s 150,000 oil wells. “This is quite a costly operation and certainly cannot be done overnight and has to be agreed on by the six-seven oil producers in Russia. It’s a bit more complicated and expensive than people may think and definitely is not like Saudi Arabia where there are many fewer wells and very highly productive,” Kokin said.

TASS quoted Novak as saying on January 28 that Russia has confirmed participation in the meeting of the Organization of Petroleum Exporting Countries (OPEC) and other oil producers for discussing low oil prices and coordination of a potential crude production cut due in February.

But Kokin told New Europe that Russia would agree to an oil production cut only if its absolutely convinced that it will face an oil price of $30 for years. “That’s why I don’t buy this idea that Russia will cut production in February. I think late in 2016 it’s possible just because it would have to face the consequences of underinvestment in the industry,” the UralSib expert said.

There is also a game of who will cut oil production first. “There is a kind of free-riding problem, the usual problem in this sector and Russia has never accepted a voluntary cut,” Kokin said. “The Soviet Union never played these games either. It just produced as much as it could and Russia produced as much as possible under the circumstances. So it will be very unusual. The impact of a credible report that Russia would reduce output, the impact of that would be enormous. But I’m just not convinced that this is credible at this point,” he added.

The oil price jumped on January 28 immediately after Novak’s statement. Kokin said the oil price rose on statements that there is some kind of discussions and there have been proposals by Saudi Arabia. “At this point, it’s hot air. Later on, I believe if the oil price stays where it is and everyone keeps producing at current levels and Iran starts pumping more oil in the market, perhaps in summer Russia would be more open and more ready to commit to a production cut,” he said.

There is also a question of trust. Russian production levels are transparent, Kokin argued. “You can observe it even on a daily basis. Definitely on a monthly basis but even on a daily basis it’s possible to get the information from the Russian Energy Ministry so, in other words, Russia has a good record on transparency. I don’t think Saudi Arabia has a good record on transparency so there would be a bit of mutual suspicion,” he said.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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