Russia offers olive branch of deeper cut to OPEC

Dec. 10, 2001
Russia last week may have averted the possibility of a damaging market share war with the Organization of Petroleum Exporting Countries by telling OPEC it will increase its proposed oil export output cuts to 150,000 b/d.

Russia last week may have averted the possibility of a damaging market share war with the Organization of Petroleum Exporting Countries by telling OPEC it will increase its proposed oil export output cuts to 150,000 b/d.

The announcement from Moscow that its original offer of a 50,000 b/d export supply cut would be increased came after a behind-the-scenes meeting between a delegation of OPEC economic advisers and officials of the Russian energy ministry and leading Russian oil companies.

Its immediate affect on London's International Petroleum Exchange was to send the price of the next-month Brent futures price contract up by 3.9% to close Dec. 5 at $20.05/bbl-although that price was still down 16% since the Sept. 11 terrorist attacks on the US because of lower demand.

Non-OPEC deal-making

A meeting had been scheduled in Moscow for Dec. 10, when it was expected that the offer of a 50,000 b/d output cut would have been confirmed (OGJ Online, Nov. 30, 2001).

OPEC had sought cuts of 200,000 b/d from Russia, in addition to cuts by other non-OPEC oil exporters that would yield a total supply reduction from the latter of 500,000 b/d. OPEC had said its own planned Jan. 1 cut of 1.5 million b/d hinged on the non-OPEC cuts materializing.

It specifically targeted Russia in citing that condition and warned that a much smaller cut could lead to it abandoning its own plans for output cuts, thus possibly sparking an all-out production increase free-for-all and causing oil prices to plummet.

In Vienna, an OPEC spokesman welcomed the news and said that the group will issue a formal statement once the Russian decision is confirmed.

Norway has confirmed an output cut of 200,000 b/d, Mexico pledged a cut of 100,000 b/d, and both Oman and Angola have said they will make unspecified cuts. OPEC hopes that the reduced output in 2002 will send prices back to the middle of its price target band of $22-28/bbl for the OPEC marker basket of crudes (or about $23/bbl for Brent).

Russia's cut

The new Russian cut equals about 5.2% of the country's exports. It comes after Prime Minister Mikhail Kasyanov met with executives of the country's biggest oil producers, OAO Lukoil, OAO Yukos Oil Co., and OAO Tyumen Oil Co. Press reports indicated that only Yukos resisted increasing the offered output cuts. The cut will last for at least 3 months and then be revised depending on oil prices. The companies haven't set a date for another meeting.

Simon Kukes, CEO of Russia's No. 3 oil producer Tyumen Oil, said after the meeting, "The cut is real. We actually will do it, and the government, which owns the export pipelines, will check on it."

New export capacity

Ironically, as OPEC was persuading Moscow to limit crude output, Russia is about to open a new pipeline that will add 240,000 b/d to its export capacity.

The Baltic Pipeline System was filled with oil the last week of November, and the new export link, built by the state-owned Transneft pipeline monopoly, is due to be opened officially Dec. 25.

Russia announced that on Dec. 2, workers finished loading oil storage tanks at the Primorsk port, the BPS terminus on the Gulf of Finland, while carrying out system checks and some final adjustments. The first tanker full of Russian export crude oil will set sail from Primorsk before yearend.

The BPS project is designed to allow Russia to reduce dependence on existing oil terminals in the Baltic states of Latvia and Lithuania. Most of the country's oil exported through the Baltic Sea goes through the Latvian port of Ventspils. BPS's initial annual capacity of 12 million tonnes will eventually increase to 30 million tonnes, mostly from Siberian and Timan-Pechora oil fields in the north of European Russia.

The first phase of the pipeline extends 270 km from Kirishi to the new terminals in Primorsk, 120 km north of St. Petersburg.

Once completed, the BPS project will extend farther from Kharyaga in the Komi Republic to Usinsk, and it will include an updated version of the existing Yaroslav-Kirishi pipeline connecting Usinsk-Ukhta and Ukhta-Yaroslavl.

Although initially planned as a political response to the separation of the Baltic States from the Soviet Union, BPS now appears to have a solid economic foundation. The project is expected to cost $1.8 billion and is likely to be completed by 2004.

Kazakh exports

The opening ceremony will probably be low key compared with another pipeline opening in a former Soviet republic that Russia attended last week.

Officials of the Caspian Pipeline Consortium, including the Russian, US, Kazakhstan, and Oman governments, inaugurated the CPC pipeline on Dec. 4.

It is a $2.6 billion pipeline extending from what CPC operator ChevronTexaco Corp. claims is the world's sixth-largest oil field, Tengiz, on the Caspian Sea coast in Kazakhstan, to the Russian Black Sea port of Anapa.