Russia offers production cut olive branch to OPEC

Russia Wednesday sent the world oil price up and averted the possibility of a damaging price war with the cartel by telling the Organization of Petroleum Exporting Countries that it will increase its proposed oil export output cuts to 150,000 b/d.

By the OGJ Online Staff

LONDON, Dec. 5 --Russia Wednesday sent the world oil price up and averted the possibility of a damaging price war with the cartel by telling the Organization of Petroleum Exporting Countries that 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 output cut would now be increased to 150,000 b/d came after a behind-the-scenes meeting between a delegation of OPEC economic advisers and officials of the Russian energy ministry and representatives of the leading Russian oil companies.

Its immediate affect on the London International Petroleum Exchange was to send prices up by 3.9% to $20.05/bbl, although still down 16% since Sept. 11 because of lower demand.

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. OPEC had sought cuts of 200,000 b/d and warned that a much smaller cut could lead to it abandoning its own plans for output cuts of 1.5 million b/d, thus sending the world price downward.

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 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 at around $23/bbl.

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. It is understood 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."

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 pipes of the Baltic Pipeline System (BPS) were filled with oil last week, and the new export link built by the state-owned Transneft pipeline monopoly is due officially to be opened on Christmas Day.

Russia announced that on Sunday, workers finished loading oil storage tanks at the Primorsk port, BPS's final destination 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 the end of this year.

The BPS project is designed to allow Russia to reduce dependence on existing oil terminals in the Baltic states of Latvia and Lithuania. Russia has had no Baltic Sea oil port since the breakup of the Soviet Union. Most of the country's oil exported through the Baltic goes through the Latvian port of Ventspils.

BPS's initial annual capacity of 12 million tons will eventually increase to 30 million tons, mostly from Siberia and Timan-Pechora in the north of European Russia.

The first phase of the pipeline runs 270 km from Kirishi to the newly-built terminals in Primorsk, 120 km north of St. Petersburg.

Once completed, the BPS project will also stretch from Kharyaga in the Komi Republic to Usinsk, and it will include an updated version of the already-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 completely finished by 2004.

The opening ceremony will probably be low-key compared to another pipeline opening Russia attended earlier this week. Officials of the Caspian Pipeline Consortium (CPC), including the Russian, US, Kazakhstan, and Oman governments, inaugurated on Tuesday the CPC, a $2.6-billion pipeline running from the world's sixth-largest oil field, Tengiz on the Caspian Sea in Kazakhstan, to the Russian Black Sea port of Anapa.

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