Is Russia’s cooperation with OPEC a long-term strategy?: Fuel for Thought

Russia has used its position as leader of the non-OPEC coalition to strike upstream deals with OPEC members as a possible quid pro quo for spearheading non-OPEC involvement in the production cut to balance global supply.

With visits from Iraqi and Kuwaiti oil ministers and the annual OPEC/Russia energy dialogue meeting scheduled to take place before the end of June, this trend could continue, as Russian companies seize the opportunity to discuss bilateral cooperation on the sidelines of discussions about the output deal.

Before significantly increasing discussions over the OPEC/non-OPEC deal early last year, Russia’s involvement in OPEC member states’ oil production centered around a few key partnerships. The more successful include operations in Iraq, where Gazprom Neft produces at Badra and blocks in Iraqi Kurdistan, as well as Lukoil’s involvement in the West Qurna 2 and Block 10.

Furthermore, Russia’s status as one of the top three crude producers casts it in the light of a competitor rather than potential partner for many OPEC members. There was therefore much scope for Russia to ramp up its partnership with OPEC members when the prospect of a deal to limit crude production was first raised.

Since then, Russia’s negotiating position has further improved, as it has been credited with playing a key role in the deal, bringing other non-OPEC countries such as Azerbaijan and Kazakhstan on board and also taking the lion’s share of the non-OPEC cut commitment at 300,000b/d.

OPEC ministers have acknowledged this effort and in the first three months of the deal there has been little criticism of Russia, despite the slower pace at which it is implementing its cut compared to OPEC countries.

Russian energy minister Alexander Novak’s recent trip to the monitoring committee meeting in Kuwait demonstrated Russia’s approach to combining talks on bilateral cooperation with the main committee’s operations.

A day before the monitoring committee met, Russian and Kuwaiti officials discussed bilateral cooperation on crude production and LNG supplies. Novak said that discussions included the possibility of Russian companies, possibly Lukoil, investing in oil exploration and production projects in Kuwait. In turn, he said that Gazprom Neft is interested in attracting Kuwaiti investment in crude production projects in Russia.

Russia's foreign markets forays not guaranteed

This followed on from a flurry of activity from Rosneft in February, when it signed crude supply deals with Libya and the Kurdistan Regional Government, and started exploration drilling at block 12 in Southern Iraq.

The company has said it may purchase further volumes from the region, saying that it sees Kurdish crude oil as playing an important role as it seeks to diversify feedstock supply.

At the same time Libya’s NOC said it had signed a framework agreement with Rosneft on looking into exploration and production opportunities and crude supplies.

All this positive sentiment is no guarantee that cooperation will develop according to plan however.

Analyst notes released following these announcements have stressed the risks involved in Russian producers’ forays into foreign markets. They point to expensive exits from foreign projects in the past and the high risk of political instability in some countries in the region, including Libya and Kurdistan.

Furthermore expectations that significant agreements would be signed during Iranian President Hassan Rouhani’s visit to Moscow in late March failed to live up to the hype.

Not for the first time in the run up to meetings with Russian companies, Iranian officials indicated that they may sign concrete deals with Russian partners over crude supplies and the entry of Russian companies into the Iranian upstream sector.

A much-anticipated oil-for-goods deal including Iran selling 100,000 b/d of crude in return for Russian goods, services, and potentially cash, was not signed during the visit, despite officials commenting beforehand that they expected to do so.

Undoubtedly the relationship between Russia and OPEC members has seen a change in the last year, but this may prove to be a temporary state of affairs, with bilateral cooperation deals in their early stages stalling when the production cut deal comes to a close.

A more positive interpretation is that we may see talks develop into more meaningful longterm cooperation on crude and LNG production and supply between Russia and OPEC, regardless of oil price trends and political instability.