Western, Middle East spare production capacity neutralizes OPEC+ cuts: Rosneft

Western and Middle Eastern companies' increases in spare production capacity are offsetting the effect of the OPEC+ group's recently announced extension of cuts and weighing on oil prices, Rosneft CEO Igor Sechin said June 8.

Dubbing the increased production "phantom barrels," he said they neutralize the impact of voluntary oil production cuts assumed by the main OPEC+ participants and this is reflected in price falls that followed the announcement of the cuts.

"The formation of reserves that we see in both Western and Middle Eastern companies may signal serious market changes," Sechin said at the St. Petersburg Economic International Forum.

Saudi Arabia and seven other countries have made some 2.2 million b/d in voluntary cuts that were due to end after June, but will now be maintained through September, before being gradually eased by about 180,000 b/d monthly from October to December and then by about 213,000 b/d from January to September, the group said June 2 after ministers convened for talks.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $80.18/b May 31, the last trading day before the meeting. Platts assessed it at $76.77/b June 3 and it has since risen to $78.32 on June 7.

"Theoretically, for the Russian oil industry, a price reduction could mean the possibility of lifting all restrictions on the price ceiling, and the revenue side of the approved federal budget is based on $60/b," Sechin said.

Russia has been subject to a number of international sanctions in response to its invasion of Ukraine in February 2022. These include oil embargoes in jurisdictions including the European Union, previously a major customer, and a ban on maritime service providers in G7 countries and the EU on facilitating Russian oil exports unless the barrels are sold below certain thresholds. In the case of crude, this is $60/b.

Expensive to avoid Russian gas

Europe has also been cutting down on its Russian gas imports.

European Union countries spent more than $630 billion on importing gas from alternative sources over 2021-2023, Sechin said.

This amount is comparable to Europe's total gas spending over the previous eight years," he said.

This value is close to European investments in green energy over the same period, comparable to the GDP of Sweden and Poland, and is also almost four times the total GDP of the Baltic countries, Sechin said.

Increased gas costs are "eating up" the margins of such energy-intensive industries as the production of steel, fertilizers, chemicals, ceramics and glass, he said. As a result, production activity in the Eurozone has been declining since mid-2022 and 32% of German enterprises are already planning to transfer their facilities abroad, Sechin said.