Vienna — Russia is celebrating after months of negotiations resulted in a commitment Saturday from 10 other non-OPEC countries to join a coordinated output cut aimed at rebalancing the oil market.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Highlighting the positive impact of closer contact with OPEC members over the course of the year, Energy Minister Alexander Novak said that the deal represents a unique opportunity to balance the market.
"Producing countries now have a unique opportunity to reach market balance and to miss out on this chance would be wrong," Novak said in his opening speech at a meeting in Vienna, where several non-OPEC producers agreed to join Russia in cutting output by a combined 558,000 b/d, adding that it "marks a new era for global oil markets."
Russia's decisive role is likely to continue as it will be one of two non-OPEC countries on a monitoring committee that will oversee the deal, alongside Oman. OPEC members Algeria, Kuwait and Venezuela will also sit on the committee.
The deal was welcomed in Moscow, with one analyst describing it as "very impressive."
"Russia has been instrumental in getting this deal and particularly with bringing the non-OPEC countries onboard, they haven't pulled something like this off before," said the analyst, who spoke on condition of anonymity.
Novak said that the deal now depends on the active participation of non-OPEC members, but described non-OPEC countries' commitments as "voluntary," with no formal mechanism in place to verify compliance or penalize those who do not meet their targets.
Other ministers attending the meeting, including those from OPEC, echoed this sentiment, diverting questions on possible sanctions until after the deal comes into force on January 1.
Unlike OPEC, which released a breakdown of quotas when it reached consensus to cut earlier this month, meeting attendees did not release any formal record of non-OPEC country quotas.
Besides Russia, countries that agreed to take part include Mexico, Kazakhstan, Oman, Azerbaijan, Malaysia, Bahrain, Brunei, Equatorial Guinea, Sudan and South Sudan.
"[Non-OPEC] cuts are to be made in the first half of 2017 in accordance with an accelerated schedule," Novak added, without giving further details, but he did stress that "consultation led to a level of trust among producers."
He also said it wasn't a "closed agreement," adding that the producers involved in the pact will be working with other non-OPEC countries to join the efforts to stabilize global oil markets. But at this stage it seems unclear who else will have the stomach to pitch in.
LESSONS LEARNED FROM DOHA
Russia has played a decisive role in bringing non-OPEC countries onboard and keeping discussions going after failure to reach a deal in Doha in April. Novak said Saturday that the Doha meeting had been an important lesson for oil producers mulling coordinated action.
Russia facilitated commitments not just from countries with which it already cooperates closely such as Azerbaijan and Kazakhstan, but also others further afield.
Several OPEC ministers acknowledged this role around the meeting.
"I am over 20 years in OPEC and this is a historical moment for cooperation and collaboration between OPEC and non-OPEC. I appreciate the support of the non-OPEC producers, especially Russia," Iranian oil minister Bijan Zanganeh said en route to the meeting Saturday.
The key breakthrough has been the close relationship between Novak and Saudi Arabian counterpart Khalid al-Falih, with the two meeting frequently since Falih took office earlier this year. Both ministers Saturday praised the closer relationship.
"We really had long and detailed discussions about what can be done. This trust-based agreement allowed us to adjust our position," Novak said.
With many analysts estimating that to be effective the deal does not need much more than the commitments given by Russia and Saudi Arabia, the continuation of this close relationship is likely to be key.
Novak said Saturday that bearing in mind calculations discussed at the meeting on Saturday, the market may balance in the third or fourth quarter of 2017, in an interview aired on state-owned Russia 24 TV.
He said that prices of $50-55/b are around $20/b higher than they may be if producers had failed to reach an agreement.
But until the market sees actual cuts introduced, there is likely to be a degree of skepticism among market watchers. Russia has committed to over half of the non-OPEC commitment and is planning to reduce output by 300,000 b/d.
Novak reiterated Saturday that Russia's cut will be gradual, with output dropping 50,000-100,000 b/d in the first quarter of 2017, before going down by 200,000 b/d by the end of March. Non-OPEC members, including Russia, have agreed to use October output levels as a reference point.
Russia's October output was 47.386 million mt (around 11.204 mil b/d) according to data released by the Central Dispatching Unit, an arm of the energy ministry. Novak said that monitoring of Russia's compliance with the deal will use CDU data.
It remains unclear how this may impact overall output in Russia next year. Officials have indicated that a reduction on forecasts is likely, without providing concrete details.
Developing a framework for the cut could prove tricky, as it will be divided among companies that are state and privately owned, as well as some that include foreign ownership.
Novak said Saturday that he plans to meet with representatives of Russian companies in the next few days to discuss the issue further. When asked if there will be any penalties for companies that fail to comply, he said the commitments would be "voluntary," with no set penalties in place for non-compliance.
"All companies have quite a clear idea of what they have to achieve during the time of the deal and have practically started to act," Novak said.
Experts in Moscow see little risk of companies refusing to comply, and many company representatives have expressed their approval of the deal, since the OPEC meeting last week when it was revealed that Russia is willing to cut 300,000 b/d.
"I think there is very little risk that Russian companies won't comply, because even in Doha I think they had the agreement of Russian companies to comply and it will be hard to cheat," the Moscow-based analyst said.
While final company quotas have not been announced, Novak said that the cut was likely to be a proportional cut across the sector.
If this is the case, some companies could be more affected than others.
Lukoil, which has seen its output decline this year, hinted that it may seek compensation for cutting output, citing the potential technical impact.
Analysts and ministry official have indicated that this is unlikely, however, due to the likely positive impact if the deal is successful and prices rise.
"I think there's no way in 2017, which will see hard budgetary conditions ahead of the elections. Maybe after 2018 they could see some tax allowances, but it's very unlikely," another analyst said.
POSSIBLE FURTHER BENEFITS
Russia could also capitalize on its closer OPEC ties to attract benefits beyond short-term price stimulation.
Last week the Qatar Investment Fund agreed a deal with Glencore to take a significant stake in Russia's largest producer, Rosneft, which some commentators indicated was facilitated by Russian officials' closer contact with Qatari authorities over the course of this year.
This week Novak travels to Tehran with representatives of Russian oil producers as they eye opportunities in Iran, as the country bids to develop its upstream industry with the involvement of foreign majors.
A secondary benefit from the output cut deal could therefore be increased opportunities for foreign investment in Russia's upstream sector, as well as opportunities to join upstream projects abroad, if close dialogue continues.
--Rosemary Griffin, firstname.lastname@example.org
--Paul Hickin, email@example.com
--Edited by Herman Wang, firstname.lastname@example.org