The biggest non-OPEC oil exporter, Russia, is considering “a new format” of cooperation with the Organization of the Petroleum Exporting Countries and will send a high-level delegation to the oil cartel’s next meeting in Algeria on December 17, Russian Energy Minister Sergei Shmatko said.
Russia has long attended OPEC meetings as an observer, but lent further impetus to the cartel’s conference this month by sending its highest level delegation, headed by influential Deputy Prime Minister Igor Sechin, who has spearheaded boosting energy ties with Venezuela.
Russia supplies one-third of Europe’s energy needs, while OPEC accounts for nearly 40 percent of global oil production. Together they produce half the world’s oil. That would be a force to be reckoned with.
But is Russia really serious about joining OPEC? For Russia, it is good to be outside the cartel and let OPEC members lose market share as they reduce their production to defend prices while Russia — on the outside — can maximise its production and revenue according to the technical and economic criteria.
“Why should they join OPEC? Let OPEC defend the price and they maximise their production,” Manouchehr Takin, analyst with the Centre for Global Energy Studies in London, told New Europe, adding that Russia has so far counted on OPEC to defend a floor price.
Despite the Russian stock market crisis last week, the Russian economy overall is going to be fine, Ron Smith, chief strategist at Alfa Bank in Moscow, said, adding that the global liquidity crisis has limited impact. “The (Russian) government is absolutely flush with cash. There are things they can do to use that cash if a stimulus is needed in the future and oil prices are still high. So the economy should be fine,” Smith told New Europe.
Because the Russian economy relies heavily on exports of commodities, in particular oil and gas and gas prices are linked via contract to oil prices, the oil price becomes a huge question. “Whether other commodities may decline the oil price has a natural floor out there that can be established by OPEC. The question is where they choose to establish that floor,” Smith said. “But oil prices are not going back down to 60-50-40 dollars. It’s not gonna happen because OPEC will start to pull back production.”
At the September meeting, OPEC announced that members should “strictly comply” with their crude production allocations. However, there was considerable confusion as to what this meant. OPEC President Chakib Khelil suggested this amounted to a cut of 520,000 barrels per day, but Saudi Arabia alone is producing some 700,000 barrels per day above its formal quota.
Smith said Saudi Arabia can very quietly start producing at quota again and bring a substantial amount of oil off the market. Takin said Russia may benefit from closer ties with fellow producer countries, as well as put pressure on the US and the West.
He said Russia’s interest in OPEC is partly a reflection of the current politics. “They have been making the circle tighter and tighter in the last few years with the former Soviet satellites becoming independent and then having ambitions of becoming a member of NATO and some have already joined NATO,” he said, adding that the clash in Georgia has also factored in Russia’s decision to cooperate more closely with OPEC. “Overall, they might be interested to become a member,” Takin said.
On the negative side for Russia, there is the likelihood that Russia will lose revenue and would have to sacrifice cutting production if prices fell further. Of course, Russia could say its crude oil capacity is higher and negotiate a higher number as an OPEC staring point for the Russian production.
But for now Russia hopes OPEC will defend a floor price and preferably around USD 100 per barrel. “It’s a good wish and maybe Russia wants to be involved in it,” Takin said.