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Interview: Russia's Novak spells out vision for close long-term OPEC relationship

Moscow (Platts)--13 Feb 2018 526 am EST/1026 GMT


Russia wants to build a long-term relationship with Saudi Arabia and the broad OPEC alliance once their pact to restrict oil supplies expires, energy minister Alexander Novak said in an interview with S&P Global Platts.


  • Outlines post-OPEC deal mechanisms
  • Coalition must avoid 'knee-jerk' reaction to prices
  • Russia can 'quickly' ramp up output
  • Sees steady Russian output until 2035

The world's largest producer of crude is reining in its output as part of a deal first agreed in 2016 with OPEC and a Russia-led group of smaller producers to withdraw 1.8 million b/d from global supply.

S&P Global Platts interview with Russian energy minister Alexander Novak

Novak consented to extend the pact through 2018 last December, from the previous deadline of the end of March, and co-chairs, alongside Saudi energy minister Khalid al-Falih, the coalition's influential market monitoring committee.

The coalition members are increasingly talking about future cooperation after the deal expires, and Russia and Saudi Arabia are already working closer in a number of areas.

Last year, the two countries established a $1 billion fund to invest in joint energy projects, including in oil services and petrochemicals. They are also discussing gas projects, after Russia's Yamal LNG project was launched in the Arctic.

While some analysts question the stability of the relationship between the world's two biggest oil producers, which are likely to start competing for the markets again sooner or later, Novak said he did not see the grounds for such concerns.

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"We understand that global demand for oil will continue to grow rapidly and this demand will need to be met, so we will likely need to work together, including on upstream technology and joint projects to meet this growing demand," Novak said.

The energy minister is meeting his Saudi counterpart in Riyadh as part of an energy symposium for the International Energy Forum this week. This is their third meeting already this year, with bilateral talks in Riyadh set to involve discussions around Saudi Aramco.

"Taking into account the current political and economic relationship and projects that we're considering, I think our relationship will be of long-term nature," he said.

The comments echoed those by Falih in late January, who said he believes that the relationship between Russia and Saudi Arabia will continue for "decades and generations."

Oil prices have climbed almost 20% to over $60/b since Russia surprised many analysts by entering into the agreement with the Vienna-based group and cooperation between the 14 OPEC and 10 non-OPEC countries is expected to continue even after the historic deal ends.

Although Novak was coy on the need for ongoing market management, regular communication among group members would ultimately provide flexibility to respond to volatile prices.

According to Novak, future cooperation could include joint studies and the exchange of information in addition to some investment projects.

"Everybody liked [the format] when key producing countries that account for some 60% of the world production meet to discuss various topics that are important and of interest for them, including on the future of the energy markets," Novak said. "Where else can you meet 24 energy ministers from various countries, including for bilateral discussions, at the same time?" he said.


NO SURPRISES


Higher oil prices touching $70/b last month prompted many analysts to question the strength of the group's commitment to the output cut deal, with Iranian oil minister Bijan Zanganeh also raising concerns that higher prices may require a change of production policy.

Novak, however, has cautioned against any change to the strategy because of the recent rise in oil prices.

"My recommendation is to assess the market in the longer term and avoid knee-jerk reactions," he said, adding that the 24 participants in the OPEC/non-OPEC production cut deal need to act "very cautiously" in respect of new decisions and remain firm in their strategy to remove stock surplus from the markets.

Oil demand is forecast to grow by 2 million b/d in 2018 and Brent prices to average $65-$70/b, according to S&P Global Platts Analytics.

"We have to focus on the supply and demand balance rather than price. Otherwise, there is a risk that we'll bring to naught all those positive results that we've reached over the term of the agreement," he said.

Novak stuck to the clear line other industry and OPEC sources have been echoing: the focus should be on fundamental drivers rather than getting caught up with the whims of the markets.

Various factors, including cold temperatures and declarations of force majeure, can influence the price trajectory, and the recent increases could be of a short-term nature, he said.

At the same time, oil stocks continue to exceed the five-year average even though significant progress has been made in reducing the glut, Novak said.

The OPEC/non-OPEC monitoring committee estimated oil surpluses at 118 million barrels as of January 1, 2018, down from 340 million barrels a year ago, he said.

Despite Russia's ongoing commitment to the OPEC/non-OPEC deal, Novak said that "technically, Russia can ramp up production quickly" once the agreement ends, as the country has accumulated significant spare capacity.

Novak also pointed out that Russian companies understand the necessity to ensure a gradual exit from the deal, assuaging concerns that Russian oil majors could quickly undo all the hard yards Russia had put in.

Russia will continue to meet its obligations to reduce the output by 300,000 b/d from the October 2016 level, Novak said, adding that all of the companies had confirmed they remained committed to the deal at the latest meeting earlier this month.

In the long term, Russian crude production is set "to remain within the range of 490 million mt/year and 555 million mt/year, or what equates to [roughly] 10 million b/d-11 million b/d, according to the updated Russian strategy until 2035, which is yet to be approved by the government," Novak said.

The minister noted that the authorities envisage certain measures to keep output high, such as tax changes, which would offset risks to future production. These include the worsening of oil reserves and a natural decline in output at mature fields in West Siberia, he said.

Russia has plenty of reserves that are yet to be commercially developed even if some costs are prohibitive at this stage. These include tight and shale oil, with conventional reserves located in the remote and hard-to-access regions, such as in the Arctic.

Novak earlier estimated that new oil projects in the Arctic, especially those located offshore, could be commercially attractive under prices above $80/b. But even though higher oil prices are no longer considered as desirable by the market -- as they are likely to spark new cycle of volatility -- Novak believes Russia will continue efforts to explore and develop the region.

"The Arctic area, which is rich in reserves, will be a new phase in the oil industry development. I believe that in the future the development of technology and a corresponding cut in expenses will allow us to secure efficient production in the Arctic even at lower prices," he said.

This is why Russian companies continue to actively work in the region, even during low prices and amid sanctions, he added.

--Nadia Rodova, nadia.rodova@spglobal.com
--Andrew Critchlow, andrew.critchlow@spglobal.com
--Paul Hickin, paul.hickin@spglobal.com
--Edited by James Leech, newsdesk@spglobal.com


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