Russian Bear vs. OPEC: A battle of wits!

Sep 20, 2009 (Arab News - McClatchy-Tribune Information Services via COMTEX) -- LUKOY | Quote | Chart | News | PowerRating -- With the global energy equation undergoing another adjustment-albeit a temporary one-a battle royal seems on the cards. For the first time since the collapse of the Soviet Union, Russia has surpassed Saudi Arabia as the top oil exporter. Exports of crude oil and refined products from Russia have risen to 7.4 million barrels a day in the second quarter of this year, up from 7.25 million in the first quarter, according to the Russian Energy Ministry. Russia 's crude oil production climbed 1.3 percent in August from the same month in 2008, to 9.97 million barrels a day. Exports grew 5.9 percent in the same period.

The increase came after the largest Russian producer, Rosneft, began pumping from its new Vankor field in Siberia. Rosneft is not alone in having launched new fields. LUKOIL, its closest peer, has also begun production at the South Khylchuyu deposit while TNK-BP has started the Uvat, Kammenoye and Verkhnechonskoye projects last year. Meanwhile, Saudi shipments fell to about seven million barrels a day, from 7.39 million, according to the International Energy Agency. Under drastic cuts agreed upon by the 12 OPEC members in late 2008, Saudi Arabia was obliged to slash 1.31 million barrels a day from its output.

The emerging scenario is ruffling feathers. There seems a definite distancing between Russia and OPEC, as Moscow seems determined to capitalize on the OPEC output cuts. Speaking after the Vienna ministerial, OPEC Secretary-General Abdullah Al-Badri said he was not encouraged by Russia's lack of tangible cooperation in cutting supplies. He was indeed diplomatic in venting the frustration, according to many present at the meeting.

Moscow was not invited to the previous Vienna OPEC ministerial, and eyebrows were raised on that move as well, with a few linking it to the changing global market dynamics. "There is a huge amount of frustration within OPEC that Russia has taken advantage of OPEC's cuts over the last year and has gained market share," says Chris Weafer, chief strategist at UralSib investment bank.

The grouping "has lost a significant portion of market share in global crude production in the last year mostly to Russia," wrote Francisco Blanch, a commodities analyst at Bank of America Merrill Lynch. "There are just too many free-riders around."

Saudi Arabia alone has sacrificed billions of dollars in revenues this year by cutting oil output.

"In no uncertain terms Russia has been the biggest beneficiary of OPEC's sacrifice," Weafer said during an interview in Moscow. "Higher prices have equaled a $20-billion tax windfall (for Russia)."

On the other hand, with its production capacity rising but output held down by lower quotas, Saudi Arabia's missed oil revenues are probably running at close to $100 billion per annum, or almost 25 percent of GDP, some analysts have emphasized.

Until recently Moscow was flirting with OPEC.

Last December, Putin sent his deputy Igor Sechin to an OPEC meeting in Oran, Algeria, hammering the message that Russian output was already down by 350,000 barrels a day the previous month and that Moscow was prepared to cut an additional 320,000 if prices failed to rise.

The reductions never took place, and two months later, OPEC's Al-Badri is on the record having said that he is "very disappointed."

However, Sechin, who is also chairman of Rosneft, still insisted in March that Russia was playing "an active role in decreasing supplies."

Today it's a different era. Russia hardly appears apologetic. Energy minister Sergei Shmatko told the press in Moscow that Russia would make no apologies to OPEC for boosting oil production to record highs. "We never had any obligations (to OPEC). When we were communicating, we never promised anything," Shmatko said late on Thursday after OPEC members decided to retain output cuts. "To say that we do not abide by the rules is not correct."

And the Russians have their reasons. Alexander Medvedev, deputy chief executive of Russian energy giant Gazprom, blames the Siberian chill for being not in tandem with OPEC.

"There is a very simple explanation to this: We are not in a desert where it's easy to regulate. We are in an extreme situation in Siberia where reserves could be damaged if you up and down your production levels," he told this year's Reuters Russia Investment Summit. If Russia shuts down Siberian wells, its industry leaders argue, they could seize up forever as they go cold. So Russia is apparently on a collision course with the OPEC.

This indeed could not go on forever, analysts say. Market share is important to OPEC, too. The short-lived affair between Russia and OPEC that began when the then Saudi Crown Prince Abdullah visited Moscow in September 2003 seems shaky for the time being. And if it continues it could have disastrous consequences for the energy industry in the medium to short terms.

After all, if the OPEC wants to pick a fight, it has the capacity and the tenacity to fight it out to the end. The low cost Middle East producers have weathered similar storms in the past, and they are better equipped to do so in the future.

Russia holds less than a tenth of the oil reserves of the Middle East. At current production rates, it will be out of the running by 2020. The world will still be dependent on crude from this part of the world. The Russian Bear needs to be wary of the sleeping Middle Eastern giant.

And in the meantime, reports are pouring in of possible discussions between the two sides in Moscow before the end of the year to diffuse the tension. Let's hope sense prevails.

And this very interesting battle of wits over the sour crude continues, let's enjoy the sweetness of Eid for the time being. Capitalizing on the opportunity: Let me extend a very, very happy Eid Mubarak to you all, dear readers and friends in the energy fraternity!

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