Russia-Saudi collaboration will continue

The collaboration between the world’s two biggest oil producers Russia and Saudi Arabia will have to extend beyond the end of OPEC-led production cuts to manage the transition back to a normal crude market, according to Rosneft’s chief.

Speaking in Berlin on Thursday, Igor Sechin, the head of Russia’s state-run oil company, said the two producers needed to discuss how to engineer a “smooth transition” after the OPEC output curbs expire to ensure that the “market doesn’t suffer.” He said a release of large volumes of oil on to the market could lead to such volatility that “consumers will be hit hard.” He said producers needed to prevent “dramatic consequences for the market - essentially a force majeure situation.”

OPEC and Russia, together with other producers outside of the cartel, agreed late last year to cut output by almost 1.8m barrels a day in the first six months of 2017, in a bid to shrink excess stockpiles that had put pressure on prices. Prices recovered slightly but hit a ceiling after inventories remained bloated and US shale producers started pumping more oil. Brent crude, the international benchmark, fell below $47 a barrel earlier this month, erasing all the gains since global producers agreed the supply deal.

Saudi Arabia and Russia this week backed an extension of the output curbs until March next year, saying they would do “whatever it takes” to reduce oil stockpiles and balance the market. The move has to be officially agreed at next week’s meeting of OPEC ministers in Vienna. The statement from the energy ministers of Saudi Arabia and Russia surprised oil market observers, sending oil prices up by 4% to above $52 a barrel. Most of them had only expected an extension until the end of 2017.

Mr Sechin, a longstanding ally of President Vladimir Putin, has traditionally been sceptical of OPEC and argued that Russia should stick to its own strategy and protect its market share. Last year, he told an energy conference in London that he opposed the idea of Russia working with the producers’ cartel to try to bolster prices through co-ordinated cuts in production. But he has changed his tune over the past year. On Thursday, he said Rosneft would comply with the agreed production cuts and was “comfortable” with the nine-month extension. The company would apply the curbs to greenfield sites and leave output at its older fields unchanged, he said, adding that reducing production there risks leading to a loss of pressure in the reservoir that could cause “a loss of resource”.

Mr Sechin also said that Rosneft would have more cash for dividends in 3-4 years’ time, once it had completed a number of investment programmes such as modernising its refineries. He predicted that a higher dividend, coupled with the lifting of western sanctions against the company, would raise the company’s market capitalisation to $130bn-$150bn. It is currently about $55bn.