SAUDI & RUSSIA OIL TALKS
When Saudi Arabia and Russia sat down to talk about limiting oil production 14 months ago, the discussions to stem a collapse in prices did not get very far.
"The minister confirmed that Russia was not willing to cut," Ali al-Naimi, Saudi Arabia's powerful energy minister later said about the meeting in a plush Vienna hotel. "We said 'thank you' and the meeting was over."
Days later Mr Naimi upended the oil industry, forcing through a decision at Opec headquarters to keep the taps open and put pressure on rival producers outside the cartel.
For many oil market watchers, the outcome would be no different if the two energy super powers met again today, even though prices have fallen by more than half since that fateful meeting in November 2014.
While signals from Moscow this week about a willingness to entertain conversations about a collaboration with Opec producers excited traders — sending oil prices up more than 8 per cent — oil executives in Russia and Opec officials remain wary."Co-ordination between Russia and Opec has been discussed in the past and has always come to nothing, and it would be a shock if any different outcome occurred this time," says James Henderson at the Oxford Institute for Energy Studies.
Russia has long argued that the structure of its oil industry, with many different private companies rather than a single state group, and its harsh weather conditions make a government-mandated output cut unfeasible.
However, the continued plunge in oil prices has refocused minds in Moscow. While many in the oil sector and the government still see a cut as unworkable, several senior figures are now calling for talks in Opec.
Alexander Novak, Russia's energy minister, on Thursday said Russia was ready to participate in a meeting with Opec countries. "We had these sorts of consultations before, when the situation was somewhat different. As we see, prices have fallen," he said.
One reason for the shift in tone is the deteriorating state of Russia finances. The government — which traditionally has depended on oil and gas for about half of their revenues — is discussing further swingeing public sector cuts after drawing up its budget on the assumption of $50 oil. It is also quickly depleting its rainy-day fund.
"You can't just write off these latest comments," says Gary Ross, chairman of consultancy Pira Energy, who was a member of the advisory group that worked to convince Russia to join Mexico and Norway in co-ordinated production cuts in the early 2000s.
"Low prices have a way of concentrating the mind. For the first time in a long time this is seriously being considered," he says. "It's a tough one, and there is no guarantee, but there is a process that is in motion."
Another factor for a push towards cuts is opportunistic. Some Russian oil companies — including Lukoil and Rosneft — are struggling to maintain production because of ageing oilfields in western Siberia and western sanctions that have squeezed investment.
"If there was an order to cut production, it would suit Lukoil very well," says Valery Nesterov, energy analyst at Sberbank CIB. As production falls "they could say, 'We are carrying out the decision of Opec'".
Nonetheless, analysts and oil executives say a cut remains unlikely.
Many Russian oil sector executives and those in the government still see a cut as unworkable, citing economic, mechanical, legal and geological reasons.
The combination of cold weather and the high water content of Russia's mature Siberian oilfields — many wells pump 90 per cent water — makes it tricky to manage any shutdown.
Moreover, the government's precarious finances could be even harder hit by a production cut if oil prices fail to rise sufficiently.
Further, the Russian government has no legal power to control production levels, meaning it would need to do so through the blunt tool of tax changes or through unofficial channels — a fact that has stymied Moscow's promises to cut production in the past.
And with many analysts predicting a rebound in oil prices in the second half of the year, Moscow is also loath to lose market share to other producers — most notably from US shale companies.
Igor Sechin, chief executive of Rosneft who is in President Vladimir Putin's inner circle, has for much of the last year led the charge against calls for a co-ordinated production cut.
Mikhail Leontyev, Rosneft spokesman, told the Financial Times: "All positions are well known, they have not changed in any way."
From Saudi Arabia's perspective, Russia's record of keeping its word is not good and decades of mistrust are likely to colour any negotiations on co-ordinated output cuts.
Comments from Khalid al-Falih, chairman of state oil company, suggest the kingdom is preparing for the long haul. "If prices stay low we will be able to withstand [it] for a long time," said Mr Falih.
While Russia agreed to join efforts in 1998 and 2001 to cut production they never stuck to their side of the bargain — something that has never been forgotten by senior figures in the Saudi oil ministry. It made no commitments in 2008 and refused to curb output 2014.
"Anything Russia says now I doubt they will be taken seriously. Saudi Arabia has been there, done that, got the T-shirt and been ripped off in the past," said Paul Stevens, a Senior Research Fellow at think-tank Chatham House.
But Russia — which like Saudi Arabia increased its own production in 2015 — is not the only hurdle that needs to be overcome before co-ordinated supply cuts can become a reality.
Saudi Arabia has said it would only consider lowering output if it was joined by other members of the cartel as well as other large producers such as Russia.
Yet several Opec members — Iran and Libya — are demanding the right to produce as much as they can to make up for years of lower production because of war and sanctions.
For the kingdom, production cuts whether it be from Russia or Opec members is difficult to monitor and enforce. "There is a lot of mistrust," said one person familiar with the matter.
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