ECONOMY
OPEC’s Waning Influence and the Weak Outlook for Russian Oil
October 2, 2024
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Mikhail Krutikhin
Oil and gas market expert - Tatiana RybakovaJournalist and writer
In an interview with journalist Tatiana Rybakova, energy expert Mikhail Krutikhin looks at the global oil market, explains why oil prices are trending lower and lays out his view that the Power of Siberia 2 project is all but over.
The original interview in Russian was published in Republic and is being republished here with minor changes and the publication’s permission.
I would like to start with Saudi Arabia’s decision to abandon its $100 per barrel crude target. How serious is this?
Firstly, there has never been any target. There have been no official announcements that the Saudis should support this price. There was, however, media speculation that they needed it, followed by reports that the Saudi budget could balance only at $100 per barrel.
The IMF believes that Saudi Arabia needs a crude price of $96.20 per barrel to fiscally break even. Yet Riyadh pays little attention to this because to finance projects – and there really are very interesting large, capital-intensive projects – it needs flows of cash (the price times export volumes). So, they have gradually come to the decision to raise production and, naturally, exports.
So far, the Saudis have announced that this will happen rather slowly: starting in December and until the end of 2025, they will probably increase production by 83,000 barrels per day [for a total increase of a million barrels per day by December 2025]. Meanwhile, this decision has already affected the market, as prices have dropped somewhat in anticipation [of the increase].
In general, the decision had been expected, as we see that the OPEC and OPEC+ production quotas have rather ceased to move the market.
I would like to start with Saudi Arabia’s decision to abandon its $100 per barrel crude target. How serious is this?
Firstly, there has never been any target. There have been no official announcements that the Saudis should support this price. There was, however, media speculation that they needed it, followed by reports that the Saudi budget could balance only at $100 per barrel.
The IMF believes that Saudi Arabia needs a crude price of $96.20 per barrel to fiscally break even. Yet Riyadh pays little attention to this because to finance projects – and there really are very interesting large, capital-intensive projects – it needs flows of cash (the price times export volumes). So, they have gradually come to the decision to raise production and, naturally, exports.
So far, the Saudis have announced that this will happen rather slowly: starting in December and until the end of 2025, they will probably increase production by 83,000 barrels per day [for a total increase of a million barrels per day by December 2025]. Meanwhile, this decision has already affected the market, as prices have dropped somewhat in anticipation [of the increase].
In general, the decision had been expected, as we see that the OPEC and OPEC+ production quotas have rather ceased to move the market.
“Whereas about 15 years ago OPEC+ played a big role, supplying 40% of oil to the market, now its share is less than 27%.”
Trying to regulate something with such a small lever is difficult. Therefore, many countries are already saying: sorry, but this production-cutting is not in our interests. Angola refused to accept production quotas and left OPEC [this year]. The Iraqis constantly overproduce [their quotas], the Algerians too. Overall, some discord has emerged in the cartel.
That is why suspicions arose that Saudi Arabia – frustrated that this scheme has proven ineffective at containing production – may decide on some limited-time operation. For example, abandoning production quotas and dumping everything they have accumulated into the market within a couple of months. According to the latest estimates, the Saudis have spare production capacity of somewhere over 3 million barrels per day.
Approximately what percentage is this of the current world market?
It’s a lot. And if we add the production capacity that the UAE, Kuwait and Iraq (i.e., the biggest oil-producing Persian Gulf states) are not currently using, we get more than 5 million barrels. With global oil consumption at 101-102 million barrels per day, 5 million barrels is 5% of global consumption. And if they pump all of that, it will almost completely replace Russian oil. Because high-priced Russian oil may be unable to withstand this competition, as if all these barrels enter the market, prices will, of course, plunge.
How much can prices fall?
It is impossible to predict. The dollar is not what it used to be, but in 2020, prices fell to as low as $7-8 per barrel. Now, they could reach $35-40 per barrel in the event of such a decision.
That is why suspicions arose that Saudi Arabia – frustrated that this scheme has proven ineffective at containing production – may decide on some limited-time operation. For example, abandoning production quotas and dumping everything they have accumulated into the market within a couple of months. According to the latest estimates, the Saudis have spare production capacity of somewhere over 3 million barrels per day.
Approximately what percentage is this of the current world market?
It’s a lot. And if we add the production capacity that the UAE, Kuwait and Iraq (i.e., the biggest oil-producing Persian Gulf states) are not currently using, we get more than 5 million barrels. With global oil consumption at 101-102 million barrels per day, 5 million barrels is 5% of global consumption. And if they pump all of that, it will almost completely replace Russian oil. Because high-priced Russian oil may be unable to withstand this competition, as if all these barrels enter the market, prices will, of course, plunge.
How much can prices fall?
It is impossible to predict. The dollar is not what it used to be, but in 2020, prices fell to as low as $7-8 per barrel. Now, they could reach $35-40 per barrel in the event of such a decision.
“And if prices fall to $35-40 per barrel, that’s a disaster for Russian oil – it will be impossible to sell.”
President of Russia Vladimir Putin meeting with President of the United Arab Emirates Mohammed bin Zayed Al Nahyanin. Saint Petersburg, October 2022. Source: Wiki Commons
And what is the production cost of Russian oil?
No one knows for sure, since everything in Russia is classified. But we can assume that the production cost now, going into a new project, is about $50 per barrel.
Is that without taxes?
Yes, without taking into account taxes. That is not what the government calculates. It is capital expenditures for production, i.e., developing the field, construction and so on. Plus, there are operating costs to maintain production every day. And to transport the oil – due to the vastness of Russia, the routes are long.
But this does not include, among many other things, taxes, “social expenditures,” the corporate income tax, or administrative and corruption costs in each company – all this money is being embezzled there. When we add it all up, our production cost of a barrel of oil is already approaching $50 per barrel. A couple years ago, I saw the following comparison by international sources: whereas in Saudi Arabia the production cost is somewhere around $17-18 per barrel, in Russia it is $42-47 per barrel.
This is for new fields. What about old ones?
Not a lot of money is invested there, as old fields do not produce much. I was looking at the Yuzhno-Aganskoye field. The so-called water cut there is 98%. In other words, out of the well comes dirty water, and if you let it settle, a thin film of oil forms on top. The oil is separated from the water and collected. To get one barrel of oil, you need many, many wells. Because of this, the cost of old fields is very high.
At the last OPEC+ meeting, back in the spring, Saudi Arabia announced that from October it would begin to scale back its voluntary production cuts, which are on top of OPEC quotas. Has this happened yet?
It has not; Saudi Arabia is sticking to its voluntary cuts – a million barrels per day. Plus, like everyone else, it has a quota.
The reluctance of Saudi Arabia, along with other countries you mentioned, to continue to limit production is understandable: after the US became a net exporter of oil under Donald Trump, the US and other non-OPEC countries have indeed been replacing the cartel’s lost barrels and squeezing it out of the market. In your view, does this mean that the era of OPEC is coming to an end, or does the cartel nevertheless have a niche and will survive?
In non-OPEC countries, production is gradually increasing. Moreover, in such unexpected regions as west and east Africa. We see new discoveries off the coast of South America.
At the same time, in the US, even with Washington’s encouragement of oil production, volumes have essentially plateaued, so I do not think we should expect a sharp increase in production there in the coming years. But there are other producers. There is Venezuela, which could unexpectedly make peace with the Americans and start producing more and more oil; there is Iran, which could unexpectedly take the path of reform, leading to the oil embargo being lifted in part, and so on. Meanwhile, Chinese production is slowing: it is growing, but much more slowly than before. There are also serious issues with energy use, while oil is being replaced to a significant degree by other energy sources.
No one knows for sure, since everything in Russia is classified. But we can assume that the production cost now, going into a new project, is about $50 per barrel.
Is that without taxes?
Yes, without taking into account taxes. That is not what the government calculates. It is capital expenditures for production, i.e., developing the field, construction and so on. Plus, there are operating costs to maintain production every day. And to transport the oil – due to the vastness of Russia, the routes are long.
But this does not include, among many other things, taxes, “social expenditures,” the corporate income tax, or administrative and corruption costs in each company – all this money is being embezzled there. When we add it all up, our production cost of a barrel of oil is already approaching $50 per barrel. A couple years ago, I saw the following comparison by international sources: whereas in Saudi Arabia the production cost is somewhere around $17-18 per barrel, in Russia it is $42-47 per barrel.
This is for new fields. What about old ones?
Not a lot of money is invested there, as old fields do not produce much. I was looking at the Yuzhno-Aganskoye field. The so-called water cut there is 98%. In other words, out of the well comes dirty water, and if you let it settle, a thin film of oil forms on top. The oil is separated from the water and collected. To get one barrel of oil, you need many, many wells. Because of this, the cost of old fields is very high.
At the last OPEC+ meeting, back in the spring, Saudi Arabia announced that from October it would begin to scale back its voluntary production cuts, which are on top of OPEC quotas. Has this happened yet?
It has not; Saudi Arabia is sticking to its voluntary cuts – a million barrels per day. Plus, like everyone else, it has a quota.
The reluctance of Saudi Arabia, along with other countries you mentioned, to continue to limit production is understandable: after the US became a net exporter of oil under Donald Trump, the US and other non-OPEC countries have indeed been replacing the cartel’s lost barrels and squeezing it out of the market. In your view, does this mean that the era of OPEC is coming to an end, or does the cartel nevertheless have a niche and will survive?
In non-OPEC countries, production is gradually increasing. Moreover, in such unexpected regions as west and east Africa. We see new discoveries off the coast of South America.
At the same time, in the US, even with Washington’s encouragement of oil production, volumes have essentially plateaued, so I do not think we should expect a sharp increase in production there in the coming years. But there are other producers. There is Venezuela, which could unexpectedly make peace with the Americans and start producing more and more oil; there is Iran, which could unexpectedly take the path of reform, leading to the oil embargo being lifted in part, and so on. Meanwhile, Chinese production is slowing: it is growing, but much more slowly than before. There are also serious issues with energy use, while oil is being replaced to a significant degree by other energy sources.
“In other words, the market does not bode well for the ‘bulls’, who can boost prices by manipulating production volumes.”
OPEC’s role is undoubtedly declining…
I would like to talk a little about Russian Energy Week, which was held in Moscow at the end of September. Many people took note that the forum – technically international – was attended by a single high-ranking guest: the president of Equatorial Guinea. But there is no information about delegations from OPEC countries. Was that missed by the media or is it a sign?
This energy forum is a waste of time. Russia’s influence in the oil market is insignificant. Sure, a lot of oil is being pumped – the Ministry of Energy announced that in 2050 Russia is expected to maintain production at 540 million tons per year. This is actually the ceiling, however, and it is wishful thinking, as Russian production will fall for objective reasons.
I would like to talk a little about Russian Energy Week, which was held in Moscow at the end of September. Many people took note that the forum – technically international – was attended by a single high-ranking guest: the president of Equatorial Guinea. But there is no information about delegations from OPEC countries. Was that missed by the media or is it a sign?
This energy forum is a waste of time. Russia’s influence in the oil market is insignificant. Sure, a lot of oil is being pumped – the Ministry of Energy announced that in 2050 Russia is expected to maintain production at 540 million tons per year. This is actually the ceiling, however, and it is wishful thinking, as Russian production will fall for objective reasons.
The routes of the Power of Siberia pipeline (left), the Sakhalin–Khabarovsk–Vladivostok pipeline (right) and the proposed link between them (centre). Source: Wiki Commons
Putin did not say a word about Power of Siberia 2 in his speech at the plenary session of the forum. He did say that transport routes to the East would be built and expanded, however. Does this mean that Power of Siberia 2 is over?
They really wanted to build it, but, apparently, it’s over. The first problem is that the Chinese have flat out balked.
Instead, Gazprom must now save Power of Siberia 1, as the production from the two fields [feeding it], Kovykta and Chayanda, will be insufficient to meet the volumes specified in the 30-year contract. They can maintain this level for some years, but these two fields must produce an annual 42 billion cubic meters of gas over 30 years, of which 38 billion cubic meters is to be exported to China via Power of Siberia 1.
But they cannot keep that up for 30 years. That’s why they wanted to bring a line from the Yamal Peninsula from Power of Siberia 2 to save the contract with China. And when Gazprom realized that there would be no long pipeline from Yamal, it pivoted to the development of other fields in Yakutia. There are four fields now and eight in the future that can be used. Gazprom is planning to develop the first two in a few years and provide additional gas from there, not from Yamal.
So, we see that Gazprom has scrapped Power of Siberia 2 as a way to save its Power of Siberia 1 project.
They really wanted to build it, but, apparently, it’s over. The first problem is that the Chinese have flat out balked.
Instead, Gazprom must now save Power of Siberia 1, as the production from the two fields [feeding it], Kovykta and Chayanda, will be insufficient to meet the volumes specified in the 30-year contract. They can maintain this level for some years, but these two fields must produce an annual 42 billion cubic meters of gas over 30 years, of which 38 billion cubic meters is to be exported to China via Power of Siberia 1.
But they cannot keep that up for 30 years. That’s why they wanted to bring a line from the Yamal Peninsula from Power of Siberia 2 to save the contract with China. And when Gazprom realized that there would be no long pipeline from Yamal, it pivoted to the development of other fields in Yakutia. There are four fields now and eight in the future that can be used. Gazprom is planning to develop the first two in a few years and provide additional gas from there, not from Yamal.
So, we see that Gazprom has scrapped Power of Siberia 2 as a way to save its Power of Siberia 1 project.
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