Oil Output Cuts Deal: Who Is the Winner?

14.03.2017

On March 6-10, 2017, Houston, Texas, hosted the CERAWEEK 2017 International Energy Conference, which included a ministerial breakfast titled "The Future of the Russian Energy" with the participation of Alexander Novak, Russian Minister of Energy. One of the key topics discussed by the conference participants was compliance with the last year's deal of the leading oil-producing states to cut oil output. Danila Bochkarev, a Brussels-based EastWest Institute fellow focusing on economic security issues, commented the results of the forum in an interview with valdaiclub.com.

The reduction of oil production by the OPEC states and Russia and the subsequent increase in oil prices have provided significant support to the US oil industry. However, expectations that the Donald Trump administration will pursue a friendly policy toward the oil industry have also played their role here.

Thus, oil production in the United States has increased from 8.7 million barrels a day by the end of November 2016 to 9.1 million barrels a day in early March 2017. The number of operating drilling rigs has increased from 477 to 609 over the same period. This trend seems to be behind Saudi Arabia's possible decision not to renew automatically the oil production cut deal in order not to promote the development of shale oil industry in the US and other expensive oil production projects.

Such a freezing is important for producers of shale and other "complex" types of oil, as it will allow them to be confident that the oil price will be above $50 per barrel and, accordingly, to expand the horizons of investment planning. For example, ExxonMobil, inspired by the (temporary) trend of rising prices, announced a decision to invest more than $20 billion in oil production in the United States.

With prices at the level of $50-55 per barrel, traditional producers with low production costs, such as Russia and Saudi Arabia, become the winners. However, higher prices of the "black gold" would of course be preferable for their budgets. The International Energy Agency (IEA) made a correct statement that with low oil prices there is a risk of underinvestment in the oil sector and, as a result, oil shortages in the medium term.

At the moment, the deal to cut oil output is generally implemented. Saudi Arabia lowered oil production even more than it was required. In early March, Russia cut the production by 160,000 barrels per day and will come to a reduction by 300,000 barrels at the end of April. However, some oil producers have at times maintained oil production at a fairly high level and their long-term strategy to reduce production is not entirely clear. For example, in January 2017, Iraq produced 4.47 million barrels per day with a quota of 4.35 barrels. It is still unclear whether Iran is interested in the long-term game of oil production cuts. There is also intrigue with the accession of American companies to the deal. This possibility remains unlikely.

During the ministerial breakfast – an event for investors, attended by the leaders of the Russian energy industry – Alexander Novak spoke about Russia's role and contribution to the global energy sector as well as prospects for oil and gas production. Also, contacts with Indians were very interesting: Russia and India have many coincidences in the field of natural gas, especially LNG. India is becoming one of key players in the LNG market and plans to build terminals for LNG regasification with a total capacity of 50 million tons per year by 2020. Russia is interested in this promising market, as it plans to gain 15% of the world LNG market as a gas supplier. Moreover, the Russian energy sector is interested in Indian investors.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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