OPINION: Russian authorities this week switched to a familiar tactic of employing word games to prop up hopes for the removal of excess oil from the global market and arrest the decline of oil prices in Europe and the US.
Following his conversation with US President Donald Trump earlier this week, President Vladimir Putin said the Kremlin “has to work out such solutions together with the main [global] producers and consumers that will mitigate the situation on the [energy] market”.
Novak takes to the airwaves
That call was heard by Russian Energy Minister Alexander Novak, who all of a sudden was made available for televised interviews in which he revealed his almost round-the-clock communication with Opec members and other oil-producing countries.
However, the minister and the Kremlin have strongly denied a suggestion made by Trump in a Twitter message earlier this week that Russia and Saudi Arabia are talking directly to act jointly to reduce oil deliveries to the already saturated global energy market.
Novak has made clear that, while the Kremlin is eager to discuss “the situation with the oil price” with as many parties as possible, it does not want to make any commitments before the world passes the peak of the Covid-19 pandemic and global demand shows the first signs of recovery.
In his most recent interview to state television channel Rossiya24, he reiterated that Russian oil companies have “competitive advantages” over high-cost producers elsewhere in the world.
Kremlin 'comfortable' with low prices
Industry observers in Moscow believe that, in the short term, the Kremlin is comfortable to see oil prices in Europe at between $20 per barrel to $30 per barrel, to avoid getting negative netbacks on conventional oil developments in West Siberia where, according to Novak, production costs are running between $3 and $7 per barrel.
Although such prices leave little in terms of revenues for the Russian budget, they can sustain sufficient operating margins for major oil companies in the country, including its largest producer, Rosneft, which is run by Putin’s long-time associate Igor Sechin.
The country’s second largest producer, Lukoil, on Friday called for an immediate joint action by Russia, Saudi Arabia and the US to cut their total output by between 8 million and 9 million barrels per day. However, analysts expect strong opposition to any cut from Sechin.
Sechin has repeatedly argued for the removal of any production restrictions to bring the oil price down and, thus, push high-cost shale oil producers in the US out of business.
Ex-Yukos boss speaks up
According to Mikhail Khodorkovsky, the former chief executive of what was once Russia's largest oil producer, the defunct Yukos, the Kremlin will not be ready for any action on the global energy market until Putin and Sechin realise some political and personal gains from the oil price crisis and Covid-19 pandemic.
Country-wide restrictions on working — extended on Thursday until the end of April in response to Covid-19 — are expected to drive millions of Russians to poverty and lead to closures of small to medium-sized private businesses.
Opposition leaders in Moscow believe restrictions and the economic downturn will play well for Putin, whose popularity is tanking, as more people in Russia will depend upon direct financial support from authorities, and may feel compelled to vote for Putin’s plan to remain the top Russian leader until 2036.
Meanwhile, some observers note that Sechin has taken an opportunity to increase his grip over Rosneft, with the Russian state seeing its controlling interest in the oil producer falling to just above 40% after it parted with a 9.6% shareholding in Rosneft in exchange for its holdings in Venezuela.
In the last two weeks, a company’s subsidiary, RN-Capital, has also been buying millions of cheap Rosneft shares from the market to bring them under control of the management.
US and European politicians and producers, arguing for the benefits of a higher oil price, would be well served not to hold out too much hope that Russia will easily agree to extend a helping hand by agreeing to a large production cut.
After five years of sanctions against the country, the Kremlin may well believe it has strong reasons for not answering the call.
(This is an Upstream opinion article.)