How Moscow quarreled with Riyadh over freeloaders aboard OPEC and why it all ended in a collapse
US, WASHINGTON (ORDO NEWS) — The confrontation between the leading oil powers – Saudi Arabia, Russia and the United States – led to a negative price for oil futures. How it was?
In the spring of 2013, President of Rosneft Igor Sechin went on a business trip across the Atlantic to the main world oil and gas conference. These were the best times for oil industry workers – quotes were at the level of $ 100–110 per barrel. Heads of global concerns ExxonMobil, BP, Royal Dutch Shell, major investment banks and influential politicians such as former US Presidents George W. Bush, Bill Clinton, former Fed Chairman Ben Bernanke traditionally gathered in Houston.
After the purchase of TNK-BP and the conclusion of contracts with Glencore and Vitol for $ 10 billion in 2013, Rosneft entered the world major oil league. In his report, A New Era of Oil”Sechin outlined the scale of Rosneft’s future partnership with the West:” We invite leading companies – suppliers of equipment and services – to participate in the development of the Arctic shelf. Only at the first stage of offshore development will total investments amount to about $ 500 billion – the effect will be tangible on a global scale.”
After a series of meetings behind closed doors, Sechin looked pleased and confident in the future. In the spring of 2020, the price of oil fell to historic lows, futures began to trade in negative territory, oil companies are thinking about preserving wells and are looking for places to store surpluses.
On the way back from the USA, on behalf of President Vladimir Putin, the head of Rosneft stopped by the funeral of Venezuelan President Hugo Chavez, with whom part of Moscow’s global plans to develop Latin America’s energy markets were connected in the USA. A year later, the West imposed economic sanctions on Russia. Sechin’s global positioning plans had to be adjusted.
The place of the Russians at the Houston oil site was taken by Arab sheikhs and Chinese top managers. Meanwhile, American oil production confidently went uphill. Thanks to huge investments and know-how, the Americans managed to reduce the cost of shale oil from $ 70 to $ 35–40 per barrel, which allowed them to increase their market share. They could not calmly watch the growth of a new competitor in Moscow and Riyadh. Indeed, in Russia, oil revenues form about 40% of the budget, in Saudi Arabia – more than 70%. The big game has begun. What did she lead to?
In April 2020, the co-owner of the small company Capital Oil, Khamzat Askhabov, stopped the last of four oil wells. “The situation began to deteriorate sharply from about March 6, and from March 9, the market collapsed,” he recalls. “Traders started bidding at 5,000 rubles per tonne of oil, which is four times lower than usual.” Production taking into account the mineral extraction tax became completely unprofitable, the company in which Askhabov invested about $ 40 million over 20 years had to be frozen.
“Many people think that oilmen are sitting on money. In order to achieve profitability, it took our company 15 years, ”Askhabov explains sadly. “Many of the wells turned out to be“ dry, ”and the development of each of them cost about $ 1.5–2 million.” He was extracting oil in the Saratov region, recently he was preparing to sign an investment agreement for the development of a new field worth tens of millions of dollars, and now “even profile investors who gave money on draconian terms will turn their nose back.”
The Assoneft Association (which unites the small oil companies of Russia) believes that about 100 independent oil companies will face a difficult situation and may stop production. In an appeal to Prime Minister Mikhail Mishustin, the association is sounding the alarm: the company’s revenue will plummet due to a collapse in world oil prices and a decrease in demand associated with the coronavirus pandemic; most companies will not have enough money for settlements with the state, banks and suppliers.
Capital Oil by Khamzat Askhabov and hundreds of other independent Russian oil producers fell under the rink of global players fighting for their share in the global energy market. Competition has grown in recent years, which has brought down prices. Saudi Arabia has repeatedly called on producing countries to be jointly and severally liable.
Saudi Arabia did not want to balance the market by reducing its own production. And even more, she was not ready to sacrifice income for the sake of stability of American and Russian oil workers. “Many people want OPEC to stabilize the market in difficult times, and no one wants to take the burden of reducing production. Everyone needs money, ”said Saudi Arabian Oil Minister Ali al-Naimi in 2016.
Oil quotes have been in a fever for the past five years: the decline alternated with periods of recovery. Independent oil producers led sluggish consultations on coordinating production volumes with the OPEC cartel, but did not dare to take radical steps. When prices tested a new low of $ 27 per barrel in 2016, OPEC decided to return to regulating the oil market.
For this, it was necessary to expand the range of agreements with independent producers, involving 11 countries in the deal: Russia, Azerbaijan, Kazakhstan, Mexico, Oman, Bahrain, Brunei, Malaysia, Sudan, South Sudan and Equatorial Guinea. The negotiations were grueling: each country bent its line, taking care of its own budget, recalls one of the Russian participants present there. December 2016 for years, oil industry workers shook hands – the agreement envisaged a decrease in oil production by 1.7–1.8 million barrels per day. OPEC took a large share of the restrictions (1.2 million barrels per day).
The actions of the expanded OPEC + were successful: prices began to recover slowly. But in the fall of 2018, Russia saw a new threat. “Apparently, the United States has its own vision of its role in this process, it’s a pleasure to get used to the role of the regulator of the world oil market, guided by far from market methods and its own, far from disinterested interests. OPEC, in turn, reduced its share of the global oil market in favor of the American shale industry, ”Sechin explained at the Verona Energy Forum. In his opinion, while Russia was working in the framework of a deal with OPEC, the US oil industry was growing at a rapid pace, “which has come to first place in the world in oil production, this has never happened.”
The main oilman of Russia listed: during the period of the agreement with OPEC, several export pipelines and offshore terminals were built in the United States, and the American gas industry and oil industry began active entry into the European market. “Ten times, for example, increased supplies to India, six times – to Europe. Well, please draw conclusions. Do we need to maintain our market share or not? I think it is necessary, ”Sechin reasoned.
But growing US oil production was only part of the problem. The cheap liquidity of central banks pushed the growth of oil and gas projects in many regions of the world – in the USA, Africa, and in the basin of the northern seas. Banks were actively issuing loans, new oil projects were launched, as a result, the growth rate of production began to overtake demand, said Ole Hansen, head of strategy for product markets at Saxo Bank.
The market continued to stay afloat, but rather by inertia. And then a new blow suddenly struck. The coronavirus epidemic that has spread throughout the world and the lockdown in most economies have plunged global demand for raw materials.
Back to the 1990s
Fatih Birol, director of the International Energy Agency (IEA), calls April 2020 the bloody month in the history of the oil industry. “Because of COVID-19, the world economy has lost a year of growth, and for the oil market it’s a loss of almost a decade,” he said. According to the IEA, demand in April fell by 29 million barrels per day, to the level of 1995.
In March, Moscow refused to join the oil cartel deal, which came as a surprise to many. According to the director of the NES Energy and Natural Resources Economics program, Vitaly Kazakova, Moscow hoped with a little blood (due to a moderate decrease in oil prices, but maintaining production volumes) to achieve an increase in the market share in the medium term after leaving the market for shale producers with high costs prey.
“Russia saw shale producers as freeloaders aboard OPEC +. Price reduction was a pressure tool that could pull competitors out of the market and help their own manufacturers, ”adds Stephen O’Sullivan, senior fellow at the Oxford Institute for Energy Research.
Russia was ready for a drop in oil prices – too many new projects in the world have been launched in recent years, says Deputy Energy Minister Pavel Sorokin. Economic calculations of the Ministry of Energy showed that, excluding coronavirus, prices will return to the level of $ 40–45 in the second half of 2020 only due to overproduction of oil. But Moscow underestimated the power of the blow. A catastrophic short-term drop in demand, coupled with increased production volumes, resulted not only in a collapse in oil prices, but also led to the threat of disruptions to the entire oil production infrastructure due to overfilling of oil storage facilities.
Saudi Arabia seized the moment and began to reduce prices for European suppliers. And then Russian President Vladimir Putin intervened in the negotiations of the oil industry. He asked the Russian Minister of Energy to soften his position and contacted the US President and the King of Saudi Arabia several times. “These were ongoing negotiations in detail. Without the president’s participation, the deal could not have taken place, ”Energy Minister Alexander Novak told the federal television station .
On April 12, 23 oil producing countries finally agreed to reduce production – from May 1 to 9.7 million barrels per day. But it was too late: the market entered a peak, and the price of Brent hit $ 11. The most emotional event occurred on April 21, when the price of futures for US WTI oil went into the negative area – minus $ 40 per barrel. Texas senators immediately demanded that U.S. President Donald Trump impose sanctions against Russia and Saudi Arabia for conspiring against US oil.
What is happening with oil in 2020, Saudi Arabia gently calls the period of disagreement. Such disagreements happen in every family, but usually families cannot stand it outside their circle, Saudi Arabian Minister of Energy, Industry and Mineral Resources Prince Abdulaziz bin Salman Al Saud told Bloomberg: “Resolving disagreements makes families stronger. No divorce is planned.”
Is the situation stabilizing after the new OPEC + deal? “The decline in production will occur automatically. If manufacturers negotiate [on an additional reduction in production], this will only be a demonstration of control over the price situation. But by doing so, they will confirm a clinical fact, ”said German Khan, co-owner of Alfa Group, to RBC . Nonetheless, Lukoil’s vice president, Leonid Fedun, nevertheless considers the deal useful : “Thanks to the agreement with OPEC, we can go all the way to the edge, and without this agreement, of course, we would be flooded with oil and have to stop the wells in emergency mode.”
Until the balance between supply and demand comes to a reasonable state, the market will be in a fever. “Interesting times await the industry,” predicts Stephen O’Sullivan. “However, over the 40 years of my work, the oil sector has never been predictable.”
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