By Olesya Astakhova and Vladimir Soldatkin
WEST SIBERIAN OIL FIELDS/MOSCOW (Reuters) – Russia’s oil industry has argued for years that it cannot cut output to support falling global prices for purely technical reasons; in reality it can – as long as it has the political will.
The days that oligarchs decided production levels according to their own private interests are long gone. Today the state directly controls roughly half of output, with most of the rest in the hands of business figures who are loyal to President Vladimir Putin, or at least will not oppose his wishes.
Moscow has long ruled out an output cut coordinated with other producers, even during the collapse in crude prices since the middle of 2014. However, Energy Minister Alexander Novak said on Thursday Saudi Arabia had proposed that all exporters should reduce their production by up to 5 percent, adding that Russia was ready to discuss the idea. [nL8N15C3XR]
Russia’s oil industry has a chequered record on carrying out requests to cut production.
On previous occasions when the Kremlin said it would consider cooperating with OPEC, exports kept flowing or even increased. In some cases oil companies shifted their cargoes from the pipeline system to the railways or tankers where there was less state oversight.
The only time Russia implemented a brief cut was in early 2002 when Moscow reacted to Brent crude prices that were below $ 20 per barrel (LCOc1) – about $ 15/bbl below Thursday’s level.
Since then the picture has changed. The Kremlin has consolidated its control over of Russian oil production since the demise of the giant Yukos energy company following the arrest of its head, Mikhail Khodorkovsky, in 2003.
An industry source noted this consolidation and the increased power of Putin, who oversees all major energy deals in Russia, saying that oil companies are now much more likely to fall into line with a production cut if needed.
Novak floated the idea at a meeting with energy company executives on Wednesday evening at his ministry. A source briefed on the meeting said those present did not oppose it. “Yesterday’s meeting has shown that the oilmen share the same views,” the source said.
NATURAL REDUCTION
Russia has a large number of oil wells where productivity is low or declining. Production there can be sustained only by sinking new wells or pumping in water to increase the pressure, measures which are costly.
Such wells are barely profitable with prices so low, so the companies who operate them could actually save money by falling into line with any production cut ordered by the Kremlin.
“The longer the oil price remains in the $ 25-35/bbl range, the greater the likelihood of a production decline, making preemptive voluntary cuts more acceptable to oil producers,” Uralsib brokerage said in a research note.
In this way, Russia could present lower production as its contribution to coordinated international action to ease the global glut, when output might have dropped off naturally without any state intervention.
CONVENTIONAL WISDOM
Conventional wisdom among Russian oil industry veterans has it that turning off a well in the Siberian taiga, where most of the oil is found, is far harder than in Saudi Arabia or Texas. They cite permafrost, even though the soil is frozen all year round only in some production areas.
In particular, they argue that if a well is turned off, the reduction in pressure will allow rocks to deform. To restart production could then require drilling costly new wells to restore access to the reservoir.
Scientists and a new generation of industry specialists are challenging this consensus.
“Russia is able to cut oil production without any damage to the layers of soil,” said Alexander Shpilman, the director of analytical centre on subsoil usage in Khanty-Mansiisk, the heartland of Russian oil production.
“Depleted wells have already been shut, there is nothing catastrophic about that,” said Shpilman, the son of a celebrated Soviet oil scientist, in whose honour a Western Siberian oil field has been named.
That Russian oil companies can regulate their output is also clear from a seasonal pattern: they lower production in the winter due to the cold weather, and increase it in the summer.
A government source said Russia has the technical capability to mothball some of its crude production.
“That’s what it did in the 1990s… And the technologies have been developing fast. The oil industry is a hi-tech industry,” the source said.
(Reporting by Olesya Astakhova in Siberia and Vladimir Soldatkin in Moscow; additional reporting by Margarita Papchenkova; editing by David Stamp)
