On October 22, 2018, Khalid A. Al-Falih, Saudi Arabian minister of oil, made an official announcement regarding the start of negotiations with the Russian Federation on the creation of a new intergovernmental organization OPEC+, which aims to formalize long-term official relations between OPEC member-states and other leading oil-producing countries that are not OPEC members. According to the minister, the principal deliberative body of the new organization should be the international secretariat with its headquarters most likely situated in Vienna; all necessary organizational measures and registration of the new organization should be completed by the end of December 2018.
Khalid A. Al-Falih emphasized that in the period from 2014 to 2016 and till now, OPEC member states, the Russian Federation and other oil producing non-member states of OPEC cooperated informally, and such cooperation, in the opinion of the minister, demonstrated its ability to achieve common goals, in particular: controlled reduction of oil production by 1 million barrels per day and balancing of world demand and supply of oil in order to maintain its stable and safe functioning. As Khalid A. Al-Falih noted, in order to create a new alliance of oil producing countries, all participating countries will have to sign interstate agreements on strategic cooperation in the oil sector. The agreement shall have no expiry date, be effective for an indefinite period, be open to all signatories willing to join OPEC+ in the future.
According to Khalid A. Al-Falih, there will be close cooperation established between OPEC and OPEC+. The main objective of OPEC+ will be coordination of volumes of oil production by the participating countries. Taking into account the considerable volumes of oil production, the economic and political weight of the Russian Federation, the leading role in the secretariat of OPEC+, according to Khalid A. Al-Falih, shall be performed by the Russian Federation. The representative of Saudi Arabia in this alliance shall act as co-chairman. In addition, the minister noted that the OPEC+ as well as the OPEC should adhere to the rule “one country, one vote”.
Referring to the imminent tasks of OPEC+, the oil minister of Saudi Arabia drew particular attention to the prospect of imposing US sanctions on Iran and noted that the trajectory of further development of the world oil market remains uncertain. Uncertainty may further increase in the event of deterioration of the domestic political and economic situation in Venezuela, Libya, Mexico and Nigeria, as well as in the event of a slowdown in the development of the world economy or difficulties in the further development of shale oil extraction by the United States. Thus, according to an official, OPEC+ will focus its work on prevention of extreme fluctuation in oil prices and maintenance of oil demand and supply balance at the world market.
Khalid A. Al-Falih noted that, given the current level of oil production of 10.7 million barrels per day, in the event of negative scenarios for the world oil market, Saudi Arabia has an additional capacity of about 1.3 million barrels of oil per day, which can be put into operation rather quickly and which are able to mitigate price fluctuations in the world oil market.
According to Nick Cunningham, expert of international energy markets, Saudi Arabia accepts Russia’s leadership in the future OPEC+, taking into account Riyadh’s positive assessment of the prospect of growing oil production in Russia.
Thus, according to Nick Cunningham, in September 2018, despite the generally poor state of the Russian economy, the effect of international sanctions, the Russian oil industry set a new historical record by raising oil production to 11.36 million barrels of oil per day. According to N. Cunningham, during the last decade, Russia’s potential to increase oil production has always been underestimated by Western analysts and even officials of the Ministry of Energy of the Russian Federation.
Thus, in 2005 V. Khristenko, the Deputy Prime Minister, argued that Russia’s oil production rate of 9.6 million barrels of oil per day would be substantially reduced by the end of 2010. Other analysts claimed that Russia would be able to reach the level of oil production of 10.2 million barrels of oil per day only in 2020.
Regarding Russia’s ability to further increase oil production, Nick Cunningham noted that such a scenario is probable in case of acquisition and application of the latest western technologies that are able to improve the oil production rates in those wells where oil flows are shrinking or to restore oil production from wells which were sealed in the Soviet Union.
Further growth of the world oil price to 100 – 120 US dollars can also lead to the restoration of oil production at low-flow wells, which were sealed for economic reasons for a period of low oil prices. In addition, the high oil price will allow Russia to revisit the development of Arctic oil reserves, which have the potential to add 20-30% to the current level of oil production in the Russian Federation.
As expert believes, another important factor in increase of oil production, which has not yet been addressed by Russia, is free competition between state and private Russian and international oil companies. Provided that the Russian Federation decides to liberalize the oil market, world companies that can significantly increase oil production in Russia can enter the country.
It is known that after the international companies entered the oil market of Kazakhstan in 2010, oil production in the country raised by more than 65% over a relatively short period of time. However, in Russia there is a tendency to monopolize the oil market by state-owned companies. After the acquisition of the private oil company Bashnafta by Rosnafta in 2017, due to ineffective management, the company’s oil production decreased by 3.6%. At present, about 300 oil and gas companies operate in Russia. Meanwhile, only 12 companies provide 90% of the total oil and gas production in the country. For example, in the United States, there are 9,000 medium or small companies that rigorously compete for the production of 54% of oil and 85% of gas.
Among other important factors which will affect the possibility of increasing of oil production in the Russian Federation, Nick Cunningham determined the efficiency of the oil industry in Russia in general. The expert noted that, despite significant investments made in the development of the industry over the past 20 years, the level of operation of existing wells in Russian oil companies does not exceed 28-33% (in the UK, this figure constitutes 42-43%). Nick Cunningham explains that this situation is attributable to the sector policy of the government, which does not set strict requirements for oil companies to extract all available oil volumes from the oil fields the lifespan of which is coming to an end. If this issue is regulated, and the control over companies is strengthened, oil production in the Russian Federation, according to Nick Cunningham, may be increased by 800 thousand barrels per day.
According to the expert, provided that modern principles of branch management and effective regulation of its activities are introduced and the market of the oil and gas industry of the Russian Federation remains open for foreign companies and investments, the volume of oil production in the Russian Federation may increase significantly in the medium term.
Consequently, the announcement by Saudi Arabia of the creation of a new oil cartel Russia – OPEC+ confirms the intentions of both parties to control the world oil price over the long-term period of time. At the same time, referring to the political weight and military power of the Russian Federation in the world, Riyadh demonstrates readiness to concede a leading position in the new organization to Russia.
The aggregate of such factors as the achievement of Russian historical peak of oil production once again (up to 11.36 million barrels of oil per day), the growth of the world oil price and the probability of its further growth in the medium term, the prospect of establishment of a new oil cartel with the leading role of the Russian Federation reaffirms Russia’s increasing role on the world oil market.
