MOSCOW (Bloomberg) — Russia has committed to cooperate with OPEC by cutting as much as 300,000 bpd from its oil output but offered no clear method for enforcement, creating uncertainty about how easily the reduction can be delivered.
Output cuts should be spread proportionally between Russian producers, who have said they support the move, Energy Minister Alexander Novak told reporters Thursday. Yet no oil companies have so far taken the lead on explaining how they will implement the cuts, said Chris Weafer, a partner at Macro Advisory. State-controlled Rosneft PJSC is likely to bear most of the burden, according to Renaissance Capital.
“Trying to get an agreement for a pro-rata cut amongst the Russian oil producers, even if mandated by the Kremlin, would be akin to herding cats,” Weafer said by email Thursday. “All would want to wait to see what the others do first.”
The Organization of Petroleum Exporting Countries confounded skeptics on Wednesday by reaching an agreement to cut production by 1.2 MMbopd. Russia added to the surprise by saying it too would reduce current output of 11.2 MMbpd—a reversal for Novak who had for months expressed Russia’s preference for freezing at that level. While crude futures jumped above $50/bbl on the news, questions remain over how the supply curbs will be implemented.
Lukoil PJSC Russia’s second-largest producer, supports OPEC’s moves to stabilize global oil markets, Pavel Zhdanov, the company’s director of capital markets and mergers and acquisitions, said on conference call Wednesday. It is too early to get into details, he said.
The press services of Rosneft, Russia’s largest producer, and Lukoil declined to comment on any measures they would take to enact cuts.
“Rosneft looks like the number one company that should take the biggest share of the cut,” Ildar Davletshin, an oil analyst at Renaissance Capital, said by email. It controls almost 50% of Russian oil output and it has one of the lowest shares of so-called greenfields, or new developments, in its current production portfolio, he said.
Cuts are more likely to be achieved by dialing back drilling on older fields, allowing the natural decline rates to grow, as opposed to stopping new projects, he said.
An output reduction spread proportionately among large companies won’t result in changes to overall levels of investment in the industry, Olga Danilenko, director of oil and gas research at Prosperity Capital in Moscow, said by email. Instead, they would probably shift funds to longer-term projects, she said.
Russia plans to meet with OPEC producers and nations from outside the group in the next 10 days, during which the country will likely sign a memorandum confirming the supply reductions, Novak said in a briefing Wednesday.