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Russia Ready for Painful Production Cuts

Russia has confirmed it is ready to participate in a broader oil production curb pact among the Opec-plus alliance and other leading producers, including the US. The energy ministry said Apr. 8 it is ready to consider a cut of 14% -- or a whopping 1.6 million barrels per day -- from its first-quarter production level, which averaged 11.3 million b/d, as part of joint efforts to remove at least 10 million b/d from the market.

A megadeal aimed at lifting prices off recent lows is to be discussed Apr. 9 at an extraordinary virtual meeting of the Opec-plus group called by Saudi Arabia, to be followed by a G20 energy ministers video conference the next day. There are still many moving parts, including the strained relations between Moscow and Riyadh, which blame each other for launching the price war, and the form of US participation in the cuts, without which Russia believes the deal would make no sense.

Moscow's choices are limited, though, as historic drops in demand for oil products around the world because of the coronavirus outbreak threaten to overwhelm available storage capacity in less than a month, leaving Russian producers with little option but to shut in wells. There is a silver lining as well: By effectively dressing up cuts that would have been made in any case, Russia could intensify its dialogue with the US that could potentially involve the sensitive issue of sanctions against Russian projects and companies (NC Apr.2'20).

Following a telephone conversation with US President Donald Trump, President Vladimir Putin last week held a meeting with the CEOs of Russian major producers -- including Rosneft, Lukoil, Gazprom Neft and Tatneft -- as well as members of the Russian government. He said that "it is necessary to unite efforts in order to balance the market and reduce production as a result of these coordinated efforts," naming the Opec-plus members and the US as participants. He added that "according to preliminary estimates, I think that we can talk about a reduction of more or less 10 million b/d," without elaborating on what Russia's quota could be.

Sources close to the Russian government tell Energy Intelligence the final figure should become clear in the course of negotiations. According to Putin, the base line for the cuts should be the production level in the first quarter of this year when Russia's output averaged 11.305 million b/d. The Saudis will probably insist on the current level as their output has recently grown by nearly 2.4 million b/d to nearly 12 million b/d.

A lower range cut of 1 million-1.5 million b/d was floated earlier by mass media and discussed by analysts in Russia who believe that the number represents calculations coming from Russian companies which think they would be able to restore those volumes without major losses in future. Some analysts believed that 1 million b/d would be the maximum as it already represents 20% of Russia's exports and going beyond that could pose a risk of losing market share. Besides, shutting in wells and bringing them on stream later involves costs that should not exceed any gains from the potential production cut deal. The final command will come from the Kremlin.

According to Konstantin Simonov, expert of the Russian Valdai discussion club and general director of National Energy Security Fund think tank, Russia is going to face the biggest problem with cutting as it is not a swing producer, as opposed to Saudi Arabia and the US, and has a much greater number of wells. Conserving the wells represents a real hurdle for Russia, chiefly because of the extreme cold conditions, Simonov said. He added that shutting in wells and bringing them back on line takes time which creates the risk that Russia won't be able to increase production quickly when demand starts recovering, ceding its share of the market to other players as a result. "This is the time for responsible decisions, and the decision on production cuts -- that in the end could last only for a couple of months -- should be carefully weighed," he told Energy Intelligence.

There is no economic sense in shutting in or holding operations at new fields, although it would be easier. But those fields enjoy tax breaks, which are limited in time. Also, companies need to recoup capital investments at those fields, where the barrels are usually more marginal.

Russian companies say that even if there is no deal, they would each have to resort to shut-ins in any case in response to plummeting demand. Those decisions would be made on a case-by-case, field-by-field basis. Some of the wells can easily be brought back to production, even in West Siberia, home to most of the mature deposits, analysts say. Others may never come back on stream again.

Before shutting in wells, companies could reduce the pace of the pumps at mature fields, then cut the amount of geological and technical work each company does. Also, companies might reschedule some planned maintenance works as happened at Gazprom Neft's Prirazlomnoye and Novy Port fields and even the Messoyakha acreage in past years.

Nelli Sharushkina and Nadezhda Sladkova, Moscow

Energyintel.com, April 9 2020


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