We do not coordinate our activities with OPEC for principle considerations, we pursue our independent policy in the energy market

2 june 2015 | Rossiyskaya Gazeta

Representatives of the Organization of the Petroleum Exporting Countries (OPEC) will gather in Vienna at the end of this week. They should agree on what is more favorable for the cartel - the growth or the fall of prices. That will be the basis for world markings.

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

Alexander Kurdin, the Head of the Department for Strategic Studies in Energy of the Analytical Center, in an interview to "Rossiyskaya Gazeta" talked about what to expect from the oil cartel, what affects the prices and how that affects our lives.

- Alexander Alexandrovich, it was said, that OPEC this time might not make radical steps. But it is not profitable for all of its members.

- Now prices have risen to $65 p/b, and most important is that the dynamics is stable and even positive in comparison with the beginning of the year. Of course, the range of $60-70 p/b is not too comfortable for a number of OPEC countries. If Saudi Arabia, Kuwait, Qatar, in a word, the Arab countries of the Middle East are generally satisfied with it, so Iraq, Venezuela and possibly Iran are not.

- Is the Arab revolt against the leaders of OPEC possible, until the split of the organization?

- OPEC is working so that all the countries must reach an unanimous verdict. The vote by a simple majority or the quota was not provided, all is based on compromises. And yet, I think, the supporters of a moderate price carry out the idea that it is necessary to maintain reasonable and stable oil prices, otherwise OPEC may lose control over the world market. Most likely, this position will prevail on the upcoming meeting. Dissatisfied will remain in the minority.

- But if one of OPEC countries in opposition to its course came out of the organization, it would be able to increase exports and thus to solve budget problems.

- I do not think, that countries, dissatisfied with the OPEC policy, could significantly increase exports, even if they were not bound by quotas. Unlike the US, where the oil services industry is very well-developed, and it is easy to raise capital for new wells, in OPEC access to credit is not always easy, and competencies and technology are not enough. In addition, Iraq has a problem of political instability and the "Islamic state", so not every company would dare to work there. In fact, production costs in Iraq are not so low today.

- And Venezuela?

- Yes, Venezuela has extra-heavy oil reserves, according to OPEC, they are comparable to Saudi Arabia. However, they are quite expensive and difficult to develop. Venezuelans alone are unlikely to overpower it, and they have problems with the investment climate, there are not too much companies wishing to work there. Of course, there were cases when the composition of participants of OPEC has changed. But only small oil states or countries that actually ceased to be oil exporters left it. Indonesia, for example. Of course, the states in opposition would not mind to pursue an independent policy. But everyone knows that the OPEC collapse will further deteriorate the market, causing a drop in prices. Russia can afford to be an independent player, it itself produces about 10 million barrels a day - a third of all OPEC production. Iran, Iraq, Venezuela mined from two to four million barrels per day, it is certainly advantageous to be part of the cartel.

- If Iran becomes sanctions-free, and requires its quota of production within OPEC back, will other countries still have to reduce production?

- This is a very painful and potentially conflictual issue. The Iran's return to the market, more precisely, an increase in its exports for one and a half million barrels per day, that is, to its previous level, may occur in 2016. OPEC does not explicitly disclose the structure of quotas by countries. To a certain extent, this is justified because in some OPEC countries something is always going on - in Libya something happens, then in Iraq, Iran, and it is difficult to fix country's quota for almost half the year. Still, OPEC countries are trying to show some flexibility. The production of OPEC is slightly higher of the quota of 30 million bpd. The International Energy Agency estimates it at 30.5 million bpd.

- How do they violate their own decision?

-  OPEC's decisions recently have a disclaimer that members of the organization in emergency cases may take unilateral measures to maintain a balance in the oil market. There is no tight control over the observance of quotas. It is assumed that if the excess of the quota is significant and has a major impact on the market, then countries will gather and call violators for discipline. Now, without any lifting of sanctions, the surplus of oil in the world market is nearly two million bpd, or a little more than two percent of global production. By the end of 2015, the gap between demand and supply will be reduced. But if in 2016 Iran with its "extra" barrelsl appears, OPEC, of ​​course, will face the question: what to do? In my opinion, they still will find a way to reduce the volume of extraction. This may happen to Saudi Arabia.

- You say that an excess of oil was increased, but prices do not fall, like last year, when there was less excess. Why is that?

- Yes, the trend has changed, and this can be attributed to several factors. There was a new hotbed of tension in the Middle East, Yemen, and world prices immediately reacted on the military operation. I would not like to go into conspiracy, but sometimes there is the idea that this instability was probably inspired to put pressure on oil prices.

- The war in Yemen is so important for the oil market because of its geographic location?

- Yes, Yemen is located on the banks of the Bab el-Mandeb Strait, which closes the exit from the Red Sea. And the war is threatening a large part of shipments from the Persian Gulf. In addition, the factor of expectations plays a significant role - an excess of oil in the world market should eventually disappear. This is, in first, obvious because of reduction in the rate of production growth in North America, the unexpectedly strong demand for oil in Europe - it is half a million barrels a day more, if we compare the first quarter of this year with the same period in 2014. In the developing world, the upward trend in demand also remains. As a result, by the end of the year the oil market will be closer to equilibrium, stocks will no longer build up, and then begin to decline. Now goods stocks put much pressure on prices. Although we will not see the price of $100 p/b, but the sale is not expected.

- And what will happen to prices?

- Markets anticipate these changes and react to them in advance. Therefore, although we will not see the price of $100 p/b, but the sale is not expected.

- The US oil has declined? In January, the first bankruptcy case of the American company in mining took place. We started talking about the collapse of "shale boom." What is happening to the oil production in the United States?

- The United States, of course, is also experiencing uniquely low oil prices. However, compared to the first quarter of 2014, production in the US increased by half a million barrels of oil and condensate per day. A colossal figure, given that the entire global growth rate is less than three million barrels a day. But if in the past year the average increase was the same one and a half million barrels a day, this year it will be around 0.8 million barrels, and the following year, perhaps, there will be no increase. That is, production in the US has peaked or is close to it. This is proved with the dynamics of operating rigs in the oil industry: if in October they were 1600 in the United States, now they are only about 700, this is the level of 2010. This means that new wells developed are significantly smaller, and there will be no increase in production. The number of permits issued for drilling has decreased, that is another important indicator. We can say that low prices have played a role in relation to the US oil industry. And we must, of course, take into account that oil reserves in the US, even difficult, are not limitless.

- In the US the "shale boom" is based on the success of small-scale producers. What prevents us to apply this expertise?

- US differs from many countries, because the owner of the land there has the property of the subsoil, so he is interested in its development. If he invites the oil company on his site, he will receive a significant, or even the bulk of the revenue from the wells. In Europe and Russia everything is made in a different way. The subsoil, minerals are the property of the state, and site owners are not interested in the fact that something will be sought and mined on their territories.

But we have a new production primarily carried out in sparsely populated, remote regions - in the north of Western Siberia, Eastern Siberia, the Far East, and now in the Arctic. And there is a completely different problem than in the United States, where production areas have human resources and infrastructure. In addition, they have, as I said, a well-developed oil services industry. There is a competitive and high-tech industry, and, in fact, because of this, production of shale became possible. Add to that the high mobility of the population, which easily moves from state to state. The rotational method, used in Russia, is more expensive. However, we have our own advantages.

- What do messages of the Ministry of Energy about consultations with OPEC mean? After all, aren't they talking about negotiations on reduction of production?

- We do not coordinate with OPEC for principle considerations, we pursue an independent policy in the energy market. But the expert circles discuss, that if all big producers come together, then it is possible to reduce the oil. OPEC alone is not ready to take on this burden. By the way, in the period of crisis, OPEC cut production in an effort to support prices, and Russia, on the contrary, increased it. And it turned out that Russia is benefiting from price stabilization, achieved by the OPEC. We have to admit, perhaps, that it was so. Another thing is that now we should not rely on the support of OPEC. Consultations mean the exchange of information. They are useful at least in order to make an objective picture of the market, because not everything that is happening in reality is reflected in the analysis. In the current uncertainty, even a common understanding of the situation is quite important.

- It will be a year soon as fuel and energy complex is tested by sanctions and low prices. What has changed?

- Of course, oil companies complain, but it is a standard situation for the oil industry and government relations. Indicators of oil production and processing do not give cause for panic. Yes, companies now require additional funding from the National Welfare Fund, and ask to ease environmental requirements, safety requirements for especially dangerous objects, to simplify the issuing of licenses for exploration and production. But again, it is not clear that they are in some kind of a dangerous condition. At least, in tone of discussion, that we have with them, we can see that they are trying to solve fundamental problems in the business. In my opinion, a "tax maneuver" in the oil industry, the possible introduction of the tax on financial results, the debate on access of private companies to the shelf play or can play no less important role, than sanctions and low prices. That will actually determine the position of oil companies. For example, small oil companies, that are not actively engaged in the modernization of production, found themselves in a difficult situation in the implementation of "tax maneuver." Vertically integrated companies have large enough supply of capacity. Of course, they will reduce the investment program, but it is a global trend. OPEC expects that from 2014 to 2016 investment in countries outside the organization will be reduced from 750 to 550 billion dollars.

- The Finance Ministry and the Ministry of Energy have no unique understanding about the tax on financial results. The Ministry of Energy argues that only such a system will allow to develop hard and dwindling oil reserves. The Ministry of Finance is opposed to it. Who is right?

- The carefull position of the Ministry of Finance is due to the fact that the transition to the tax on financial results may suddenly generate a sharp oil costs rise. So, they pay less tax, responsibility for this will be borne by the Ministry of Finance, and this will hardly lead to an improvement of the industry. The question is difficult, and not only in Russia. Developed countries, which are faced with the depletion of deposits - Britain, Denmark, the Netherlands, try to move to a system of the tax on financial results. It is fair to tax the actual income that was received, but not the proceeds in case when costs grow or even losses take place. Then it is logical to just close the well. On the one hand, we now turn to more complex and costly deposits, on the other - they still will be a smaller portion of our future production. At least 2/3 of the production in the next 20-25 years will be in the same traditional regions. Yes, there will be depletion effects, but costs are not comparable with the production on the Arctic shelf. It seems that the hybrid approach is optimal. There are several countries where there is only the tax on revenue or production volumes, as in Russia, or the countries, where the tax is only on the profit. Generally, there are both approaches in various combinations. Why should not we leave the old system in old fields? A new may be tested in pilot projects, and only after that we may extend its application.