Page 7 - FSUOGM Week 37 2019

FSUOGM COMMENTARY FSUOGM
necessary to co-operate in managing supply, in order to stimulate a market recovery. Neither side wants to jeopardise this truce.
Russian oil production peaked at 11.45mn bpd last December, before the latest OPEC+- agreed cuts came into effect this year. Output averaged 11.294mn bpd in August, topping the rate Moscow has pledged to cap supply at under the pact, and remained high at 11.27mn bpd in the first half of September. As such, Russian oil producers are unable to boost production sub- stantially without breaching their commitments.
Limited opportunity
Even if Moscow were to flout the OPEC+ agreement, output could only grow by around 160,000 bpd from August before reaching last December’s record. In theory, Russia might be able to surpass this level. However, the country traditionally maxes its production in winter, when Siberian ground is firmer and can sup- port increased drilling, and when there is higher domestic gas use, resulting in a boost in produc- tion of condensate. Reactivating wells takes time in any conditions – potentially too long for Rus- sia to fill the Saudi gap.
The bulk of Russian crude is also produced in its western regions and sold in Europe, where Saudi Arabia’s market share is limited. The big- gest buyers of Saudi crude, on the other hand, are China, Japan, India and the US. Russia also sells large volumes to these markets, having jos- tled with Saudi Arabia for the position of China’s top supplier for years. But there are limits on how much oil it can physically divert eastwards, with the Eastern Siberia – Pacific Ocean (ESPO) pipeline – the main route for Russian oil to Asia – already operating at near full capacity.
Furthermore, most of the oil Russia currently sells to Asia is sweet, originating in Eastern Sibe- ria. Few new projects have started up in Eastern Siberia in recent years, limiting how much extra production could be brought on stream. And
Russia cannot simply substitute these supplies with the sourer blends it produces in Western Siberia and the Volga-Urals region, as many of its Asian customers have refineries configured to process sweeter crude.
De-escalation
Politically, Russia also has reason to respond cau- tiously to events in Saudi Arabia. Yemeni rebels claimed responsibility for the attack, although the US has been quick to pin the blame on Iran, Russia’s main ally in the Middle East. The event could rally other countries with vested interests in the Middle East against Tehran, undermining Moscow’s influence in the region. It also jeop- ardises Russia’s relationship with Saudi Arabia – which has grown stronger since the pair began co-operating on oil supply – potentially pushing the kingdom further into the US orbit.
EU opposition to re-imposing sanctions on Tehran has driven a wedge between the US and its European partners – something that Russia has keenly exploited. If Washington manages to convince its allies of Tehran’s direct involvement in the attack, this would help repair the breach.
Russia’s interest is therefore in de-escalating the situation. It will likely try to convince Saudi Arabia not to accuse Iran of the attack, putting it in a better position to maintain relations with both adversaries.
Indicating this is Moscow’s strategy, Russian President Vladimir Putin declared on September 17 that Russia was “ready to help Saudi Arabia to protectitspeople,”evenwhilespeakingatapress conference with his Iranian counterpart Hassan Rouhani. He even went on to offer the kingdom Russian-made air defence systems.
Notably Iran and Saudi Arabia seem eager to avoid escalation as well. Unlike Washing- ton, Riyadh has been silent on who might have assisted the Yemeni rebels in instigating the attack. Tehran, in turn, has directed its rhetoric solely at US interference. ™
Russian President Vladimir Putin (right) at a press conference with his Turkish and Iranian counterparts on September 17. Source: Kremlin website.
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