Page 8 - MEOG Week 01 2021

MEOG REVIEW MEOG

FSU: Tighter margins drawing from the practices of US shale compa-
As members of the OPEC+ alliance, Russia, nies, which sometimes drill but do not complete
Kazakhstan and Azerbaijan committed to dras- wells when oil prices are low, and then finish The spread of a
tic cuts to their oil production this year. them when prices are higher.
Russia alone took over 2mn barrels per day Azerbaijan and Kazakhstan are more mutant strain
of oil supply offline beginning in May. It restored dependent on oil and gas for their economic of COVID-19
500,000 bpd in August and expects to bring a output and state finances than Russia. From
further 125,000 bpd back on stream this month. an operational point of view, OPEC+ cuts have has led to more
Further increases will be negotiated with its forced Azerbaijan to reduce supply at its flagship
OPEC+ partners on a monthly basis. Azeri-Chirag-Gunashli (ACG) oil project in lockdowns which
Producers have implemented these cuts the Caspian Sea, in additional to smaller fields.
by closing down older, less profitable wells at Kazakhstan has imposed reductions at a number are likely to
mature fields in Western Siberia and the Vol- of large and medium-sized oilfields, including constrain the
ga-Urals region. They have also delayed growth the giant Kashagan and Tengiz sites operated by
at greenfield projects in the Arctic and Eastern international consortia. much-anticipated
Siberia. The risk is that some mature projects
may never return to operation, undermining Latin America: Complicating the situation return of demand
long-term prospects for Russian oil supply. The year began with OPEC losing ground in
Russian oil producers boast some of the low- Latin America. On January 1, 2020, Ecuador growth
est production costs in the world. But the out- formally exited the group, leaving Venezuela – Ian Simm
put cuts, combined with weak oil prices, have increasingly moribund, as a result of US sanc-
squeezed their margins considerably. tions – as the only remaining member in the Principal Advisor
During the 2014 oil price crash, the ruble’s region. IGM Energy
resulting collapse wreaked havoc on Russia’s This departure had little practical effect,
finances at large. But it also helped prop up Rus- partly because Ecuador had been one of the
sian oil firms’ earnings by inflating the value smallest oil producers in the organisation and
of their exports. This time around, they have partly because the subsequent crude price
enjoyed no such relief, as Russia’s government crash made a mockery of that country’s hope of
made delinking the currency from the oil price boosting output and exports in order to increase
one of its key tenets of economic stability in the earnings. Nevertheless, OPEC and its pricing
aftermath of the 2014-2015 economic crisis. and production policies certainly did affect the
Russian oil producers have also had to con- region, as they cut into the revenues of hydrocar-
tend with an overhaul in oil taxation, aimed at bon-dependent states such as Mexico.
extracting more budget revenue from the indus- In turn, Mexico showed itself reluctant to
try. While state oil giant Rosneft has come off come to the organisation’s aid after the OPEC+
relatively unscathed, others such as Lukoil, Gaz- deal lapsed at the end of March. More specifi-
prom Neft and Tatneft are reconsidering invest- cally, it declined to accept the group’s recommen-
ment plans in light of the changes. dations on output cuts, saying it could not afford
Despite the hardships of 2020, though, Rus- to rein in production. (This move led US Presi-
sia’s oil majors have proved more resilient to dent Donald Trump to offer to make up part of
the downturn than many of their international the difference.)
peers. The country’s producers have mostly kept Meanwhile, the coronavirus (COVID-19)
their dividend policy unchanged and some have pandemic disrupted Latin America’s oil and gas
continued buyback programmes, reflecting con- industry, even as infection rates soared in the
fidence in their financial standing. region. It led major producers such as Brazil and
There are concerns in Moscow that Russia Argentina to make temporary reductions in oil
might struggle to reclaim its market share once and gas yields, and these cuts, in turn, helped
OPEC+ cuts are ended. As such, the government to derail Argentina’s plans for becoming a net
is looking to provide support for the drilling of exporter of LNG.
some 3,000 wells that will remain unfinished It also served to complicate negotiations
until the output restrictions are lifted. Russia is on initiatives such as the planned takeover of

P8 www. NEWSBASE .com Week 01 06•January•2021