Russia and Opec working together is new world order

Saudi Oil Minister Khalid Al Falih. The kingdom and neighbours are working with Russia. Bloomberg

Russia’s Opec alliance looks increasingly permanent.

Oil prices recovering above $80 per barrel shows the benefits of working with the oil producer group instead of against it. Forging closer bilateral ties with key Middle East members such as Saudi Arabia and the UAE are an added bonus for the Kremlin.

The draft charter sketching out the nature of longer term co-operation between the Vienna-based grouping and 10 other producers led by Russia envisages “policies aimed at stabilising the oil market in the interests of producers, consumers, investors and the global economy”. So far it has been a success.

Crude prices have climbed more than 60 per cent since Opec and Russia joined hands in late 2016 to reduce their combined output by 1.8 million barrels per day to stabilise the market. By following up their historic deal with a surprisingly high level of compliance they silenced critics and proved old enemies can become friends when oil is at stake. Warmer relations between the main actors are another unexpected outcome.

Distrust among the world’s leading oil producing superpowers has been replaced by a greater understanding. Russia’s oil minister Alexander Novak and his entourage have developed a healthy working relationship with their Saudi counterparts, which was unimaginable in previous eras.

“I think that the Russia-Saudi relationship is a fantastic development especially in working together within the Opec deal to maintain the market share for Opec … this also brings the two countries politically closer in terms of maintaining the stability of the region … and oil markets,” said Saudi energy expert Yousef Alshammari said in an interview with S&P Global Platts.

However, for this greater political dialogue to translate into tangible results companies and the private sector will also have to play its part. Both countries have signed a string of cooperation deals in various spheres, and more are expected by the end of the year to strengthen their growing friendship.

Among the latest deals, Saudi Aramco inked a strategic cooperation agreement with the Moscow State University in late August, under which the two will conduct joint research programmes on upstream technology.

This followed a deal between Aramco and Gazprom Neft on a joint technology centre in St Petersburg to address the challenge both companies face developing oil reservoirs. Aramco’s MoUs with other companies, including those signed in recent months, cover oil swaps and trading with Lukoil; gas cooperation “along the entire gas production chain” with Gazprom; and a wide range of projects with the Russian top oil producer Rosneft.

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LNG is another potential area for Middle East firms and Russia to work together on. Novatek plans to choose international partners for its second major LNG project before taking the final investment decision, likely in the third quarter of 2019. Middle East partners from the Arabian Gulf would bring access to a fast growing market for LNG and investment capital.

Aramco is among the potential partners. Saudi Oil Minister Khalid Al Falih has been a frequent visitor to the freezing Yamal Peninsula where Novatek’s first LNG project was launched late last year. Arctic LNG 2 will be built on the Gydan peninsula across the bay from Yamal LNG between 2022 and 2025 and comprise of three trains with 6.6 million tonnes per year capacity each.

Although most of the talk about Russia’s increasing cooperation with Opec has centred on its relationship with Saudi Arabia, it has also actively developed bilateral ties with other members of the group recently such as the UAE. Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, visited Moscow in June to sign a strategic partnership with President Vladimir Putin, which straddles defence, the economy and culture.

Mubadala’s petroleum arm finalised a deal to enter several upstream projects in Russia with Gazprom Neft on the sidelines of Russian Eastern Economic Forum in Vladivostok in early September.

Tatneft followed by agreeing to resume operations in Libya. National Oil Corporation chief Mustafa Sanalla emphasised “the Russian company’s important role in the development of Libya’s oil sector”, on the sidelines of the Russian Energy Week in Moscow.

But greater cooperation with Saudi looks like the priority for the Kremlin. Both sides have repeatedly stated there is a room for greater collaboration, playing down the concerns of the natural rivalry of the two oil exporting powers.

“The market is big enough to absorb both of us,” Mr Al Falih told the Moscow forum this month. “Competitive tension … between Aramco and its peers from the Russian energy landscape is healthy. The fact that we cooperate in bringing stability to the global market should not be taken in any way that that will reproduce competition. So competition and cooperation can go hand in hand.”

To strengthen their pact, Saudi Aramco and Russian companies may ink new deals before the year end as the two countries are aimed to accelerate the bilateral work, according to the two ministers.

Nadia Rodova is managing editor of S&P Global Platts in Moscow