Frozen pipelines, expensive tankers and no storage: Russia’s hesitation to cut oil output more than political

Neither a recession nor a collapse in revenue has yet been enough to convince Russian President Vladimir Putin it’s time for you to join with OPEC and cut oil output to enhance prices. His reasons may be pragmatic rather than political.

Russia’s Energy Minister Alexander Novak and his Saudi Arabian, Venezuelan and Qatari counterparts agreed to freeze output at January levels on Tuesday. The earth’s second-largest crude producer faces numerous obstacles to the deal that would actually cut production, even when Putin decides it’s in the national interest. Reducing the flow of crude might damage Russia’s fields and pipelines, require expensive new storage tanks or simply take too much time.

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Prior to Tuesday’s agreement, Novak said he could consider reductions if other producers joined in. Yet Igor Sechin, chief executive officer from the country’s largest oil company Rosneft OJSC along with a close Putin ally, has resisted, saying last week working in london that coordination would be difficult because no major producer seems prepared to pare output.

“The history of relations with OPEC shows that Russian information mill not keen to chop production,” James Henderson, an gas and oil industry analyst at the Oxford Institute for Energy Studies, said by telephone. “There are certain practical difficulties, and the companies prefer to someone else did that, and they may benefit once the price rises.”

Brent crude, the international benchmark, rose around 6.5 per cent as the four producers held closed-door talks in Doha. Prices pared gains after Saudi Arabia’s Oil Minister Ali Al-Naimi said freezing output at January levels will be “adequate” and also the nation still really wants to satisfy the need for its customers. Futures were 1.4 per cent higher at US$33.84 a barrel at 12:03 p.m. in London.

In Siberia, Russia’s main oil province, winter temperatures will go below -40 C . This is a challenge for anyone considering switching off the taps.



The oil and gas that flows from wells always contains water, so once pumping stops, pipes may freeze, Mikhail Pshenitsyn, who has worked for a lot more than Ten years within the Russian oil industry, said by e-mail. The issue goes away in summer, there is however still the chance of a long-term decrease in output just because a halted reservoir may become polluted with salts and residues, he explained.

Production from a shut-in well might never be restored entirely, Maxim Nechaev, director for Russia at consulting firm IHS Inc., said by telephone.

Russia could reduce exports to global markets without cutting production by simply putting more crude into long-term storage. Trouble is, the country has not enough facilities.

The bulk of onshore storage capacity in Russia is a member of pipeline company AK Transneft OAO and already entirely use to make sure steady flows to refineries and ports, Vladimir Feigin, head of the Moscow-based Institute for Energy and Finance, said by phone.

Building the huge new reservoirs required to store a substantial proportion of production to have an longer timeframe would cost billions of dollars and couldn’t be done quickly, he said.



While crude can be stored in vessels moored just offshore, Russia has “only seven tankers — four products and three crude — in floating storage,” Antonia Mitsana, marketing manager at London-based Drewry Maritime Advisors, said by e-mail. Their total capacity is simply over 643,000 metric tons, based on Drewry, or about 0.1 percent of the nation’s production this past year.

Chartering foreign vessels to store much more oil would be expensive. Freight minute rates are up in the short-term tanker market and ships in limited supply, Mitsana said.

Russia’s government is seeking ways to increase revenues from the energy industry, which generates more than 40 per cent from the national budget. Finance Minister Anton Siluanov suggested cutting the price threshold for oil exempt from production taxes to $7.50 a barrel from $15, according to a study from RIA Novosti, a domestic news agency.

Russia ran a budget deficit of 2.6 percent in 2015, its highest in five years. The measure could raise revenue up to 1.08 trillion rubles (US$13 billion) if implemented in an average oil cost of US$30, according to estimates by Alexander Kornilov, an oil and gas analyst at Aton investment bank. That would help fill government coffers and could encourage companies to limit output at older wells with higher operating costs.

Yet changing the tax regime is really a slower process than the “emergency” response Venezuela had been seeking.

“Usually such big tax changes would come into force from January of the next year” when they were contained in the annual draft budget due in October, Sergei Likhachev, associate director for tax practice at Moscow-based law practice Goltsblat BLP, said by telephone.