The winners and losers in the new OPEC+ agreement

The winners and losers in the new OPEC+ agreement

Oil-producing countries started their “marathon of negotiations” on April 9th, and concluded it on April 12th, around midnight Moscow time. Over the course of these three days, the ministers of the countries that signed the OPEC+ agreement held two videoconferences. Another one was held by the energy ministers of the G20 group. Two phone calls were also made amongst the “Big Oil Three”, that is, the Kingdom of Saudi Arabia, the United States and Russia: Vladimir Putin and Donald Trump spoke over the phone thrice, while Republican senators negotiated with KSA officials.

The OPEC+ agreement has been worked out and agreed upon and should be implemented from May 1st, 2020, and last until April 2022. The schedule for overall production cuts looks as follows: a cut of 9.7 million barrels per day from May 1st to July 1st, 2020, then 7.7 million barrels per day from July 1st to December 31st, 2020, then 5.8 million barrels per day from January 1st until the end of the second quarter of 2020. The ministers of the G20 group did not separately address the issues of cutting oil production in their final declaration, which is surprising on one hand yet quite logical on the other, since G20 is a group made of oil consumers, not producers. Donald Trump’s shuttle diplomacy, who in turn made a phone call to Salman bin Abdulaziz Al Saud and Vladimir Vladimirovich Putin, helped to solve even such a problem as the initial «cut-off point». The KSA and Russia have agreed to cut 2.5 million barrels per day (bpd) from their initial production of 11 million bpd.

A new OPEC + agreement is a start for new negotiations

As we already said, the negotiations are still ongoing. On April 12th, the outcome of the videoconference held by the African Petroleum Producers Organization (APPO) became known. This organization isn’t often talked about in the press, even though its creation dates back to 1985. It includes 18 countries of the continent: Algeria, Angola, Benin, Gabon, Ghana, Democratic Republic of the Congo, Egypt, Cameroon, Côte d’Ivoire, Libya, Mauritania, Niger, Nigeria, Republic of the Congo, Sudan, Chad, Equatorial Guinea and South Africa. The overall oil production of the APPO member countries is about 7.5 million bpd, and they have about 125 million barrels in their proven reserves. ARRO officially notified OPEC that it not only welcomes the signing of the new agreement, but also undertakes to join the production cut. Detailed information on the total volume and the distribution of quotas should come out in the upcoming days.

On April 10th 2020, the Bloomberg agency spread out a message from the Norwegian Ministry of Petroleum and Energy whose leader, Tina Bru, took part in the OPEC+ videoconference as an observer. This state intends to consider the possibility of a unilateral cut in its production. On April 14th, 2020, Texas will hold open hearings on the regulation of oil production. These will be led by the Railroad Commission of Texas (RRC). It is a historical tradition for the RCC to have the power of regulating the operation of oil pipelines, terminals, and production wells in its state. Texas (where both conventional and shale oil production are conducted) accounts for about 42% of all US oil production (about 5.5 million bpd). Therefore, a decision made at a RCC meeting can be a significant contribution to the overall production cut not only for the United States, but for the entire global oil industry.

On April 12th 2020, CBC Television informed that decisions on a possible oil production cut were to be considered by the provinces of Alberta, Saskatchewan, Labrador and Newfoundland, which are the provinces where the country’s oil production is concentrated. As a matter of fact, we are witnessing exactly what we have previously written about: the new OPEC+ meeting triggered a wave of negotiations between everyone. There are precisely two reasons for this: countries such as the United States and Canada have adopted antitrust laws so strict that their leaders are not eligible for official participation in cartel agreements for oil just like for any other product.

Mexico, a little body often harbours a great soul

However, a confusing exception has arisen: Donald Trump committed himself to reduce oil production in the United States by 250 thousand bpd to fulfill the quotas which the JMCC (the OPEC Joint Ministerial Monitoring Committee) considered necessary for Mexico. The JMCC’s decision was motivated the fact that from the 1st of May 2020, all OPEC+ countries will cut their production by 22.9% based on the volumes available as of October 2019, with the exception of Saudi Arabia and Russia. It was calculated that Mexico should be reducing its production by 400 thousand bpd, but Rocio Nahle, the countries’ representative at the April 10th 2020 meeting, categorically insisted that this was impossible for Mexico, and that the maximum cut could only be 100 thousand bpd. Two of the 10+ hours that this meeting lasted were spent on trying to reach an agreement with Rocio Nahle, and resulted in the fact that the only woman who took part in this videoconference ended up leaving the call.

Donald Trump, the President of the USA

On the very next day, April 11th, Trump made his sensational announcement: the States, in spite of any legislative restrictions, have officially committed themselves to reduce their oil production to compensate for their neighbor country, even though their relations have been far from rosy ever since the decision of building “The wall”. The second OPEC ministerial meeting was held late in the evening on April 12th. It took into consideration the guarantees of the United States, and only lasted a couple of hours. Although several days have already passed since that, information on this matter comes in very small portions. The biggest piece of information to have been revealed so far sounds more or less as follows:

“Every October, Mexico hedges its oil exports for the period from December to November. Usually, this schedule Provides for the purchase of financial instruments (customarily options) in the amount of about $1 billion. Hedging helps the government fix the price of oil that has not yet been extracted and thus protect itself from the risks of lower prices. October 2019 is no exception: Mexico once again hedged its future exports based on the price of $49 per barrel, and the purchase of options cost the government $1.25 billion.”

The information appears to be very detailed: it includes dates, amounts and prices. But how can Mexican options be any of the US President’s business, especially since Trump is on the verge of violating his country’s own legislation by making such concessions? Not only that, but there also hasn’t been any negative reaction from the Democratic party of the United States, which is always on the frontline when it comes to point out all of Donald Trump’s mistakes, both real and fictitious ones. The truth unravels fairly simply: here is a list of banks with which Mexico has hedging agreements: JP Morgan Chase, Citigroup, Goldman Sachs, BNP Paribas. What you have just read is a list of four of the largest banks in the US whose heads manage the federal reserve banks that are part of the FED.

In addition to annually signing hedging agreements, the Mexican leadership has another habit: never, under any circumstances, the details of these transactions were open. They have always been and remain a state secret. But, as recent events have shown, Mexico signs hedging agreements with gentlemen whose words are taken for it, and who are trusted by both the US president and by ministers of OPEC and OPEC+.

State oil reserves as a “safety cushion” and more

Of course, one cannot help but say a few words about the numerous comments the total, incredible loss of Russia, and even of Igor Sechin and Vladimir Putin personally. Some commentators have already gotten to the point of “inevitable default of Russia and hunger riots in the streets” which should appear anytime. But in the eyes of these commentators, there doesn’t seem to be any COVID-19 pandemic and four billion people on the planet stuck in quarantine. Personal means of transportation are immobilized, 80% of air flights have been canceled all around the world, railway trips have been canceled by hundreds, thousands of enterprises have been stopped, and yet this is all “trivialities of the daily life”, and therefore it turns out that Russian leaders “had no right to go for such a reduction in oil production”. These same commentators also forget to say anything about where all this oil would have to be stored. After all, European refineries (which is the traditional market for Russian oil) are currently loaded at almost 50% of their capacity. Only enterprises with a continuous production cycle, critical infrastructures and the agriculture field are still afloat.

Oil tanks in USA

The USA Strategic Petroleum Reserve (SPR) is considered the largest on the planet (officially about 635 million barrels) and is almost filled to the max, with a remaining free capacity of 77 million barrels, that is, 7-8 days of full capacity operation of oil companies of this country. One cannot exclude the possibility that China’s state reserves have an even greater capacity since Beijing has never given their official assessment, and the country’s largest state-owned oil companies, China National Petroleum Corporation (CNPC) and Sinopec have their own commercial reserves. The latest information on this issue was published by CNPC: in December 2019, the company announced that the PRC government plans to increase its oil storage capacity to 503 million barrels by the end of 2020. But no matter what China’s state reserves are, it doesn’t have any significant impact on the world production volume. China can and most likely will take the opportunity to fill its capacities while the price of a barrel is at historically record lows, because thanks to its own efforts the country is now in a privileged position. The COVID-19 crisis has been overcome in this country, the economy is recovering as quickly as possible, and there are storage capacities for oil reserves.

The fate of the oil industry is in the hands of doctors

However, for the global oil industry, these maneuvers are not critical: according to the most optimistic estimates, the overall reduction in oil consumption is at least 19 million barrels per day, and it won’t stop there, since the fight against the pandemic is gaining moment and peaks have not yet been reached in all countries. This is not a crisis of overproduction (there has been enough of these in the history of world oil production), the current situation is something that has never been seen before: there has never been such a drop in demand in the world of oil. For this very reason, black-and-white assessments of the outcome of the OPEC+ negotiations and the negotiations that followed and will follow after this event cannot be objective: not a single oil-producing country can now be the “winner”. Planet Earth on March 6th, 2020, when the previous OPEC+ ministerial meeting was disrupted, and planet Earth on April 12th, 2020, when a new agreement was signed are two different planets.

COVID-19 front

The negotiations on April 9th and 12th went precisely on how to avoid the collapse of oil production in all countries at once. If there had not been an agreement to reduce production from May 1st, 2020, at the April production rate, all countries would have simply and physically ran out of oil storage tanks by mid-summer. Russia’s leaders only had two options: either to agree on a reduction in production, or to prepare for the storage of oil in the Transneft pipelines after a complete cessation of shipment to all of the country’s export terminals. Trading on commodity exchanges that began on April 13 clearly shows that the OPEC+ agreements did not have any impact on oil quotes: Brent is still in a range between $30 to $33 per barrel, and WTI ranges between $22 and $25. These are the prices at which monthly production in the United States fell by 600 thousand barrels per day, without any OPEC+ agreement nor obligations under any Mexican quota. In reality, the fate of the world oil market is now in the hands of doctors who are barely standing on their feet from excessive loads of work, rather than in the intricacies and intrigues of oil-producing countries. The truth of our current situation is as simple as that. The well-being of ExxonMobil depends on how clearly the quarantine restrictions are respected in Moscow, and New Yorkers living in apartments fight for the positive balances of Rosneft and LUKOIL. If India copes with the pandemic, then BP won’t have time to suffer, and the decline in oil production in Canada (which once again has nothing to do with OPEC+ nor binding obligations on the part of the government of this country) can only be stopped by the Italians and the Spanish.

Failure to understand these simple facts makes any attempt to analyze what is happening completely absurd. If one comes to terms with facts that, as we know, do not depend on our personal preferences, then there will be no reason to panic: the OPEC+ agreements are neither a loss nor a gain, neither for those who signed it, nor for the ones who, referring to the peculiarities of their own legislation, did not participate in this meeting. Russia’s decision to refuse to fulfill Saudi Arabia’s ultimatum, made on March 6th at the previous meeting of OPEC+ ministers wasn’t a mistake either; at that time, the situation on the planet was completely different from what it is now.

Leaving all political correctness aside, we can state that at that time, the political leadership of Russia planned to make maximum efforts to prevent further strengthening of positions of US oilmen in the world market. But take another look at today’s WTI crude oil quotes on commodity exchanges and see that there are no signs that after signing a new OPEC+ agreement, the working conditions for American shale companies have become even slightly better. 22-25 dollars per barrel is a price that makes oil production by hydraulic fracturing very unprofitable, and the situation for this sector of oil production remains just as critical.

Unused opportunities

If there is still criticism to be made about the Russian leadership, then we shall try to remain as objective as possible. Mistakes have been made, and there’s not point in turning a blind eye. The fact that oil production in Russia is distributed between export and domestic consumption more or less equally is not a secret: out of 11 million barrels per day, 5.5 million barrels went to oil refining and petrochemical enterprises. n other words, Russia is not only a major producer of oil, but also a large consumer. Countries that consume large volumes of oil also have their own organization, a kind of “anti-OPEC” : the International Energy Agency. Back in the previous century, the IEA gave a simple recommendation to its member countries: for each country to organize oil storage facilities on its territory that would allow it to survive without oil for 90 days, or three months. Therefore, if applying this approach, for its own energy security and sufficiency Russia would have to organize a state reserve with a total capacity of about 600 million barrels of oil. In such a case, its domestic companies would have the freedom to maneuver for almost two months and deal with organizational issues to reduce production volumes calmly and methodically.

Let’s take a look at the actions that Trump is currently taking. The first thought that the US president had after the collapse of oil quotes was obvious: to buy oil from shale companies in the amount that SPR allowed, but Congress, controlled by the Democrats, immediately vetoed such government spending. And after that, Trump used an approach against which no one can object: he allowed shale companies to rent free capacities, thereby making money for the state budget. The conclusion is simple: the use of the state oil reserve is not a commandment on some stone tablet, and the approach can be as flexible as possible, allow private companies to ease their way a bit through difficult times, and return to the state the investments that were spent many years ago on the construction of huge salt reservoirs. And, since we drew attention to the example of the United States, let’s study it a little bit more in depth.

The volume of oil production in the United States in 2019 amounted to almost 13 million bpd, while, according to the information department of the Ministry of Energy of this country, the export volume was 2.2 million bpd. In percentages, it looks even clearer: 17% of the production gone to export and 83% for domestic consumption. Let us put aside the individual problem of the United States, namely, that on their territory there is a minimum number of heavy oil deposits, and they therefore have to import heavy oil. Russia does not have this problem, since it has heavy oil from Tatarstan and the Volga region, as well as light oil from Siberia. However, Russia’s domestic consumption is only about 50% of its production, which is 1.7 times less than in the United States. This is an objective, mathematically accurate assessment of the level of development of Russia’s oil refining and the level of the petrochemical industry.

Yes, the Ministry of Energy was able to literally impose on large domestic companies the need to invest in the development of their refineries: now they are not only able to produce gasoline of E5 class, they have also achieved a deeper refining of oil than what was previously available. But let’s look at the news stories of the end of 2019 and the beginning of 2020:

“Izvestia”, October 25th, 2019:

“In Omsk, Gazprom Neft has begun the construction of a modern complex for the production of high-tech catalysts for oil refining. To date, complexes of this scale do not exist in Russia. The plant will produce catalytic cracking and hydrotreating catalysts necessary for the production of Euro-5 gasoline and diesel fuel, and hydrocracking for deep oil refining processes. It is planned to produce 4 thousand tons of hydrotreating catalysts, 2 thousand tons of hydrocracking catalysts and 15 thousand tons of catalytic cracking catalysts per year. ”

“Neftegaz”, January 28th, 2020:

“Rosneft has put into operation the first pilot industrial complex in Russia for the production of hydroprocessing catalysts. A modern facility with a total area of 720 square meters is located on the territory of the Novokuybyshevsky catalyst plant, a subsidiary of Rosneft. In the future, new technological capabilities will significantly reduce the dependence of the Russian Federation on imported products in the field of catalysts for oil refining processes. Currently, the share of imports in hydrotreating catalysts is about 90-95%. Due to the development of its own production, Rosneft plans to reduce this figure to 50% by 2024.”

It’s good that state-owned vertically integrated companies began to work in this direction, but the dates of these news reports are another clear evidence that this is happening with a great delay, and each of the companies is engaged in these developments independently. This, of course, corresponds to the liberal doctrine of the economy: two producers will compete with each other, and as a result, other oil companies with their own refineries will receive the highest quality and lowest price result. Great. In order to stop the production of high-quality fuel in Russia, its “western partners” do not even need to apply sanctions to Russian oil companies: a ban on the supply of catalysts is enough. The result is quite obvious: the capacity of the refineries will drop, which will automatically reduce domestic oil consumption in Russia and oil producers will be forced to lower production without any OPEC+ agreement.

Any energy resource has two components: an economic one, and one that is associated with such important concepts as energy security and sufficiency. As long as commercial feasibility is of the utmost importance in Russia, energy security and sufficiency will be at risk. Already back in 1970, a specialized design bureau was created in Novosibirsk, which still exists and successfully functions today under the exact same name: the SKTB Katalizator. At the beginning of 2019, the SKTB Katalizator announced a plan to create an engineering center. The essence of the “National Center for the Engineering and Testing of Catalysts” project is to create a fleet of pilot plants at the Novosibirsk site for the main oil refining processes, on which it would be possible to test the catalysts under real operating conditions of plants at specific refineries and on real raw materials. Things are going quite well : the leadership of the Novosibirsk region allocated 3 hectares for construction, guaranteed assistance with the arrangement of infrastructure, and the SKTB has found 500 million rubles for initial financing. It is left to find another 1.5 billion, and then by 2025 Russia should have its own center for testing catalysts. There is no state assistance, SKTB is negotiating with oil companies, while Gazprom Neft, LUKOIL and Neftysa JSC (the parent company of Novosibirskneftegaz) have promised to think about their participation in co-financing.

Having shut their to the words of Vladimir Putin about how the liberal ideology has outlived itself, the Russian government persists to try to introduce this exact liberal doctrine in the country’s economy. The future engineering center will be private, the state does not intend to participate in the production of catalysts, since that could mean the revival of state control over private businesses. The fact that Russian private business is in the control zone of foreign states is also being ignored. We play no hear and no see, say one thing and think another, and as a result, energy security is still at risk.

“Liberalism has outlived its purpose”: said, but misheard

The Central Bank of the Russian Federation released the ruble into “free float”: over the past month, the national currency rate against the dollar and the euro fell by more than 20 percent. This, of course, is shocking, but over the past five years, Russia has developed the agricultural sector so successfully that such a depreciation does not affect the standard of living as severely as it did in the 90s.

We have on more than one occasion looked at examples of Rosatom’s activities as a state structure that is outside the direct influence of the Ministry of Energy, and we will do it once again. In 2018, Russia launched a new solid municipal waste management system, also known as the “trash reform.” To put it mildly, it has considerable difficulties passing through, but already in April of that same year 2018, Atomenergomash signed an agreement with Hitachi Zosen Inova on the localization of a production of equipment for incineration plants at ZiO-Podolsk. The fact that boilers are made at Podolsk is no secret, and it thus not surprising that boilers for “RT-Invest” plants are being produced there. But let’s take a look at the news of January 20th, 2020:

«ZiO-Podolsk has signed a contract to supply a set of equipment for the Riverside waste recycling plant in the UK.»

The international competition was won easily and confidently: there were already samples of equipment manufactured for Russian consumers, quality was on point, and then the cheapened rubble, after the March depreciation, became an additional gain for Atomenergomash (which includes ZiO-Podolsk).

In summary, the state enterprise Atomenergomash, which is not directly subordinate to the government, is dealing with import substitution, while enterprises associated with the Ministry of Energy will reach this same level only in a few years. Here is a new post dated May 13th, 2019:

“Rosneft excluded the Eastern Petrochemical Complex from its investment program due to a tax maneuver in the oil industry,” said Pavel Fedorov, First Vice President of Rosneft. “This decision, in fact, was made for our sake, and it follows the adopted fiscal policy. Under such circumstances, the project VNHK is not profitable,” said a representative of Rosneft.

“We tried to maintain it, but it was impossible: VNHK is a petrochemical complex, which was supposed to be built in the Primorsky Territory. It was planned to build three lines for oil refining with a total capacity of 12 million tons per year and a line for the production of petrochemical products with a capacity of 3.4 million tons per year. «

Almost a year has passed since Rosneft made this decision, and there have been no news on the subject from neither the company or the government. 12 million tons, or 84 million barrels of crude oil of high-tech processing in the Far East with the creation of an appropriate number of jobs: this is what could have been done, but wasn’t.

There are more examples of such kind in Russia, and no reports on successes in oil refining can “cope” with two numbers, since facts are stubborn things. 83% is the volume of domestic consumption of oil produced in the United States, while 50% the volume of domestic consumption of oil produced in Russia. 635 million barrels is the capacity of the US strategic oil reserve and 0 is that of Russia’s. Fun can be made of the States about the fact that there is enough free capacity in their state reserve for a week of oil production in the usual volumes, but there are no such jokes being made since in Russia, there is not even a hint of the possibility of such a maneuver that could somehow mitigate the situation that has arisen in the global oil market. Reducing production by 2.5 million barrels per day for Russian oil companies is a technologically extremely difficult task, since the country has a lot of wells in the final stage of their operation which can only be stopped once and for all. The lack of time to maneuver only complicates this task, just as it is being made more complicated by the existing ratio of domestic consumption and export. It makes sense to talk about it out loud, but it is meaningless to endlessly recall what happened at the OPEC+ meeting on March 6th, 2020 ever since COVID-19 moved from the rank of an epidemic in China to that of a global pandemic.

The OPEC+ agreement of April 12th, 2020 did not bring victory nor was it a defeat for any of the participants in the global oil market. The question here is different: will it be possible to limit the damage? A series of negotiations and meetings will follow, but it is currently impossible to tell whether or not the world oil industry will be able to cope with a huge decline in demand for «black gold». The fate of the industry lies in the hands of doctors and in the success of quarantine measures in each individual country. But the reasons why the Russian oil industry was far from being completely ready for such a test should not only be the subject of analysis and discussion, but also an occasion to draw adequate conclusions as quickly as possible.

Translated by Ellina Hensen
Original text: geoenergetics.ru

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