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Novak on future of OPEC+ deal: Current price range comfortable for all

Russian energy chief on whether Russia will help Iran continue exports of its crude under US sanctions and which oil price is comfortable for both producers and consumers
Russia's energy minister Alexander Novak Stoyan Vasev/TASS
Russia's energy minister Alexander Novak
© Stoyan Vasev/TASS

In his interview with TASS, Russian Energy Minister Alexander Novak spoke about what will influence the decision of OPEC and non-OPEC countries to cut output in 2019, whether Russia will help Iran continue exports of its crude under US sanctions, and which oil price is comfortable for both producers and consumers. 

On future of OPEC+ deal

- The OPEC+ monitoring committee has recently met in Abu-Dhabi. Unlike your colleagues from the Middle East, you didn’t speak out in favor of cutting oil production in 2019. Is there a final stance on the issue today?

- Basically, all participants of the Abu-Dhabi talks have agreed that there is no need to make any serious joint statements because we can still watch the market in November.

This will enable us to develop a more or less common stance for discussing the deal ahead of the meeting.

- What exactly will you monitor?

- Inventories, exports of Iranian crude, and production in other countries. We will keep an eye on the oil price dynamics during that period, as well as on China and the US as far as their trade ties go. It is no secret that decisions on the issue can be made at the G20 summit. The decisions of central banks of various countries can also influence the market. That is, there are a lot of factors. .

- You’ve said that the oil price is one of the factors that affects Russia’s stance. Are you OK with the current price?

- To me, the current price range is comfortable for producers and consumers. The spike up to $86 (per barrel) was short-term, largely driven by the Iran factor. Now the prices have retreated, although uncertainty around Iran remains to some extent.

- Do sanctions on Tehran continue to have a strong impact on the market, or Iran supply fears have subsided?

- I think that most of this risk has been priced in already.

- Considering that the US has granted several countries wavers on sanctions, allowing them to import Iranian crude, does the threat of a supply shortage remain? What can you say about Iranian exports?

- We don’t know exactly what is going on with Iranian exports. It is only Tehran and buyers of its crude who have such data. It is not recorded daily but with little delay, meaning we will only see the November statistics in mid-December. 

- Will you develop your stance on what to do in 2019 before going to the Vienna meeting in December?

- Of course, we need to develop our final position by the ministerial meeting. But even by that time, we will not have data on Iranian exports for November. That’s why we will have to rely on estimates of the OPEC+ technical committee. There will be no independent sources.

- Saudi Arabia believes it would be fine to curb production by 1 million bpd compared to the October level. Even a proposal to cut oil output by 1.4 million barrels per day has been announced… If the decision to reduce output is made, how will quotas be allocated given that it was just Russia and Saudi Arabia that have been ramping up their production?

- If the decision on such volumes is made, the algorithm of allocating the quotas will be set at the ministerial meeting (in December – TASS). It is too early to speak about it now.

- You have met with representatives of Russian oil companies before going to Abu-Dhabi. What do they think about further participation in the OPEC-led supply cut deal?

- Yes, we’ve had a meeting with the companies. Everyone said then that the agreement had proved efficient for the oil industry, the economy and the budget. They also confirmed that cooperation in this format is viable in the future.

- Did anyone propose withdrawing from the deal?

- No, there were no such statements. Our colleagues believe that the mechanism has demonstrated its efficiency, which is why it should be employed in the future. They also agreed that it is premature to make any decision on the parameters of the deal for 2019. On the other hand, the companies said they are ready to change their output if needed.

- In that case, are Russian companies ready to more flexibly manage their production to cut or boost it faster than in 2017?

- Such decisions are up to the companies. They are in different situations and have different possibilities of sharply or smoothly curbing their crude output. So it depends.

- Which is the current oil production in Russia?

- It was somewhat lower in November than in October. We’ve already contributed to the stabilization of the situation in the market. In the first 27 days of November, production was 40,000 bpd lower compared to the October level.  

- Can it rise by the end of the year?

- There should be no sharp fluctuations. The average October level will be maintained by the end of the year.

- Saudi Arabian Energy Minister Khalid al-Falih said that Riyadh ramped up oil exports since June, cementing new supply destinations. What about Russia?

- We raised our production, so exports grew too by roughly 4.7 percent by now.

- What were the export destinations?

- On average, 65 percent is supplied in the Western direction with the remaining 35 percent flowing eastwards. It is impossible to track what happens with this crude afterwards. There are numerous contracts, and traders.

We are different from Saudi Arabia. There is one company, Saudi Aramco, which collects the orders. The volumes that we’ve added were likely to go westwards since our eastern direction is fully loaded.

- Let’s talk about the future of OPEC+ a bit more. Saudi Arabia’s Energy Minister said in an interview with TASS that the new organization will have its own secretariat, and that Russia should take the leadership in creating it. Are there any steps in this direction already?

- The issue is not being debated at the moment, and no decisions on setting up the secretariat have been made yet. I think that the existing system will be maintained.

The Secretariat of the Organization of the Petroleum Exporting Countries (OPEC) is likely to continue to handle the deal. The format of convening meetings of technical and ministerial committees will also remain. It is likely that some document will simply be signed to continue cooperation from 2019 for an indefinite period of time.

- So basically nothing will change in 2019?

- We did consider the creation of a new organization, but the deal works under the current conditions. Hence, there is no need to further expand the bureaucracy. Although there are options here.

- Can the working mechanism of the OPEC+ monitoring committee change?

- It will depend on our December agreements.

- Russia is meanwhile discussing joining OPEC as an observer. Is there any progress?

- This idea has been voiced, it does not cause rejection, but requires a careful and balanced approach. In this regard, there cannot be hasty decisions.

- Participants of the agreement are even said to be given verbal recommendations to speak about price expectations as little as possible...

- We’ve never discussed the issue.

- If the decision is made to cut, then exceptions for some countries will definitely be discussed, like it was with Libya, Nigeria and Iran in 2017. What do you think about it? Is it possible to keep some preferential terms for these countries given their situation?

- This issue needs to be debated, it requires consensus.

I would proceed from the assumption that all countries should participate in the implementation of common decisions under the deal. Of course, following the development of our joint position. However, the baseline for the deal to cut output should not be the October 2016 level but other, more up-to-date periods.

On relations with Iran

- There is much talk that Russia will facilitate Iranian crude exports using its infrastructure. Is that true?

- We are not considering it. Russia is an oil exporter, not an importer.

- Also, Russia and Iran are implementing an oil-for-goods deal. Can it be extended? How much of the announced 5 mln tonnes of oil was delivered in 2018?

- These are commercial relations. If it is beneficial to both parties to continue this work, then the mechanism will be extended.

As for the volumes, there are no strict obligations. There are some agreements on the highest volumes possible. If they are lower, it means that it was beneficial to the parties.

- Which currency will we use in mutual settlements with Iran in light of sanctions?

- Our goal is to boost settlements in national currencies between our countries, namely in rubles and rials. In this regard, the dynamics is positive with the volume only growing.

- And what about other partners, for example, China? Can we speak about a trend towards stepping up the use of national currencies in mutual settlements for energy resources?

- We do our best. But that is not so easy because specific conditions in the financial and economic spheres need to be created. Our financial and economic services along with central banks are working on it.

- Will Russia keep plans to build a 1,200 km gas pipeline from Iran to India?

- The project is on the agenda, we gradually conclude intergovernmental documents. A Memorandum with Iran was signed last year, and this year with Pakistan. Now we are working on approving the memorandum with our Indian colleagues, as well as a quadripartite document. After that, a feasibility study will be developed.

- Who will finance the project given sanctions?

- It’s too early to speak about it. If the parties want to implement this project, I think that a mechanism of funding it will be found.

On gasoline prices

- The OPEC-led supply cut deal, in which Moscow participates, indirectly affects the Russian domestic fuel market. If we agree to reduce (oil output) again, consequently triggering an increase of the oil price, won’t it conflict with our efforts to keep petrol prices at bay?

- Anyway, higher prices replenish the state with additional revenues, primarily the budget.

As for the situation in the domestic market, we already have tools adopted at the legislative level, taking effect on January 1, 2019. It is the damping negative excise mechanism, enabling you to neutralize fluctuations that may occur in foreign markets.

- Some companies argued that the tax maneuver, which you are talking about, needs to be improved. Do you admit that its parameters can still be changed?

- Those changes that come into force on January 1 set new rules for companies, tax agencies, and the Finance Ministry. It means that you need to look how it works first and only then make conclusions.

We do not rule out that these rules can be adjusted if necessary with the maintenance of the current base.

- In general, does the damping mechanism fit you as a long-term solution, or is it just a temporary measure aimed at stabilizing the market?

- We discussed several options and chose the most rational one. On the other hand, a floating excise tax on oil products could also become such damping mechanism. No decisions on it have been made yet since the excise duties remain a source of income for road funds.

We believe that this issue will need to be re-addressed in the future because the flexible excise duty is a simpler, more understandable and market-based mechanism.

- What do you think about the idea of obliging companies to supply at least 17.5 pct of produced oil to the domestic market?

- This proposal has been formulated. Dmitry Kozak (Deputy Prime Minister – TASS) has instructed to study this issue together with our companies. At the moment, we are making an analysis and assessment of the implementation of such mechanism.

- The proposal is to fix these 17.5 pct in production licenses. Does it mean that amendments to legislation need to be made, and each company will have to change its production license?

- Various options are being considered now. Generally speaking, it is about companies taking on obligations to supply oil products to the domestic market.

- With no link to production?

- The issue is not settled yet. It is under consideration.

- Does the deterioration of legal disputes with Ukraine affect the chances of reaching an agreement on gas? Does it make sense to continue trilateral negotiations under the circumstances?

- The thing was that we are ready to consider the extension of the contract and discuss specific parameters provided that court proceedings are settled, which are now being considered in the Stockholm arbitration. The balance of interests has been disturbed, and the issue of early cancellation of a transit agreement is being studied.

The second term for maintaining transit and using the Ukrainian gas transportation system is that such agreements should be economically beneficial. It should be competitive as opposed to other routes and destinations. It’s commerce, not charity.

As for ministerial meetings with the European Commission, we don’t say no to such consultations and are always ready.

- What prohibited holding a trilateral meeting in October then, as initially planned?

- We held an expert-level meeting in September. We’ve already received a proposal to hold it at the ministerial level, and are now coordinating dates with our colleagues. Perhaps, it will take place before the end of the year.

- Winter is coming, have your Ukrainian colleagues signaled that they want to restore direct purchases of gas from Russia?

- They haven’t bought gas from us since autumn 2015, and the Energy Ministry has no information whether they want to resume the purchases. I cannot see any changes in this regard. They continue to buy our gas via reverse flows, which is a bit more expensive.

The molecules are Russian; this incurs additional costs, but they don’t import it from us under the documents. More importantly, the issue does not raise any questions or cause surprise, as if others see things through rose-colored glasses. For us, it is not very critical because actual volumes remain the same.

By Yulia Khazagayeva, Alexei Bolshov