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20

Russia vs. OPEC.......Another cold war?

With Russia now exporting more oil than Saudi Arabia, the scene is set for a cold war between Moscow and the Organization of Petroleum Exporting Countries (OPEC), industry experts say. The Russians are refusing to go along with OPEC demands for a concerted drop in production, posing looming problems for the cartel as OPEC oil ministers prepare to meet here on Thursday.

With Russia now exporting more oil than Saudi Arabia, the scene is set for a cold war between Moscow and the Organization of Petroleum Exporting Countries (OPEC), industry experts say.
The Russians are refusing to go along with OPEC demands for a concerted drop in production, posing looming problems for the cartel as OPEC oil ministers prepare to meet here on Thursday.
Russia does not belong to the organization but has become a prime mover on world petroleum markets, and there is not much OPEC can do about it.

"The sharp rise in Russian oil exports this year -- which will continue next year -- once again raises the question: 'Is OPEC doomed?'" said Leo Drollas of the Center for Global Energy Studies in London.

Russia is pumping some 8.6 million barrels of oil a day, compared to 7.96 million for Saudi Arabia. This, Drollas said, was "changing the power structure of the industry." OPEC wants all oil-producing countries, whether or not they are members of the cartel, to reduce output in order to make way for exports by Iraq, which is expected to be producing 3.5 million barrels a day within five years.

Without a reduction in the offer, the addition of Iraqi exports will create a glut on the market, making it difficult for OPEC to maintain the 25 dollars (21 euros) per barrel, which it sees as the "fair price" for long-term market stability.
But the fact that benchmark Brent crude oil stands around 29 dollars a barrel because of what OPEC calls temporary speculative pressures, gives Russia no incentive to curb its output. In fact, it is likely to increase production to 9.2 million barrels a day next year, according to Francis Perrin of the magazine Petrole et Gaz in Paris. "Russia has no interest in collaborating with OPEC," Drollas said. "It's better off fighting another cold war with it." It's the so called 'free-rider syndrome,' he added. "While Russia refuses to cut production, OPEC has to if it wants to sustain prices, so Russia gets a free ride on production levels and high prices without giving anything back to OPEC."

Frederic Lasserre, an oil industry analyst with Societe Generale, said OPEC is caught in a vicious circle. "To maintain a price of 25 dollars means it would have to reduce its offer," he said. "The shortage thus created would be compensated by an increase in production by the non-OPEC countries, notably Russia, Mexico and Norway, which would cause the cartel to lose market share."

OPEC has about 38 percent of the world market today, down from 41 percent in 1998, and and this is likely to fall still further to 36 percent next year, according to an estimate in The Economist. However, Lasserre said "the capacity of OPEC to fix prices is more real than this fall in its market share would suggest. "Among the principal members of the cartel, it is the state which decides how much to produce and export, while the privatized Russian petroleum industry does not necessarily see a 'national interest'" as it takes on the competition, he said. Perrin said this was the reason why Russia "is in no hurry to heed OPEC's siren call."

Nevertheless, he added, the real logic in the oil industry is concerned with reserves, rather than with current production and prices. "Some members of the cartel consider the reserves of the non-OPEC countries will be exhausted by 2050," he said. "Considering the significant increase in world demand, the organization, which has 66 percent of the known reserves in the world, including 20 percent in Saudi Arabia, has no interest in triggering a price war with Russia, which has only six percent of known reserves."

Farouk Ibrahim, head of communications at OPEC headquarters here, said nobody has an interest in a fall in prices. "Without a fair price, investors will not invest and find new reserves. Our Russian friends have understood this perfectly," he said.

Author: Sam Maxwell

Source : Neftegaz.ru