Russia stands by OPEC deal even after two months of overproducing

The country remains “fully committed” to bringing balance to the crude market, Russia’s Energy Minister Alexander Novak said in a statement Thursday. Russia’s compliance with the deal was 95.2% in April, after a rate of 93.4% in March. While this over-production is more than offset by slumping output from some members of the Organization of Petroleum Exporting Countries, missed Russian goals could become a feature of the pact, according to Massachusetts-based ESAI Energy LLC.

“Six months from now, Russia may follow Kazakhstan’s example, restraining output at some fields to demonstrate ‘good intentions’ even as overall production climbs,” ESAI Energy Principal Andrew Reed said by email. Growing spare capacity at oil projects run by state-controlled Rosneft PJSC and Gazprom Neft PJSC “will soon lead to weakening Russian compliance.”

OPEC and its allies led by Russia have nearly succeeded in wiping out an oil glut through production cuts initiated in early 2017, boosting prices to a three-year high. While the deal formally expires at the end of this year, Saudi Arabia has signaled the curbs could be extended into 2019.

Novak said earlier this month that the partners will discuss further cooperation in June, with all options on the table, including easing the caps, depending on the market situation.

The compliance rate of the OPEC members was 168% in April, up from a revised 165% in March, according to a Bloomberg survey.

New projects

“Fluctuations” in Russia’s oil output in April were caused by “activity” at projects developed under production-sharing agreements, Novak said in the statement, without elaborating.

Under the deal with OPEC, Russia pledged to cut production by 300,000 bpd from its October 2016 level. The country may boost output by 120,000 bpd from 2018 to 2019, even as the alliance holds, given all its “new projects are moving forward,” ESAI Energy said.

That outlook echoes the one published on April 25 by Renaissance Capital, whose analysts Alexander Burgansky and Oleg Chistyukhin calculated Russia’s spare production capacity at 215,000 bpd, led by Rosneft and Gazprom Neft. The market may see “another occurrence of the brownfield renaissance first observed during 2002-2004, which could boost Russia’s oil production to new highs in a cost-efficient way, supporting our favorable sector outlook,” they said.