Russia and OPEC dismiss talk of price war

by Charles Coe

Talks in Moscow on August 6 between Russian Energy Minister Igor Yusufov and OPEC new Secretary General Alvaro Silva Calderon ended on a cordial note with both sides dismissing the thought of a price war erupting in the crude market and pledging to work for price stability.
There was no indication, however, that Russia had made any promises to OPEC as it had at the end of last year when Moscow agreed to cut crude exports by 150,000 bpd for the first half of the year. Russian crude production ranks second in the world with current output at around 7.4 mm bpd, a close second to Saudi Arabia’s 7.5 mm bpd production rate. The revival of Russia’s oil industry and its plans for further developments and export increases has alarmed OPEC member countries, which see Russian companies as manoeuvring to capture a larger market share.

According to Moscow, world markets have stabilized and restrictions on Russia’s exports are no longer necessary. However, a statement released by the Russian energy ministry said that Russia was prepared to continue its dialogue with OPEC to jointly monitor the situation on international markets.
“The rise in oil production in Russia as in other countries in OPEC is aimed at satisfying growing market demand,” Yusufov said after he and Silva met. “There is no reason for concern today given the growth of the US and Western European economies.”
Meanwhile, Silva said there would be no price war. “No member of OPEC or non-member could imagine such a situation. Russia has supported the stabilization of prices.”

Russia has stated that it is happy with a price range of $ 20-$ 25 per barrel for crude oil, while OPEC’s policy is to keep the price of oil within a $ 22-$ 28 per barrel range. In recent weeks the price has averaged about $ 25 per barrel. Russia’s perceived encroachment of OPEC’s market share has prompted some voices within the 11-member group to speak occasionally of boosting output in what could become a price war.
Moscow’s decision to scrap export cutbacks as of July brought criticism from OPEC President Rilwanu Lukman who said that it didn’t make sense for OPEC to cut production to support higher prices in order “for people to ride on our back.” Pointing out that OPEC’s production cuts had left it with 6 mm bpd of excess capacity and that OPEC member production costs were lower than Russia’s, Lukman said “if it comes to competition, we know who is going to win.”

Despite the diplomatic pleasantries Russia and OPEC exchange, there is little to indicate that either side have been true to the cause. A recent report by the Paris-based International Energy Agency (IEA) said that OPEC is now exceeding its own production quota of 21.7 mm bpd by 1.5 mm bpd, equivalent to the size of the cut that OPEC made last January. It said that prices are remaining at an average $ 25 per barrel as a result of OPEC over-production, falling world stock markets and macroeconomic concerns.
For its part, its remains unclear if Moscow really did honour its pledge to reduce exports during the first half of 2002. A variety of figures for the time period have been released and the agreement is reported to have pertained only to those exports made via Transneft pipeline, that those exports that travelled by rail or by other means.

A recent report said that the country's exports outside the Commonwealth of Independent States (CIS) averaged 2.7 mm bpd during the first half of 2002, an increase of 2.1 % over the same period in 2001. Meanwhile, it was reported that Russian oil exports outside the CIS will average more than 3 mm bpd during the third quarter of this year. Russia’s oil companies are expected to try to maximize their exports in order to take advantage of favourable price conditions on the world market.
One market that Russia is keen to develop is the US, which is looking to reduce its dependence on oil supplies from OPEC suppliers, particularly those in the volatile Persian Gulf. Yusofov met in Moscow in early August with US Secretary of Energy Spencer Abraham to discuss US investment in the Russia oil industry.
Talks included US funding for studies of oilfields in Russia’s Far East, which lie close to the US market. US investment in Russia’s transport system was also discussed. Russia’s strained crude and product transport network is viewed as one of the major constraints on the sector’s growth.