THE prognosis looks good. Despite concerns about lack of implementation, there are growing indications that Riyadh and Moscow are keen to pull the 1.8 million bpd output cut agreement through. In fact there are also indications that OPEC may overshoot the agreed output cut level. "I can tell you with absolute certainty that effective Jan. 1 we're going to cut and cut substantially below the level that we have committed to on Nov. 30," said Saudi Minister of Energy, Industry and Mineral Resources Khalid Al-Falih minutes after announcing deal with non-OPEC major producers. Falih elaborated he was ready to cut below the psychologically significant level of 10 million bpd - a level it has sustained since March 2015 - depending on market conditions. Months of back door energy diplomacy, at the highest level, helped overcoming the lack of trust between Moscow and OPEC. Russia's history of working with OPEC on output cut has been awful. Moscow did not keep its commitments several times in past, as former oil minister Ali Al-Naimi too referred in his memoirs. A Platts report highlights Russia renegading on its commitments with OPEC in March 1998, March 1999, November 2001, December 2001 and as recently as November 2014. Skepticism hence remains, with some harboring doubts about the implementation of the agreement. Questions persist about how serious Russia might be about following through on its output cut commitment, while others wonder if Moscow even has the legal or technical ability to deliver those pledged cuts. Some also suggest the offer to reduce supply by 300,000 bpd basically portrays natural declines from its older fields. Reuters reported that despite the joint curtailment agreement with OPEC, the overall Russian oil production forecast for 2017 is not being revised. The Russian Ministry of Energy continues to maintain the same forecast on production growth, with total output in 2017 to reach 548 – 551 million tons (11.01 -11.07 million barrels per day). Russian Energy Minister Alexander Novak made it clear that the long-term contracts signed by Russian energy companies and mentioned in intergovernmental agreements "will not be subject to the reduction agreement with OPEC", although he did underline that the joint Russia-OPEC agreements would be implemented in full as the reduction of oil output would not be significant. Things but appear different - this time. Stakes are too high. The Russian government, including Putin himself, have made a substantial reputational commitment to making the deal work. In case he doesn't deliver on his commitments, his reputation could be at stake As per press clippings, the agreement follows almost a year of petro-diplomacy that led Russian president Vladimir Putin and Saudi leaders putting aside their differences over the war in Syria as their economies struggle to adapt to the halving in oil prices since mid-2014. The deal involved direct talks between Putin and his Saudi and Iranian counterparts, while the breakthrough reportedly came from a late night phone call between the Russian and Saudi oil ministers. "Negotiations from technical to leadership went on for a year with meetings in Russia and elsewhere," one OPEC delegate was quoted as saying. The involvement of Putin, who has held talks this year with Deputy Crown Prince Mohammed Bin Salman, adds weight to Moscow's commitment. "With Putin directly involved in brokering this deal and Saudi Arabia and Russia co-operating on various fronts, not just the oil market, Putin is likely to put substantial political pressure on the companies to ensure substantial, if not full, compliance," Amrita Sen, co-founder at Energy Aspects was quoted as saying by FT. Ronald Smith, Citigroup's senior Russian oil and gas analyst, is of the view that, the math of higher prices versus lower production also adds to the impetus to the Russian government to follow up on the commitments. This is based on the fact that oil taxation has traditionally provided almost half of the country's tax revenue and because the Russian oil tax regime is highly geared to the price of oil. For example, extraction taxes and export duties combined go up $8.30 per barrel for every $10 rise in oil prices. The net effect of a 300,000 b/d output cut and a $10 oil price increase would be a 28 per cent increase in oil tax revenues in US dollar terms, and 15 per cent in local currency terms, giving a material boost to the Russian government's efforts to balance its budget. As for Russia's ability to cut output and questions about the Kremlin's legal authority to dictate production levels, while the government may lack formal control over output, it has substantial informal influence over the industry, Citigroup's analyst believes. ‘We think Russia's oil producers will be willing to work with the government to meet the production cuts. Indeed, we think the first step in reducing output will probably involve the government asking producers for voluntary cuts.' And then answering the question, why would producers voluntarily reduce output, Smith thinks most Russian oil companies have at least some older fields that are at best marginally profitable, with economic rents predominantly going to the government as taxation. One large Russian oil company estimated in March that "over 30 percent" of its producing fields were uneconomic. While this could partly be due to the low oil prices at the time, it also lends credence to suspicion that there may be a material amount of Russian production that remains on-line to generate tax revenues for the government than profit for the producing company, the analysis added. Additional cuts could hence come from slowing brownfield drilling, a delayed but potentially powerful method of adjusting production. And Russian government has already reached a framework agreement with energy companies on how to implement the output cut. After a meeting of 12 oil producers that account for around 90 percent of Russian output, Energy Minister Alexander Novak told reporters: "We agreed that the reduction will be in proportion to the production volumes (of each company)." Nikolai Tokarev, the head of Russia's state-controlled oil pipeline monopoly Transneft said the deal was unlikely to affect Russia's export plans. "This is about output, not exports," he said after the meeting. Novak though reiterated that the cuts will be voluntary for each company and that there would be "separate discussions" on production-sharing agreements involving a number of foreign energy companies, including Exxon Mobil. Saudi Arabia and Russia today together account for more than a fifth of global oil supplies. The first global crude supply pact in 15 years is underlining the growing energy amity between Saudi Arabia and Russia. "It is very significant to have an agreement by the two powerhouses that are Russia and Saudi Arabia," said Olivier Jakob, analyst at the Petromatrix consultancy. A new geopolitical dynamics is being created and it has the potential to transform and impact the global oil markets.
