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Russia may boost OPEC clout, raise oil risk premium

  Closer cooperation between OPEC and Russia, which between them supply half the world’s oil, could see a bigger political risk premium priced into oil and add more muscle to the producer group’s output policy.

 

Russia’s desire for deeper cooperation with OPEC comes as its relations with the West have deteriorated over issues such as the conflict in Georgia. Moscow has already forged closer ties with OPEC price hawks and US foes Venezuela and Iran.

The biggest potential effect on prices would come if Russia joined any move by the Organization of the Petroleum Exporting Countries to cut supplies, an unlikely step with oil trading near $100 a barrel. But in comments raising the prospect of Russia actively managing supplies, Energy Minister Sergei Shmatko said on Thursday Moscow wanted to influence prices by publishing output forecasts and delaying the development of fields.

“It’s certainly not the sort of thing consumers want to hear coming out of a major producer,” said Julian Lee, analyst at the London-based Center for Global Energy Studies. “It will raise concern about the future of Russian production.”

Shmatko said Moscow’s policy would not involve coordinated action with OPEC states, and added the ministry would be ready to unveil its approach at OPEC’s meeting in Algeria on December 17. Even so, some analysts said the world’s number two exporter may consider cooperation on output if the global financial crisis and economic downturn cut oil demand significantly.

US oil has fallen to around $95 a barrel from an all-time high of $147.27 reached in July as demand in industrialized nations weakens. “You could get some cooperation in that scenario from Russia and other producers to sustain oil prices at say $80 a barrel,” said David Kirsch, consultant at Washington-based PFC Energy. “But that would be an extreme case and relatively minor cooperation would be the extent of it, unless Russia reshapes its oil policy.”

 

OBSERVING OPEC

With no spare oil production capacity and output seen flat for years to come, Russia would be able to do little to help any future OPEC decision to increase oil supplies. Russia and a handful of other non-OPEC countries pledged to cut output when OPEC slashed supplies in response to the economic aftermath of the September 11 2001 attacks, which pushed oil below $20 a barrel.

Many at the time viewed the change in Russian oil supply to the market as minimal. Russia has long attended OPEC meetings as an observer, but sent a delegation headed by Deputy Prime Minister Igor Sechin to OPEC’s September meeting. It plans to send another senior team to the December conference.

Tighter ties between Russia and OPEC could see the ebb and flow of the Russia-US relationship have a bigger impact on oil price movements, Kirsch said. With Russia’s overtures to OPEC, I think tension between Moscow and Washington in areas like Eastern Europe could be reflected more in the oil price than in the past,” Kirsch said. A resurgent Russia has deepened concerns of consumer nations over security of energy supplies, adding another line to the political risk equation centered on the Middle East and Nigeria.

Moscow has pledged closer ties to Washington’s most ardent Latin American foe, OPEC member Venezuela, in the wake of US criticism over Russia’s invasion of Georgia. Russia offered to help Caracas develop a civilian nuclear program and sent bomber planes on a trip to Venezuela, their furthest mission since the Cold War. The two countries plan joint naval exercises in the Caribbean later this year.

Russian gas export monopoly Gazprom clinched an exploration and production deal for offshore gas in OPEC-member Venezuela earlier this month. Russia has also struck deals to work on energy projects with OPEC member Iran this year, ignoring US calls for foreign companies to stay out.

Shmatko indicated last week, that Russia was keen to parlay its energy wealth into greater political influence: “We think that since we have such a significant position in the high society of world oil, a Russian factor should appear.” Russia’s gravitation toward OPEC is the culmination of Moscow’s renationalization of the energy industry. Russia now has more in common with countries with state-run national oil companies than in the past.

Closer OPEC ties could bring more deals for Moscow’s state energy champions with OPEC members. “The most real and reasonable way of cooperation between Russia and OPEC is further expanding Russia’s ties with OPEC countries to get access to some certain projects, like it has just done in Venezuela,” said Denis Borisov at Moscow-based Solid Brokerage. (Reuters)