May 27, 2009 / 5:43 PM / 10 years ago

Russia pursues market share as OPEC flirtation ends

MOSCOW (Reuters) - Russia is no longer a welcome guest of OPEC after boosting its production to levels far above those pumped by the group’s biggest exporter, Saudi Arabia, and snatching away market share.

After flirting with OPEC when a barrel of oil cost less than $40, Moscow has once more set its course on raising production to support an economy entering its first recession in a decade, leaving OPEC to shoulder the burden of record output cuts.

“OPEC members have cut almost 4 million barrels per day in order to subsidize the Russian oil industry and economy to the tune of about $150 million per day,” said Chris Weafer, chief strategist at UralSib investment bank.

“This is unlikely to sit well with OPEC member countries.”

The Organization of the Petroleum Exporting Countries, meeting on Thursday in Vienna, is expected to leave output unchanged as it pins its hopes on a sustained oil price rally in defiance of swollen stocks and reduced demand.

It has already said it would reduce production by 4.2 million barrels per day since last September and is estimated to have delivered around 80 percent of the promised cuts.

Senior Russian government officials have attended the last few gatherings, while producers, including the largest independent oil firm LUKOIL (LKOH.MM), had signaled they might be willing to cut output.

Yet Russian oil production rose in April to 9.85 million bpd — 1.3 percent more than the 9.72 million bpd produced in February.

Saudi Arabia, the world’s top exporter, has been pumping less than 8.05 million bpd since February as it accounts for the bulk of OPEC’s cuts.

“Russia, rather than cutting exports, has now increased exports of oil products at a time when OPEC supplies are at their lowest in five years,” said Valery Nesterov, oil and gas analyst at Russian investment bank Troika Dialog.

While OPEC has cut output by about 5 million barrels per day since last July, Russia has increased the supply of oil and oil products by 6.4 percent, or 0.45 million bpd, Nesterov said.

“In other words, Russia has compensated for about 10 percent of the cuts made by OPEC.”

At the last OPEC meeting in March, Saudi Arabian Oil Minister Ali al-Naimi said collaboration on output between OPEC and non-OPEC countries had been better in the past in a swipe at Russia as it attended the talks as an observer.

OIL PRICES RECOVER

In tandem with a rally to six-month highs on the international oil futures market, Russia’s main crude export blend, Urals, bounced back above $60 on Wednesday for the first time since November — above the $41 level against which this year’s budget is set.

The rise has prompted a recovery in the value of the ruble to four-month highs against the euro-dollar basket.

As production and prices recover, and the government cuts export duties, Russian oil majors are reaping the benefits.

TNK-BP TNBPI.RTS returned to profit in the first quarter after a loss-making end to 2008 and Rosneft (ROSN.MM), Russia’s biggest producer, is seen posting a 72 percent quarterly rise in net profit on Thursday.

Russian officials said they were not invited to this week’s OPEC meeting, but say their absence is not political.

“It has nothing to do with the rising oil prices. There are some organizational issues,” Anatoly Yankovsky, Russia’s deputy energy minister, told Reuters. Another ministry official said OPEC called Russia to its meetings as an observer during crises in global oil markets. “OPEC now considers that the situation is stable,” he said.

Analysts also linked Russia’s decision to send high-level delegations to OPEC to Moscow’s differences with the West following its conflict with Georgia last summer and its price dispute during the winter that disrupted gas supplies to western Europe.

Russia has also failed to endear itself to OPEC following its unwillingness to join in efforts to support prices by curbing production.

At the March meeting, Algerian Energy and Mines Minister Chakib Khelil said: “Wouldn’t you be disappointed if you cleaned in front of your house and your neighbors started pouring stuff in front of theirs?”

Analysts said Russia never intended to join the OPEC cuts. Last year’s involuntary output decline, the first in a decade, was a result of underinvestment and depletion of old fields.

“Russia is simply not willing to play by someone else’s rules,” said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies.

Alfa Bank senior oil and gas analyst Chirvani Abdoullaev said Russia was instead pursuing ways to diversify from oil.

“Russia has 140 million people and needs to develop alternative sectors,” Abdoullaev said. “We can’t live forever in the oil game. To enter artificially into long-term alliances is not in our long-term interests.”

Additional reporting by Katya Golubkova, Tanya Yegorova and Vladimir Soldatkin in Moscow and Barbara Lewis in Vienna

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