Russia rejects deal with OPEC, maintains maximum oil output

Russia has rejected a deal with OPEC to curb oil outputs, even after prices hit their new lows last week – Deputy Prime Minister Dvorachek and Rosneft CEO Igor Sechin said. Speculation that some kind of deal would occur has caused oil futures to rise somewhat on the hope. Apparently OPEC proposed that Russia become a member of the cartel, but this was rejected out of hand for two reasons. The first is that much of the Russian oil industry is completely privatized, with a state-owned stake in only Gazprom and Rosneft (BP owns 20% of Rosneft, the Russian state the rest), and as a result, Sechin said that “the Russian government cannot administer this oil like an OPEC country can.” By contrast, the entire oil industry in Saudi Arabia is entirely state-owned.

The second reason is environmental – since OPEC’s power comes from its ability to arbitrarily ramp its supply up and down, Russia has noted that its colder rigs have a more difficult time turning on and off to meet acceptable OPEC quotas. Sechin also noted that on most of the top-producing Rosneft rigs, the cost of production has fallen to $3 per barrel due to the ruble’s fall in value. While he is likely to be cherry picking his facts, he also expressed no concern over Rosneft’s current debt load, which is substantial.

More surprising is that many analysts of Russian oil markets agree with Sechin’s assessment of the situation. Maxim Edelson, director of Fitch Ratings in Moscow, said that due to Russian tax efficiencies, which adjust automatically to lower prices and the comparatively low cost of production due to the ruble, Russian companies are not as hurt by low benchmark prices than Western companies.

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News Briefs:

  • Kazakhstan has predicted much lower GDP growth for 2016, in the wake of falling oil prices, a competitive devaluation of its currency, and the deteriorating consumer environment. The predicted growth rate is 2.1%, which was in fact revised upwards from its budget prediction of earlier at 1.5%, probably to account for the devaluation. However, this remains substantially less than inflation and profits brought in by oil sales are likely to fall to 77 million tons next year from 80.5 million tons projected for this year, according to a document shown to Reuters. Finally, Kazakhstan has announced it will cut its export duty on oil to $40 per metric ton from $60.
  • The Economist has released a very interesting article on the history of the Ukrainian government’s bond issue, which was the subject of so much negotiation over the summer, and was finally restructured to allow for a 20% haircut on its principal owed to international bondholders in the West. However, the majority of the debt, owned by Russia, will not see the same writedown. The article goes into history of the bond that Russia holds over Kiev, loaned to them in 2013, which was indentured by Western law firms White & Case and Clifford Chance, and listed is listed as an investable security on the Irish stock exchange. The money itself from the issue has disappeared from the country – thought to be taken by Yanukovych before his departure – additionally, bizarre, unorthodox clauses in the indenture’s terms with the trustees state that if Ukraine’s debt-to-GDP exceeds 60%, Russia can demand early repayment of the principal, which could trigger an automatic default on other international bonds. With debt-to-GDP at almost 100%, Russia is holding this hammer over Kiev’s head by making it clear they can precipitate a default whenever they choose to.
  • Violence in Ukraine has reached its lowest level since the beginning of the conflict, according to Ukrainian Defense Minister Stepan Poltorak. Kremlin spokesman Dimitry Peskov agreed with that assessment, citing the upholding of the ostensible truce entailed as a prerequisite for the peace plan laid out by the Minsk II Accords of this previous February. The Russian spokesman, however, proceeded to blame Kiev for not moving forward other provisions of the Minsk II, saying that “the conceptual points of the Minsk agreements… unfortunately we cannot note progress, it is impossible.”
  • Iran’s Parliament has offered its opinion on the nuclear deal with the P5+1 powers and while the terms are acceptable, the interpretation by the US is not. The leader of the legislature, Ali Larijani, ratified all the terms, but took the time to criticize the US’s reading of the sanctions relief schedule. Larijani said that while most find the terms of the deal “acceptable,” there are critics in the legislature as well as among those clerics holding power alongside the Supreme Leader Ayatollah Khamenei.
  • Water resources management in Mongolia is a growing issue now that Oyu Tolgoi copper mine is back on track and revenues from its development have begun flowing into the country. However, wastewater management and diverting water supplies away from cities like Ulaanbaatar and towards mining projects has created a crisis of choosing between civilian applications and commercial ones – any delay in commercial wastewater management will further delay Oyu Tolgoi, but legislators are also responsible for providing water services to their constituents, creating a situation which will undoubtedly see more attention as the project moves forward.

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