A painless cut

Bloomberg cites Putin supporting a universal oil freeze:

“Russia is ready to join in joint measures to limit output and calls on other oil exporters to do the same,” Putin said on Monday at the World Energy Congress in Istanbul. “In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market.”

Russia’s production is growing, not declining: the average daily output in October has been slightly (less than 1%) above the record-high September average, getting close to 11.2 mmbpd. As several new fields are being put into operation this quarter, this surge was to be expected, although it was overlooked by major-league forecasters.

On the other hand, Russia’s economic development minister, Alexei Ulyukaev, announced yesterday that the cabinet expects daily crude and condensate output at 10.9 mmbpd in 2016 and 11 mmbpd in 2017. He said the forecast did not take possible freezes or cuts into account.

But it doesn’t have to. If Russia’s 2017 output goes down from the current 11.2 mmbpd to 11 mmbpd (the rate reported in early September 2016) or to 10.9 mmbpd (the likely 2016 average) it would be a cut of 0.2-0.3 mmbpd.

Not much but symbolically important. First, Russia has never cut down on output in solidarity with OPEC. Second, any cuts achieved by shutting down wells would be costly, so Russia would signal readiness to suffer for the common cause of boosting oil prices.

Except that I don’t think the cuts will be due to large-scale well idling since there is a smarter way. The cabinet can simply ask oil companies to slow down growth at the new fields launched this year and possibly cut down on drilling in mature oilfields and fracking on the existing wellstock – then let natural decline work its way. Lukoil seems to be willing to comply with any such request; Rosneft, curiously, not so much.

Sometimes it makes sense to ride for free. But when the bus won’t move on until you cough up a nickel (as opposed to a regular day when a ticket costs a dollar and the driver doesn’t care if you pay or not), it might be a good idea to pay after all.


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