Russia plans to show OPEC+ compliance by excluding a key metric

By Dina Khrennikova, Olga Tanas and Julian Lee on 1/21/2020

MOSCOW (Bloomberg) - For the first time in Russia’s alliance with OPEC, the country is changing the way it makes oil-production cuts.

This quarter, Russia -- one of the architects of the original deal to curb oil output between the Organization of Petroleum Exporting Countries and its allies -- will be allowed to exclude a type of light oil called condensate from the production data it submits to the group. The cartel has always excluded condensates from members’ production volumes, so it was an anomaly for it to be included for the other members of the OPEC+ group.

This should help improve its implementation with the pact which has been insufficient throughout 2019 as its total crude and condensate output hit a post-Soviet record. Compliance with the deal has been patchy within Russia and Rosneft PJSC has criticized it saying it’s contrary to Russian interests. Monitoring compliance may now become even more challenging for Russian-oil watchers.

1. What is condensate?

Condensates are hydrocarbons which below ground are in the form of a gas but then condense into a liquid when they reach the earth’s surface. They are usually stabilized before being transported, by removing any remaining gas and very light liquids. They can then be blended with crude, processed to make petrochemicals or other high-value fuels or exported. Novatek PJSC exports stabilized condensates from its Yamal LNG project and processes most of the stable condensate from other operations in Ust-Luga on Russia’s Baltic Sea coast, with the remaining volumes sold in Russia and abroad.

2. Why is Russia’s condensate now excluded from its OPEC+ target?

Russia’s condensate output has been growing as the nation’s biggest gas producers, Gazprom PJSC and Novatek, brought new fields online and ramped up output at existing ones. It’s part of a strategy to boost both piped and liquefied natural gas exports from Russia to Europe and Asia.

This rising output has put pressure on Russia’s compliance with the OPEC+ deal, its currently acting energy minister Alexander Novak said in November. The country argues that its condensate, which accounts for 7%-8% of total oil output, should be also excluded from its production cuts target because countries within the cartel don’t include it. OPEC agreed, and during its December meeting allowed all non-OPEC allies to exclude condensate from their production data.

3. Will it help improve Russia’s compliance?

It will, according to the country’s energy ministry. Excluding condensate, Russia’s production cut in December was 234,000 barrels a day, compared to the crude-only level for October 2018, the government said in a statement. That’s a deeper reduction than the nation was required to make under the OPEC+ deal. If you include condensate, the figure was 72,000 barrels a day above its output target.

Russia failed to fully comply with the pact for most of 2019, with condensate growth just one of the reasons given by the government. At the December OPEC+ meeting, Novak said exclusion of condensate is not a loophole allowing Russia to pump more oil and still claim compliance with the deal.

Under the new deal, lasting through March, Russia pledged to deepen its crude-only production cuts to some 300,000 barrels a day, from the revised October 2018 baseline which excludes condensate.

4. How will the market know if Russia is compliant?

Excluding condensate will make it more difficult to independently assess Russia’s implementation the OPEC+ deal. Previously, Russian oil-watchers -- including Bloomberg -- calculated the country’s output and compliance using detailed data from the Energy Ministry’s CDU-TEK unit. However, those figures don’t break down the split between condensate and crude.

The ministry has promised to give the market data relevant to the new deal. Yet in December it didn’t disclose outright production numbers for crude and condensate, only the increase or decrease in output for each variety of oil. Separately, Novak told reporters the October 2018 baselines against which those changes are measured.

This patchwork of data does allow oil watchers to know the following: In October 2018 Russia pumped 10.626 million barrels a day of crude and 795,000 barrels a day of condensate, according to Novak. As of December 2019, crude production had fallen 234,000 barrels a day from this level and condensate output had risen by 58,000 barrels a day, according to the ministry.

5. Are CDU-TEK production figures irrelevant now?

Not quite. The current output-cuts deal will be implemented throughout the first quarter of 2020. OPEC+ will decide on the future of the agreement at the beginning of March. If the pact is extended past then, and to include only crude output, knowing data on Russia’s total oil production is still useful for a wider understanding of its oil industry.

Related News ///

FROM THE ARCHIVE ///

Comments ///

Comments

{{ error }}
{{ comment.comment.Name }} • {{ comment.timeAgo }}
{{ comment.comment.Text }}