ENERGY

Saudi Arabia and Russia vie for global oil market foothold

Russian President Putin attends a meeting with Saudi Defence Minister Prince Mohammed in St. Petersburg. (Reuters)

In the rapidly changing geopolitical environment, Saudi Arabia and Russia are forging ahead - fostering a closer relationship - in major sectors including the all important energy sector.

When the Saudi Deputy Crown prince Mohammad bin Salman, accompanied not only by the Foreign Minister Adel bin Jubeir but also the Petroleum Minister Ali Al-Naimi called on Russian President Vladimir Putin in St. Petersburg on June 18, six major deals were signed between the world’s two top crude producers.

The deals ranged from agreement in defense sector to enhanced cooperation in energy development. It also covered greater cooperation on nuclear energy development. Citing unnamed sources, Al-Arabiya reported the kingdom planned to build 16 nuclear reactors and Russia has agreed to play a significant role in operating them.

The Saudi atomic and renewable energy body has already signed nuclear cooperation deals with countries able to build reactors, including the United States, France, Russia, South Korea, China and Argentina.

Interestingly during the visit, the two sides, who otherwise seem competing, rather intensely these days, for crude market share also announced forming a working group for joint energy projects.

“At the end of the year, in October, we will summon a meeting of the (Russian and Saudi) intergovernmental commission, which hasn’t operated for five years,” Russia’s Energy Minister Aleksandr Novak said in St Petersburg.

“There are no specific projects in the energy field yet, we only have an agreement to create a working group between our ministry and the Saudi Arabian oil ministry, which, together our companies will work on specific projects,” the energy minister told reporters.

He further clarified that his country (through the deal with Saudi Arabia) was not looking to replace its existing oil and gas partners but wanted to create newer ones.

Given that U.S. and EU sanctions limit the transfer of new oil and gas technology to Russian state oil firms, reports indicate that Russia could be seeking enhanced oil and gas recovery and advanced drilling technology from Saudi Arabia, especially for use in the older fields in West Siberia.

With a growing list of global research centers in Beijing, Houston, Aberdeen, Massachusetts and others, Saudi Aramco is today regarded as the biggest global investor in new oil and gas technologies.

But while Saudi Arabia and Russia seem to be expanding their relationship, an interesting scenario seems emerging too. They continue to compete, rather fiercely, in global crude markets, already faced with glut. The battle for market share is very much on.

In May, Russia’s oil output reached a record 10.78 million barrels a day, pretty close to the Soviet era production of 1987. This was significantly up from May last year, when Russian production stood at 10.08 million bpd.

The record crude oil output from Russia is certain to continue putting pressure on the global crude oil markets. In near term too, Russia does not appear to be considering any output cut.

And the world's leading crude exporter, Saudi Arabia's output is also in top gear. As per OPEC statistics, Saudi output went up by 697,000 bpd between February and May this year, rising to 10.3 million bpd in May 2015 as against 9.69 million bpd a year earlier.

And there are indications this could go up further.

Al-Naimi said in St. Petersburg the country has about one and a half million to two million bpd of spare capacity, and is ready to raise production if demand calls for such an action. Goldman Sachs and Citi Group are also now projecting that Riyadh will likely start to push production to 11 million bpd in the second half of 2015.

“If you are Saudi Arabia and you’re looking at the new oil order we live in, you would go to full capacity,” Jeff Currie, head of commodities research at Goldman Sachs in New York, was quoted as saying by Bloomberg.

And the competition between the two is beginning to get brutal too. With the world's largest consumer, the United States, now depending more and more on its domestic output, the focus of major crude producers is on emerging Asia, especially China - already in the process of overtaking the US as the world’s biggest importer of crude.

From Moscow to Riyadh and Tehran to Baghdad, all major stakeholders seem to be concentrating on Beijing to ensure a healthy pie of the Chinese cake. And in race to grab a significant share in the Chinese crude market, at least for the time being, Moscow seems to have pipped Riyadh too.

In May, China imported a record 3.92 million metric tons from Russia, Bloomberg reported quoting data from the Beijing-based General Administration of Customs.

That’s equivalent to 927,000 barrels a day, a 20 percent increase from the previous month. “By our records, which started in 2007, this is the first time Russia is China’s top crude supplier,” Financial Times quoted Amrita Sen, head of oil research at Energy Aspects in London, as saying.

Russian exports to China have more than doubled since 2010. And a number of reasons are also being cited for this upsurge in Russian crude exports to China.

As Western sanctions over the Ukraine crisis started to bite, Moscow has had to seek alternative markets. It has been, understandably, keen to strengthen ties with Beijing, analysts are underlining all around.

A number of other factors too seem to be aiding Moscow in its bid to expand it crude sales to China - at the expense of Saudi Arabia and others. Moscow's decision to accept the proceeds from oil sales in Chinese currency yuan seems to have helped significantly in the rise in exports to Beijing.

Further, in 2013, Russia’s largest oil producer, Rosneft, signed an $85bn deal with China’s Sinopec to deliver 100m tons of crude over 10 years. And then Rosneft also struck a 25-year contract, worth $270 billion, with Chinese state-owned oil company CNPC for the delivery of 365 million tons of oil.

The upsurge from Russia was apparently at the expense of Riyadh. Consequent to the development, Saudi crude exports to China, slumped by 42 percent last month from April, to 3.05 million tons - 722,000 bpd.

However, despite the intense media debate on the issue, one could not defer underlining that last months' figure may not be truly representative of the market undercurrents.

With brute summer around and the Saudi domestic consumption on the rise, crude exports could get compromised during the months. Less export to China may also be a manifestation of that.

In April Saudi Arabia’s crude exports fell by 161,000 bpd, to 7.737million bpd from 7.898 million in March as domestic refiners processed more crude, official data confirmed. Domestic refiners processed 2.224 million bpd, up 315,000 bpd from 1.909 million bpd in March, Joint Organizations Data Initiative (JODI) figures showed.

The country burnt 358,000 bpd in April versus 351,000 bpd in March.

Before reaching a conclusion on the Chinese market, one needs to wait for a few more months. Yet the fact remains that despite growing cooperation, Russia and Saudi Arabia also continue to fiercely compete in the global crude markets.

And that is the dichotomy of this otherwise budding relationship.

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Last Update: Sunday, 28 June 2015 KSA 11:58 - GMT 08:58
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Saudi Arabia and Russia vie for global oil market foothold
The two sides who otherwise seem sompeting are forming a working group for joint energy projects
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