BUSINESS

Saudi-Russian energy cooperation: A balancing act

While current Qatar related regional tensions are dominating the headlines, there are some long-term Saudi strategic realignments taking place. President Trump’s visit to Saudi Arabia certainly seemed to herald a new military and economic bond that had been temporarily shaken under the previous US Administration.

In another bold move, the Kingdom has also moved swiftly to cement an evolving relationship that is just as important as the mega defence deals with the USA, which will help to underpin these deals as well as the economic transformation that is taking place.

This is specifically in the oil market, where Saudi Arabia has once again assumed the mantle as undisputed leader of OPEC producers and has joined forces with Russia, the other non -OPEC oil superpower.

The visit of Deputy Crown Prince Mohammed bin Salman to see President Putin in Russia , coming on the heels of Trump’s visit to Saudi Arabia , has sent a strong signal that the Kingdom will cooperate with all powers as long as this is done on a mutually beneficial basis and where all parties’ interests are taken into account.

President Putin was very pleased with the visit, after feeling that the blossoming Saudi-US relations was marginalizing Russia, and welcomed Prince Mohammed bin Salman in the Kremlin , with both men stating they would deepen cooperation in oil and work on narrowing their differences over Syria, where Moscow and Riyadh are backing opposing sides in a civil war.

“The most important thing is that we are succeeding in building a solid foundation to stabilize oil markets and energy prices,” said Prince Mohammed. Putin said the countries would work together to resolve a “difficult situation” and extended an invitation for King Salman to visit Russia. 

The good bond 

The meeting was the second time that both men had met and it would seem a good bond was struck, whereby President Putin felt assured that Saudi Arabia would commit and honour its obligations to stabilize the oil market prices and this led to the Russians to go along.

This is despite some reservations from the partly privatised Russian oil giants like Rosneft that felt that market forces should be left to determine prices and not production cuts and quotas.

By all accounts, even Rosneft’s CEO. Igor Sehchin is now fully on board and visited Saudi Aramco to further cement this relationship, but the key drivers of the cooperative spirit have been the energy ministers of both countries, Saudi Arabia’s Khaled Al Falih and Russian Energy Minister Alexander Novak who seem genuinely to respect and like working with each other to overcome obstacles in terms of compliance with the historic December 2016 production quota between OPEC and non OPEC producers.

Novak and Falih reiterated in Moscow they would do “whatever it takes” to stabilize oil markets, borrowing a famous phrase used by European Central Bank President Mario Draghi five years ago to defend the euro.

Analysts are now viewing this energy cooperation, as well as higher level political relationships as heralding a Saudi-Russia entente and a new oil order. This will be closely watched by big oil consumers around the world, which have long relied on the hot rivalry between their top suppliers to secure better deals and play one party off against the other, which was the situation before the December 2016 agreement, with competition between the Kingdom and Russia increasing their respective market share in Asia, particularly in China and India, the only regions of the world that has so far sustained an increase in oil demand.

Dr. Mohamed A. Ramady



Analysts are now viewing this energy cooperation, as well as higher level political relationships as heralding a Saudi-Russia entente and a new oil order. This will be closely watched by big oil consumers around the world, which have long relied on the hot rivalry between their top suppliers to secure better deals and play one party off against the other, which was the situation before the December 2016 agreement, with competition between the Kingdom and Russia increasing their respective market share in Asia, particularly in China and India, the only regions of the world that has so far sustained an increase in oil demand.

In a sign of their white-hot Asian rivalry, Rosneft outbid Aramco to buy India's refiner Essar last year and boost its share in the world’s fastest growing fuel market. This new found cooperation is a complete reversal of the statements from both Saudi Arabia and Russia following the previous Saudi decision to opt for a market led strategy, with former Saudi Oil Minister Ali Al Naimi and Igor Sechin declaring that they would not mind if oil prices fell to $30 or even lower levels.

The markets took them at their word and prices collapsed, and the rest is history as they say. Much has changed since then, however, both economically and politically - and the unlikely partnership between Moscow and Riyadh has been born out of necessity.

When oil prices collapsed, both economies were driven into deficit after years of high spending and are only now slowly recovering. With Russia heading for a presidential election in early 2018, and Deputy Crown Prince Mohammed bin Salman having pledged to reform the Saudi economy, and partially list Saudi Aramco, neither country can afford another oil price shock. It is amazing what an oil crash can do. 

Consortium of investors   

Now Saudi Arabia and Russia say they will remain in partnership long after the current output reduction deal expires, and the Saudi Public Investment Fund signed a memorandum of understanding with the Russian Direct Investment Fund to explore joining a consortium of investors in a Moscow real estate project.

The Russian fund said both parties are also evaluating possible projects in retail, alternative energy projects, transportation, and logistics infrastructure worth $10 billion.

This is not to say that it is all sweetness and light between Saudi Arabia and Russia as the Kingdom still remembers Russia’s broken promises to curb production but only to renege, and has a history of free-riding on prior OPEC cuts, and the two countries are also at odds over some not-so-minor topics such as Syria and Iran. However there is now talk of their temporary and often frayed alliance becoming “institutionalized.”

The crucial test for both countries and the energy market comes next March, when the newly agreed production cuts agreement is currently due to end. By then, if the cuts hold, most of Russia's oil majors such as Rosneft, will have clocked up a full year of lower production, and their timetables for development and investment in new fields could be put at risk if the agreement with OPEC is extended.

Crucially, however, Russia's presidential election will also be out of the way, taking some immediate pressure off the government in terms of managing the budget and political uncertainty, if President Putin is re-elected as is expected, while in Saudi Arabia, the planned IPO of Saudi Aramco should be imminent and the markets will have factored in an oil price level it can live with for the IPO.
Will the pact to maintain current production quotas hold, or both countries decide that having lost market share to unchecked US shale producers, it was not worth it anymore and go their separate way and opt for higher production?

That is the question that few can predict with certainty, given current weak oil price levels, but the pact could still survive if the  “institutionalized” relationship takes on a wider geo- political perspective to suit both countries interests in the region, and not just on the energy front.

_________________________
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

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Last Update: Sunday, 18 June 2017 KSA 12:43 - GMT 09:43
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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