Russia produces crude close to OPEC+ quota: Novak

Russia is producing close to its crude production cut target under the OPEC+ agreement, Deputy Prime Minister Alexander Novak said July 23, as Russia struggles to comply with a deeper cut from the second quarter.

"We have almost reached it, are close to it, we have not fully implemented it," Novak, who is Russia's lead OPEC+ negotiator, told reporters, according to the Tass news agency.

Russia failed to meet its target in the second quarter, when it pledged to implement deeper cuts under the agreement, according to the Platts OPEC+ production survey by S&P Global Commodity Insights. It produced 9.1 million b/d in June, against a quota of 8.978 million b/d, the survey found.

Russia has pledged to compensate for overproduction in the first half of 2024, but has yet to release a detailed plan of how it will do this. For technical reasons, Russian producers have more flexibility to increase or decrease production in the summer months.

Compliance with quotas has been a source of contention within OPEC+ in 2024, and Iraq and Kazakhstan have also agreed to compensation for pumping above quota. If a recent dip in prices continues, other members of the group could increase scrutiny on compliance.

Platts, part of Commodity Insights, assessed Dated Brent at $83.07/b on July 22, down from $88.01/b at the start of July.

A meeting of the joint ministerial monitoring committee overseeing the OPEC+ agreement is due to meet Aug. 1. Under current agreements, the group will bring some barrels back to market in the fourth quarter.

Export flexibility

Novak said that Russia will be able to increase oil exports to Asia, including China, via its ports on the Black and Baltic seas by redirecting flows and implementing new projects, Tass reported. Novak was speaking during the 21st meeting of the Russia-China Intergovernmental Commission on Energy Cooperation held in Moscow.

"We are developing a number of new fields in the Arctic. A pipeline is being built to the port of Bukhta Sever on Taimyr. These are promising areas that are being considered today in order to supply energy from this region to the Asia-Pacific regions in the future," Novak said.

China and other Asian markets have played a key role in Russia's energy strategy since it invaded Ukraine in February 2022. The conflict triggered Western sanctions that have cut off Russia's access to many traditional markets in Europe.

Novak said that Russia supplied 107 million mt of oil to China in 2023, equivalent to around 2.15 million b/d. This was up from 80 million mt in 2022.

It aims to further increase supplies to Asia through development of oil upstream and infrastructure projects in Northern and Eastern Russia.

Rosneft role

Rosneft is playing a key role in these projects, including through development of infrastructure, as well as production at the Vankor cluster, to be shipped via the Northern Sea Route. The route runs entirely through Russian territorial waters and is quicker and cheaper than traditional supply routes to Asia.

Development of the project is threatened by Western sanctions, which limit Russia's access to goods, technology and tankers. Rosneft CEO Igor Sechin said that Russia can build tankers for the route with Chinese companies, during the Russia-China Energy Business Forum, also held in Moscow July 23.

"The Northern Sea Route will require a high ice-class tanker fleet, which can be created in cooperation with Chinese shipbuilders and components suppliers," Sechin said, according to Tass.

He also called for increased Chinese direct investment in the Russian energy sector to strengthen energy security.

"After all, Russia is one of the few countries that consistently invests in the development of traditional energy ... We hope for an increase in China's direct investment in Russia's energy sector, which is characterized by high investment returns for investors and no risk of returning funds to equity," Sechin said.

Sechin estimates that the economic impact of China buying crude from Russia rather than Middle East producers since January 2022 was around $14-18 billion.

Asian consumers, including China have capitalized on discounts on Russian crude compared to Dated Brent, which have been as wide as $40/b since the conflict in Ukraine began. This has come down in recent months, but remains significant. Platts assessed the differential at $12.2 on July 23.

Sechin said that the value of Russian energy exports to China was up 4% on the year in H1 2024 to around $46 billion.

"As a result, our country provided almost 20% of China's energy imports in value terms. Let me remind you that in 2021, this figure was only 13%," he said.