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. Last Updated: 07/27/2016

Russia Balks at Oil Production Cut




The world's oil community has asked Russia to cut oil exports in an effort to reduce supply and boost world prices, but Russia's acting prime minister said Wednesday cutting production would be a grave error.


Top oil producers over the weekend agreed to cut production as a way to increase world oil prices out of a five-month slump. In a meeting in the Saudi Arabian capital of Riyadh, members of the Organization of the Petroleum Exporting Countries, or OPEC, agreed to cut world output by up to 2 million barrels a day, earmarking Russia for a cut of 100,000 barrels per day, Reuters reported.


But Russia's acting prime minister, Sergei Kiriyenko, said in a published interview Wednesday that he opposes any production cuts, saying they would harm Russia's trade balance and federal budget.


Kiriyenko, appointed acting prime minister on Monday after a government shake-up, added that 30 percent of oil wells could not be restarted once they'd been shut down.


"Without question, it is impossible to allow a fall in oil production," Segodnya daily quoted Kiriyenko as saying.


Russia is struggling along with other oil-producing nations to combat the near 40 percent fall in world oil prices that has ensued since OPEC announced in November it would raise production by 10 percent.


Benchmark Brent North Sea crude rose 30 cents to $14.83 in late afternoon trading Wednesday on news that OPEC had called an emergency meeting for Monday to discuss world prices and planned to invite non-OPEC producers.


The average price for Brent crude in 1997 was $19.30.


In a sign that Russia is open to discussing solutions to the pricing crisis, First Deputy Prime Minister Boris Nemtsov will invite OPEC's secretary-general to visit Moscow, Interfax quoted Nemtsov press secretary Andrei Pershin as saying Wednesday.


The 100,000 barrels per day cut in output requested of Russia represents 4 percent of Russia's daily exports.


Despite Kiriyenko's warnings, a World Bank economist maintained that cutting production -- assuming prices would then rise -- would hurt the Russian economy less than a continuation of current prices.


Alexander Morozov calculated that in a worst case scenario, if prices for Russian oil average $11 in 1998, the federal budget would lose less than $1 billion in tax revenue due to the reduced profitability of Russian oil companies. Such prices would also increase Russia's current account deficit of $1 billion to $2 billion by up to $6.7 billion, Morozov said.


A 4 percent production cut "would cause much less damage to the current account balance and federal budget than if oil exporting countries do not agree on cuts and oil prices remain [low] for the year," Morozov said.


Agreeing to production cuts could also give Russia a stronger voice and greater negotiating power in the international oil community, said Stephen O'Sullivan, an oil analyst with MC Securities in London.


"I think it would be good for Russia as a country and good for its relations with the world, particularly with the Mideast," O'Sullivan said.


In addition to considering production cuts, Russia this week will determine whether to give Russian oil producers the tax breaks they've pleaded for in light of falling prices.


Comments made Wednesday in the newspaper Izvestia by Alexander Livshits, head of the president's administration, suggest the government is planning to grant producers tax breaks, but not the breaks they've requested.


Russian companies had asked that excise taxes be cut in half and pipeline tariffs reduced.


Instead, Livshits said a decree under consideration would refund what's called the "mineral replacement tax" to companies for use only in exploring new oil fields. The mineral tax represents 7 percent of oil companies' total tax burden.


A second decree would guarantee oil companies payment of all oil shipments to government-funded organizations, Livshits said.