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. Last Updated: 07/27/2016

Oil Majors Brace for OPEC Deal

The country's oil companies appear to have come to terms with the possibility of a government-mandated production cut if Russia agrees to help OPEC lower world supply at the cartel's summit on Wednesday.

Deputy Prime Minister Igor Sechin, who oversees the country's energy sector, will lead a 20-member delegation to Oran, Algeria, to take part in the summit, where the cartel is likely to agree on a production cut of 2 million barrels per day to help raise prices to a "fair" level.

Moscow might take coordinated action with the Organization of the Petroleum Exporting Countries following a call from the 13-member group for cooperation from Russia, Norway and Mexico after a November cut of 1.5 million barrels a day failed to halt the slide in prices.

OPEC accounts for 42 percent of global oil supply, compared to 12 percent on the part of Russia.

Of the country's top five producers, LUKoil has already expressed support for a joint reduction with OPEC, while three others — Rosneft, TNK-BP and Gazprom Neft — have indicated they would comply with a government decision to that effect.

A Surgutneftegaz spokeswoman declined to comment on the issue Tuesday.

With oil production projected to fall this year and continue the downward trend next year, it remains to be seen whether Russia would agree to cuts on top of the already falling output.

LUKoil vice president Leonid Fedun estimated in October that national crude output could fall by as much as 1.5 percent next year. OPEC is seeking a cut from Russia of 2 percent to 3 percent, LUKoil chief Vagit Alekperov said Monday.

The company, the country's No. 2 crude producer, embraced the idea of cuts despite the fact that it has bucked the national trend by planning a production increase of at least 1 percent for next year. LUKoil spokesman Dmitry Dolgov said that, in the event a deal is struck with OPEC, companies should cut their output relative to their current capacities.

"Our company believes that it's better to sell less oil at a higher price than to sell more at a lower price," Dolgov said Tuesday when asked about LUKoil's support for the cuts.

TNK-BP, the country's third largest producer, said the company wasn't taking sides on the question of cooperation with OPEC, but would comply with any government orders on production cuts, said company vice president Peter Henshaw.

"I don't think we are lobbying either way," Henshaw said. "If the government made the decision, we would do our best to follow the line."

For Gazprom Neft, the country's fifth largest producer, a slide in output is inevitable next year, with or without OPEC, the company said.

"It's necessary to reduce production because prices are falling and it is becoming unprofitable to produce and refine as much," said spokeswoman Natalya Vyalkina.

Peter O'Brien, chief financial officer of Rosneft, the state-owned industry champion, said Monday that the company would react "constructively" to government orders to trim output. At the same time, Rosneft had no plans to reduce output from this year's level, he said.

Sechin, who is also chairman of Rosneft, will be joined in Algeria by Energy Minister Sergei Shmatko and the heads of some of the country's largest oil producers, including LUKoil's Alekperov and Gazprom Neft chief Alexander Dyukov, the companies said.

The Energy Ministry issued a vague statement Tuesday ahead of the OPEC meeting, saying the cartel was considering Russia's proposal to sign a memorandum on "systemic interaction" and the exchange of information.

Ivan Mazalov, director for oil and gas at Prosperity Capital Management, an investment company, said he doubted the government would actually order producing wells to be shut down. Officials could offer OPEC cuts equal to a contraction that is bound to occur next year anyway, as companies are planning less investment, he said.

On Monday, OPEC President Chakib Khelil said that a "fair price" for oil should be around $70 to $80 per barrel — below which a number of OPEC members begin losing money.

London Brent crude gained 55 cents Tuesday, to close at $45.15.

Among OPEC nonmembers, Russia appears to be the only country ready to announce cuts in cooperation with the cartel. Khelil said Monday that Mexico doesn't need to join in any concerted action, as its output is already falling.

Norway, meanwhile, said last week that it had no plans to lower output.

Sandrine Toerstad, head of market analysis for StatoilHydro, Norway's largest oil and gas company, said Monday that "prices are too high for Norway to cut."

Production costs on the Norwegian continental shelf are roughly $15 a barrel, he said.