Russia mulls oil output cuts, pipeline still shut

Russian officials and oil bosses discussed cutting oil output on Wednesday after a pipeline dispute with Belarus shut down a tenth on Europe’s oil supply, drawing harsh criticism from European leaders.

Analysts and traders said Russia, the world’s second largest oil exporter, might need to axe around one million barrels per day of its production if the Druzhba (‘Friendship’) pipeline does not resume operation within a week.

Energy Minister Viktor Khristenko met oil firms on Tuesday night and talks continued on Wednesday after President Vladimir Putin said companies should consider cutting output if the stoppage is not resolved quickly.

“The minister and oil firms are discussing what to do in light of the halt of Druzhba, including oil production cuts,” one industry source told Reuters.

European leaders have condemned the trade row between Russia and Belarus, which shut exports of over 1,4-million barrels per day, or one third of total oil exports, from Russia to five European states from Sunday night.

The suspension became the fourth major stand-off between Russia and its neighbours within the last two years. A pricing row with Ukraine a year ago disrupted gas supplies to Europe.

The Ukraine dispute prompted many European leaders to question Russia’s reliability as a major energy supplier. But the criticism did little to prevent the Kremlin from threatening to cut gas supplies to Belarus last month.

Credible threat

Many analysts say the Druzhba closure was a Minsk’s reaction to the December gas agreement, when Belarus was forced to agree to more than double payments for gas.
Russia argues that Belarus is still paying the lowest price among its neighbours.

“The disruption in oil supplies has yet again undermined Russia’s efforts to establish itself as a reliable source of supplies to Europe,” said Yaroslav Lissovolik from Deutsche UFG.

Moscow accuses Minsk of forcing the closure by stealing oil from the Druzhba pipeline, which serves Slovakia, Hungary, the Czech Republic, Poland and Germany, Europe’s biggest economy.

Belarus says Russia should pay higher transit fees. Moscow rejects the new fee as illegal and says it would resume talks with Minsk only after it agrees to scrap the new duty.

Russian officials and traders say production cuts might be needed because Russia has limited options to send crude abroad bypassing Belarus or refine more at home.

“Putin’s threat to reduce production is both credible and possible, as it is practically impossible to replace the Druzhba volumes,” said Roman Yelagin from Renaissance Capital.

Russia produces over 9,7-million bpd and exports around five million. The biggest producers are private firms Lukoil, TNK-BP and Surgut and state-controlled Rosneft and Gazprom Neft.

Lukoil, Russia’s largest oil company with daily output of 1,8-million barrels, said on Tuesday it hoped cuts would not be necessary. “We hope a compromise will be found and there will be no need to cut production,” said spokesperson Dmitry Dolgov.

A trader with a Western major in Moscow said cuts could become a reality if the row is not resolved within a week.

“Russia can accommodate some 500 000 bpd on local refineries and by re-routing volumes to other export routes. But some one million bpd would have to be cut. This is the price of the political stand-off with Belarus, a very high price,” he said.

If the oil dispute escalates and Belarus decides not to bow to Russian pressure, Minsk could resort to its last trump card and shut down gas transit to Europe alongside oil, he added. - Reuters

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