Russia Takes Aim at U.S. Shale Oil Producers
Russia’s oil-market war with Saudi Arabia is part of a strategic campaign to cripple U.S. shale-oil production, a powerful economic tool that increasingly allows Washington to advance its foreign policy agenda, say people briefed on the Kremlin’s policies.
Less than two weeks ago, President Vladimir Putin summoned Russian oil companies to a conference room at Moscow’s Vnukovo airport to discuss strategy ahead of a meeting between OPEC and its allies on March 5-6.
For four years, Saudi Arabia and Russia had been curbing production together to prop up prices. But with the deadly new coronavirus beginning to sap global oil demand, Riyadh wanted an aggressive response with deep output cuts. Russia wanted more time to see if the effects of the virus would be temporary.
Mr. Putin asked the room whether Russia could withstand a sharp decline in oil prices that was expected if neither side could reach a compromise. Igor Sechin, the head of the state-controlled giant Rosneft and widely considered a staunch nationalist in Mr. Putin’s circle, said low crude prices “are great because they will damage U.S. shale,” according to people familiar with the meeting.
Days later, Mr. Putin sent his energy minister, Alexander Novak, to the OPEC talks with no mandate to negotiate a production cut with the Saudi-led group, according to oil officials in the cartel. The move, combined with a Saudi insistence on deeper, longer-lasting curbs, led to the collapse of the talks on March 6.
Representatives of the Saudi and Russian energy ministries, the Kremlin and Rosneft didn’t respond to requests for comment.
The disagreement set off an oil-price war between two of the world’s top producers. Over the weekend, Saudi Arabia signaled its intentions to boost production to record levels and slash prices. In response, Moscow said it was also planning to open the taps. Global oil prices then lost a fifth of their value, dropping at the fastest pace in three decades.
“Attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world,” the U.S. Energy Department said in a statement this week.
Russian Deputy Foreign Minister Sergei Ryabkov said Thursday that Russia isn’t directly targeting U.S. shale. “We’re rivals in this area, but I wouldn’t establish such a link” between Russia’s OPEC+ exit and a desire to harm U.S. shale, he told the Russian news service Interfax.
Russia’s refusal to maintain its alliance with Saudi Arabia comes after four years of joint production cuts to keep a floor on oil prices both nations need to fill their coffers. The effort culminated with the signing of a formal cooperation pact led by both countries last year.
In December, Kirill Dmitriev, chief executive of the Russian Direct Investment Fund, had backed Russian participation in the OPEC cut amid discussions to join Saudi Arabia on cross investments, according to oil officials.
Mr. Dmitriev was part of the Kremlin’s effort to expand the Saudi oil pact into a strategic partnership that would include projects in Russia’s natural-gas sector and the sale of civilian nuclear technology to Saudi Arabia—moves that could help blunt the impact of U.S. sanctions, they said.
An RDIF spokesman declined to comment.
In early February, Saudi King Salman called Mr. Putin, seeking commitments to reduce output again in response to the coronavirus outbreak, the oil officials said. Mr. Putin sought firm guarantees that Saudi Arabia would make progress on investments but was unconvinced by what he heard, they said. The Kremlin’s chief needs to insulate his country from U.S. sanctions over his country’s involvement in the war in Ukraine and allegations he interfered in American politics. Investment by the kingdom would help offset the impact of U.S. sanctions over Russia’s involvement in the war in Ukraine and its interference in U.S. elections.
The collapse of the Saudi-Russian talks gave the upper hand to a man dubbed “the gray cardinal of Russian politics” by the country’s media. Igor Sechin leads the Kremlin’s hard-line Siloviki faction, which includes former security-services agents and is often at odds with the more technocratic wing represented by OPEC backers Messrs. Dmitriev and Novak.
A former member of the Soviet armed forces, Mr. Sechin was a chief of staff at St. Petersburg’s city hall when Mr. Putin started his ascent to the presidency in the 1990s. Now head of Russia’s largest oil company, Rosneft, Mr. Sechin has never hidden his disdain for the OPEC deal, warning last July it meant “the Americans will immediately take [our] market share.”
U.S. shale producers have increased their production by about four million barrels a day since OPEC and Russia agreed to cut output in late 2016. As it became less reliant on global oil imports, Washington became increasingly bold in its use of oil sanctions. Last year, it took the unprecedented step of banning all sales of Iranian oil without exception and prohibited most Venezuelan exports.
Last spring, Harold Hamm, then-chief executive of shale pioneer Continental Resources Inc., told President Trump that American production could cushion the blow of Iranian oil sanctions. “We did advocate with the Domestic Energy Producers Alliance that the U.S. producers could more than make up for lost oil supply due to ending the waivers on Iran,” he told The Wall Street Journal.
Moscow grew concerned when the Trump administration started to focus its energy sanctions on Russia, according to people briefed on the Kremlin’s views. In late December, the U.S. announced restrictions on the $10.5 billion Nord Stream 2 pipeline, which is set to deliver more Russian gas to Germany. In February, Washington placed sanctions on a subsidiary of Rosneft for its ties to Venezuela.
“It could be a protracted struggle as Russia’s strategy seems to be targeting not simply U.S. shale companies but the coercive sanctions policy that American energy abundance has enabled,” said Helima Croft, chief commodities strategist at RBC.
The Russia-Saudi price war has hurt U.S. shale drillers. Occidental Petroleum Corp., Devon Energy Corp. and Diamondback Energy Inc. have announced measures such as spending cuts, reduced drilling and lower dividends, while Apache Corp. plans to stop all drilling activity in the Permian basin.
Mr. Trump is considering federal assistance to the shale oil-and-gas industry, while Mr. Hamm has told Bloomberg TV he intends to file a complaint with the U.S. Department of Commerce against Saudi Arabia for “illegal” dumping of crude oil on global markets.
Russia hasn’t given up on returning to the OPEC negotiating table. But it now faces Saudi intransigence. This week Russia signaled it would join a technical conference call next week for OPEC and its allies to discuss market conditions—a sign it intends to maintain lines of communication with the cartel, according to oil officials. Saudi Arabia’s delegates didn’t agree to participate, these officials said. The call was canceled.
Photo: For four years, Russia and Saudi Arabia had been curbing production together to support prices. Above, an oil pumping station near Almetyevsk, Tatarstan, Russia. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
