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By John Helmer in Moscow

Russia kept its observer’s status at this week’s summit conference of the Organization of Petroleum Exporting Countries (OPEC), and avoided taking the plunge into membership of the international oil cartel that was hinted at by the Kremlin last week.

At the same time, the Kremlin is playing a siren song to attract greater coordination of the international gas trade when the cartel of gas producers meet to hold hands in Moscow next Tuesday, December 23.

The new OPEC cut of 2.2 million barrels per day (bpd) in output quota will not be supplemented by a fresh Russian cut, although Igor Sechin, the deputy prime minister in charge of the oil sector, announced at the meeting in Algeria that if crude prices do not start to recover next year, Russia will cut export volumes by another 320,000 bpd, following the 350,000 bpd export cut in November.

The projected cut looks likely to occur whatever Sechin says, because falling prices have reduced incentives to produce among the smaller Russian producers, and the majors are also cutting back on field expansions, and delivering more of their crude to domestic refineries, instead of to the ports for export as crude.

The Russian move was considerably less than the 400,000 bpd cut OPEC members had sought. Also, Russia has not agreed to a specific cut by a specific date, as the OPEC countries have done. Industry sources note that it is more difficult for Russia, compared to leading OPEC members like Saudi Arabia, to close down producing wells, as the harsh operating conditions in Siberia make it difficult to recommission the wells later.

Russian President Dmitri Medvedev had triggered speculation that Russia might join OPEC, when he said last week that Russia must defend its interest in a higher oil price, noting that this could include “a decrease in oil production, or have participation in currently existing [or new] exporters’ clubs.”

The interpretation that Russia was getting ready to end forty-eight years of independence of OPEC) was implicitly denied by Medvedev: “Let me repeat: What is on the agenda is the source of income for our country, the development of our country. Ў¬ It’s about our national interests. We will do what we think is necessary.”

Industry sources acknowledge that Russia’s current interest is in line with OPEC’s to halt the current oil price slide, and rebuild state revenues at around $70 per barrel. The Kremlin’s policy instruments to achieve that with Russian producers are a combination of tax relief and pipeline access. Avoiding OPEC constraints, because the Kremlin has always viewed the organization as driven by a pro-US orientation, has been Moscow’s traditional policy, and Medvedev’s remarks reiterated that.

Sechin’s remarks at the OPEC meeting were a gesture of solidarity in OPEC’s direction, without a significant change in Russian policy, offering to do what the Kremlin can do little to encourage, or to prevent. As Russian company cash flows are squeezed, oil revenues fall, and costs including taxes remain high, all the domestic oil majors have cut oilfield spending, and will do so even further in 2009. This means a minimum loss of 200,000 bpd and a maximum of 500,000 bpd by end-2009. Sechin did little more than split the difference, and offer that to OPEC as the Russian contribution.

From the geopolitical point of view, the Kremlin calculates that it has preserved its cooperative relationship with OPEC, and encouraged member states, which are also gas producers, to join in next week’s round of gas output and pricing talks in Moscow. At the same time, the Kremlin has sidestepped accusations from the European Union and the US Congress that it is an unreliable supplier of energy.

On the gas front, Kremlin strategy is less reticent, not least of all because, through Gazprom, Russia controls far more of the world’s gas reserves and export flows than it does of crude oil and petroleum products.

Russia, Iran and Qatar, together, hold 69% of the world’s gas reserves. Earlier in the year, they agreed to form a tripartite organization to meet regularly for talks on gas export, transportation and pricing policy. Russia exports at present in natural gas form through pipelines, and has yet to commence liquefied natural gas (LNG) shipments, though these are planned to start next year from Sakhalin Island. Iran is planning both pipeline and LNG shipments, while Qatar exports primarily in LNG form, plus a small volume of natural gas.

In addition to this gas troika, Russia is actively building the seven-year old, hot-air talking shop called the Gas -Exporting Countries Forum (GECF). Founded in Tehran, the forum counts 14 regular country members, plus five kibbitzers, and one observer, Norway. The last summit meeting of gas ministers was held in Doha in April 2007. Moscow plays host next week.

Before the Doha meeting, when Russian confidence was buoyed on the rising price of oil and gas, and burgeoning energy revenues, then President Vladimir Putin toured Saudi Arabia and Qatar to endorse the idea of cartel mechanisms for application by the GECF. Represented at Doha by Energy Minister Victor Khristenko and Gazprom chief executive Alexei Miller, the Russian delegation pushed through an agreement to create a study group for evaluating gas pricing mechanisms currently in use, with the objective of devising a single standard, delinked from crude oil and incorporating the different forms in which gas is traded in the market.

Russian industry analysts believe the gas troika cannot have much impact on the global demand-supply balance for gas, or on gas export pricing, until a majority of the GECF members agree to shift from signing long-term take-or-pay gas contracts, which provide for less volatile export prices and guaranteed gas deliveries. A unified gas pricing mechanism will be hard to set as Gazprom exports natural gas via pipeline and there is no tradable exchange instrument for natural gas, like the Brent market for crude oil. Other GECF members, especially in the Persian Gulf, prefer to export LNG, for which prices are volatile and set differently from Gazprom’s natural gas contracts.

Breaking up — that is, delinking between oil and gas — is hard to do. But winter helps, or at least that is Gazprom’s hope now, as contracts for current and first-quarter deliveries lose the price link they have to the crude oil price peak of mid-2008.

Gazprom’s recently released production and export cuts suggest it believes that a warm winter in Europe may add to the demand reductions already dictated by recession. However, at the same time, the dominant gas supplier to Europe is wagering that it can achieve higher spot-market gas prices if the weather turns unexpectedly cold.

According to a recent briefing by Deputy CEO Valery Golubev, this year’s expected gas output from Gazprom will be 20% to 25% below that of a year ago, with December volume of 39-42 billion cubic metres (bcm) as low as the summer monthly average. The production cut forecast is deeper than domestic power generation, which fell 7% in November, compared to November of 2007. While Golubev did not issue a new export forecast, Gazprom is signalling that unless it cuts back more sharply on export shipments than domestic supplies, it will face downward price pressure from pre-winter stocking of gas supplies, and from low spot-price buying by European consumers. Gazprom is hoping that a cold spell across Europe could trigger a sudden spike in demand, and spot deficits, thereby encouraging a more sustainable price after the first-quarter contracts expire, and new ones, linked to much lower crude oil prices, must be negotiated.

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