Russia’s Influence in Saudi Arabia Undercut by Fracturing of OPEC+ Arrangement; Saudi Investments in Russia Now in Question
For three years Russia — as the third largest oil producer in the world — has been a somewhat reluctant participant of an oil production cut agreement with the Saudi Arabia-led Organization of Petroleum Exporting Countries (OPEC) that has been termed OPEC+. This alliance was formed, in part, to stabilize oil prices amid the dramatic increase in production caused by the U.S. shale boom. One byproduct of the OPEC+ arrangement, however, has been an increase in Russian influence and leverage in the region, with Riyadh incentivized to keep Russia in this new grouping. In turn, however, growing economic ties between the two countries provided Saudi Arabia leverage of its own, as Riyadh offered significant investment in Russian industry during a period where foreign capital was in short supply due to sanctions pressures. With the fracture in the OPEC+ agreement, both sides find this leverage to be temporarily lacking.
This was on display for Russia, when, on March 16, Russian’s Kommersant reported that the planned 7.5 billion ruble (~$100 million) Saudi investment in Russian oilfield services company, Novomet, “is likely to fail.” The deal would have allowed Saudi Arabia to gain a 30.76% stake in the company and with it, offer Riyadh first-time access into the Russian energy sector. Whereas, the Russian Direct Investment Fund (RDIF) claims the suspension of the deal is due to current macroeconomic conditions in the world, Kommersant sources claim that the deal fell apart due to an increasing strain in Russian-Saudi relations over the ongoing oil price war that has prompted both sides to substantially increase oil production in violation of their three-year long production cut under the OPEC+ alliance (a consortium of OPEC and non-OPEC oil exporting countries).
It is also claimed, that Rosneft, Novomet’s primary customer, has been a longtime opponent of cooperation with the Saudi oil industry and is seeking to scuttle the deal. The Russian state-run oil major has consistently vocalized its opposition to Moscow’s cooperation in the OPEC+ alliance that recently fell apart. The company has refuted claims, however, that it is meddling in the Novomet deal.
Saudi investment in Novomet was initiated in 2018 in alignment with the production cut framework of the OPEC+ alliance. It signified what many expected to be a quid pro quo of Russia agreeing to coordinate more with its new OPEC partners in exchange for access to Saudi capital taking the form of badly needed foreign investment (particularly as Russia sought to emerge from a period of sanctions). The deal was set to become the largest in Russia’s oilfield services history, while marking the entry of Saudi companies in Russia’s energy sector.
In November 2019, the transaction received regulatory approvals – a milestone considering similar past efforts by foreign companies have been blocked (in 2014, Haliburton’s $1 billion takeover attempt of Novomet was blocked, as was Schlumberger’s efforts to invest in Eurasia Drilling Company). It remains to be seen if other planned economic cooperation agreements face similar repercussions. The Novomet deal is just one of a number of bilateral energy sector-specific cooperation agreements signed between the two countries in late 2019.
Russia Sees Long-Term Opportunity Amid Downward Spiral of Oil Prices
Substantial speculation persists that Russia views the ongoing price war with Riyadh as an opportunity to demonstrate Saudi Arabia’s diminished weight as an energy powerhouse that, by itself, has the ability to dictate global export levels. Moscow may hope that cracking this perception will deliver long-term value to its own strategic position in the industry and negotiating leverage in future OPEC+ scenarios. It has also been speculated that Russia is seeking to undermine U.S. shale producers at an exceptionally vulnerable period for the energy sector. The rapid growth of the shale industry has made the United States the top global oil producer in the world. This phenomenon was described by Rosneft’s press secretary, Mikhail Leontiev, who alluded that the collapse of the OPEC+ agreement offers Russian producers a chance to concentrate on monetizing domestic crude production,
“The true result of the arrangement [OPEC+ production cut agreement] is that the total volume of oil that was reduced as a result of the repeated extension of the OPEC+ agreement was completely and quickly replaced in the world market with American shale oil.”
Viewing the undermining of the U.S. shale industry as the “long game,” both Russia and Saudi Arabia have claimed that they are able to sustain production amid record-low global oil prices, which have been fluctuating between $25-$40 since early March 2020. Russia has reserves of up to $170 billion in the country’s national wealth fund from excess oil revenues in recent, more prosperous years, which is expected to offset short-term financial pressures stemming from the price war. Earlier this week, Riyadh also claimed that it is able to weather lower oil prices while ramping up output through April and May 2020. This came amid news that Saudi Aramco is significantly cutting its expenditures for 2020 and reviewing its spending plan for 2021.