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Exclusive - Rising Russian Sakhalin-1 oil output may threaten OPEC deal compliance
November 27, 2017 / 5:14 PM / 16 days ago

Exclusive - Rising Russian Sakhalin-1 oil output may threaten OPEC deal compliance

NEW DELHI/SINGAPORE (Reuters) - Oil output from Russia’s Sakhalin-1 project is set to rise by about a quarter to 250,000-260,000 barrels per day (bpd) from January, sources with knowledge of the plan said, signalling Moscow may find it hard to comply with an extended OPEC output cut.

Russia and the Organization of the Petroleum Exporting Countries will meet in Vienna on Thursday to discuss an extension of the pact to curb output, possibly to the end of 2018.

The Sakhalin-1 project, operated by ExxonMobil off the coast of Sakhalin island in Russia’s Far East, currently produces about 200,000 bpd.

“From January, total oil production from Sakhalin-1 and a small stream from Rosneft’s separate block will be about 250,000 bpd,” said one of the sources.

A second source said production will increase to 260,000 bpd in the March quarter from about 190,000 bpd in 2017. A third source said output will rise to more than more than 250,000 bpd.

None of the sources wanted to be identified due to the sensitivity of the issue.

“Exxon is seeking permission to raise output under its development plan and hopeful of getting it later in the year.” said the first source.

In the meantime, the joint venture has opted to “front load” production and may cut it later if permission is not granted to keep the annual average intact, this source said.

India’s ONGC Videsh recently for the first time issued three tenders for the sale of Sokol crude from Sakhalin-1 in a month. [CRU/TENDA]

OPEC, Russia and several other major producers have cut their combined output by about 1.8 million barrels per day since January to reduce bloated inventories and boost oil prices.

Moscow has said it was ready to support extending a deal.

ECONOMIC PAIN

But its economy minister has also said Russia’s economy has been hurt by the deal as its dampened investment.

Russia’s oil-dependent economy grew an annual 1.8 percent in the September quarter, slowing from 2.5 percent in the second quarter.

Under the current deal that ends in March, Russia agreed to cut output by 300,000 bpd from its level in October 2016.

“Russia may have to cut output from other fields to compensate for a rise in output from Sakhalin-1. It is in Russia’s interest to comply with deal to keep oil prices high,” said Ehsan Ul-Haq, director of crude oil and refined products at consultancy Resource Economist.

ExxonMobil holds a 30 percent stake in Sakhalin-1, Japan’s Sodeco has 30 percent, India’s ONGC Videsh holds 20 percent and the rest is controlled by Rosneft.

ONGC Videsh’s managing director declined to comment. Exxon was not immediately available to comment.

One of the stumbling blocks for extending the OPEC-led deal is a boom in U.S. oil production, which has jumped by 15 percent since mid-2016 to a record 9.66 million bpd.

U.S. producers, which scaled back output with the price slump after mid-2014, have ramped up production as oil prices climbed. Higher U.S. output undermines the impact of output cuts and erodes market share for others, like Russia.

A recovery in production from Nigeria and Libya - OPEC members exempted from supply cuts due to losses caused by unrest - has also added to supplies and that could force existing participants in the deal to go for deeper cuts.

A key goal of the agreement, lifting prices, has been achieved. Benchmark Brent crude, which tumbled from well above $100 a barrel in 2014 to about $27 in 2016, is back above $60.

“Until now the discipline is very strong as prices were below $60 a barrel ...with a rise in prices many countries stop thinking about consequences of lower oil prices and that could mean low compliance,” said Haq.

“Whenever the prices are high than discipline becomes challenging,” he added.

Additional reporting by Vladimir Soldatkin in Moscow; Editing by Adrian Croft

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