The chief executive officer of one of Russia’s largest oil companies, Rosneft, reportedly has complained in a letter to President Vladimir Putin that going along with production cuts proposed by the Organization for the Petroleum Exporting Countries (OPEC) is a “strategic threat and plays into the hands of the United States,” according to an exclusive report from Reuters.
Reuters said it looked at a copy of the letter that did not include a date or a header, and that a source told the news agency was sent at the end of December. There’s one thing to keep in mind, however: Rosneft CEO Igor Sechin did not get to his lofty position by giving Putin advice that the president doesn’t want to hear. Sechin has opposed any production cuts since the partnership with OPEC was first discussed in late 2016.
Sechin first worked for Putin when he became mayor of St. Petersburg, ultimately rising to the post of deputy mayor. Before that, Sechin worked as a military translator, a role often used as a cover for intelligence officers, according to a report last year on the U.K.’s Moneyweek website. Sechin became Putin’s gatekeeper when the latter was first elected president in 2000.
Sechin is believed to have engineered the downfall of Mikhail Khodorkovsky, founder and CEO of former oil giant Yukos and, at the time, the country’s richest man. Rosneft acquired all Yukos assets and later the assets of another oil firm, Bashneft, following the same playbook. Sechin is not typically grouped with Russian oligarchs like Roman Abramovich, Alexander Abramov and Oleg Deripaska, but his power is considerable and he has been dubbed the “Darth Vader of Russia.”
Vader was not a particularly nice guy, but neither was his boss and neither is Putin. Far from interpreting this letter as a sign of dissension in the ranks, a more accurate reading may be that the leak of this letter is a signal to OPEC that the Russians will either get their way in a new round of crude oil production cuts or they will walk away from any OPEC+ arrangement.
The Saudis (and OPEC) cannot afford to let that happen. If Russia goes rogue and lifts production, the other oil-producing nations are stuck between a rock and a hard place. If Russia leaves, crude prices will come down and all that the Saudis and OPEC have left to do is lower their own prices, hoping to win back market share. This choice is a proven loser and is the one that led to crude prices of around $30 just three short years ago. Taking this path also gives U.S. President Donald Trump the lower retail pump prices on which he is pinning some of his hopes for a second term.
Sechin would argue that it is in Russia’s best interest to force lower prices because this would tighten capital for more U.S. drilling. U.S. shale production depends on drilling a lot of holes and getting the wells to produce quickly so that further drilling can begin. Sechin thinks Russia’s cheaper conventional production can dry up U.S. drillers’ access to capital, forcing them to cut back on new drilling and, eventually, lead to higher prices for Russia and other conventional producers.
The path Sechin favors is Russia’s traditional reaction to OPEC production cuts: lift production to steal market share and cut expenses to the bone. Putin hasn’t exposed his preference yet, but his dilemma is keeping all the Russian oligarchs happy, not just the oil bigwigs. We noted last week that the introduction in the U.S. Congress of bills that allow the Department of Justice to sue cartel members for antitrust violations. The U.S. oil industry opposes such legislation, and as we tried to convey, the politics are more than a little murky.
In a nutshell, the U.S. oil barons want higher prices; the U.S. president wants lower prices; OPEC wants higher prices and thinks it can get the price it wants by cutting production; Russia has gone along with production cuts but the effect has hit a pause, so maybe it’s time to return to the trusty bludgeon the country used in the 1970s.