Gennady Shmal: "Oil may reach $70 per barrel after OPEC agreement"

OPEC and 11 countries outside the cartel agreed on coordinated cut of oil production in the next six months: Russia, Azerbaijan, Kazakhstan, Mexico, Oman, Bahrain, Brunei, Malaysia, Equatorial Guinea, Sudan and South Sudan cut their oil production by 588 thousand barrels per day in total, while OPEC countries cut 1.164 million barrels per day. President of the Russian Oil and Gas Producers Union Gennady Shmal discussed possible effects of this agreement in an interview with Vestnik Kavkaza.

- How will cut by 300 thousand barrels per day affect Russian oil industry? 

- I don't think it will affect Russia that much, because our current production levels are already huge enough to fully satisfy our needs and export. At least those needs that exist in terms of export flows are fully satisfied. So I don't see a problem in cutting production by 300 thousand barrels per day, and I believe that our companies will deal with it perfectly. 

- How will it be implemented in Russia?

- A meeting with all oil companies will be held. I think it will be even, based on production levels of each company. Of course, some exceptions are possible. It would be easier to do it where production is already low, but it will be decided by the Energy Ministry and oil companies, which must determine appropriate policy and make appropriate decision. 

- Will production cut by 1.8 million barrels per day help to balance supply and demand on the world market?

- No one can say for sure, so people should not be too happy about this. This cut doesn't mean that the prices will immediately go up. Of course, prices were up as soon as the agreements were signed, but then usual fluctuations began once again. The thing is that right now the balance of supply and demand is not a determining factor for the oil price. The most important thing right now is the work of financial speculators. They say: "We don't have enough money, so we will not spend it on oil industry," and prices are staying at the current level. As soon as they invest more money, prices will immediately go up. That's why any internationally significant event affects the price. OPEC agreement itself is, of course, absolutely correct and very useful, especially since it has been achieved for the first time in many, many years. But I would not say that it will have a crucial impact on prices. 

- How much will oil prices rise will the help of this agreement? 

- I think it will be great if prices would reach $60 per barrel by the end of this year. Overall, $80 per barrel would be a fair price for both producing countries and customers today: it would cover all current costs. Let me remind you that there is, for example, a deep-water shelf, where producing oil is quite expensive, there are Canadian oil sands, where the cost is about $60-70 per barrel. However, I think this price may be achieved only in a couple of years. It would be great to reach $60 per barrel by the end of 2016, and $70 per barrel is possible next year. 

- Can higher price revive US shale oil projects? 

- Of course. US shale oil projects are profitable under the price of about $60 per barrel (shale oil production costs may be higher or lower at different fields). Basically, it's a "perpetual motion machine": production levels will increase, which means that oil prices will once again go down. So it's a double edged sword. 

- Is prolongation of this agreement in six months possible? 

- To answer this question we must first see how will this agreement actually work. But the fact that they managed to agree this time shows that it is possible to sign a similar agreement in the future if necessary.