AGSIW experts explain what regional trends they’ll be following most closely as the year unfolds.
The future of the two-year old OPEC and non-OPEC agreement, or OPEC+, on cuts in oil production seems to be on shaky grounds. Without the deal oil prices could have dropped to below the $27 per barrel (/bbl) recorded in 2016 and, because of the agreement, Russia’s budget gained an extra $120 billion. Nonetheless, the future of the alliance is uncertain. In October 2018, comments by Saudi Crown Prince Mohammed bin Salman that Russia would “disappear” as an oil supplier within 20 years drew sharp responses from Moscow. This was followed by a projection from Russia’s Central Bank in January that the federal budget for 2019-21 would be based on an oil price of $55/bbl. Consequently, given that oil prices in 2019 and 2020 are expected to be well above $60/bbl, Igor Sechin, the powerful head of Russia’s largest oil company, Rosneft, suggested an upward revision of oil production levels in future OPEC+ meetings to regain market share lost to U.S. oil exporters. A similar position was adopted in early April by Kirill Dmitriev, head of Russia’s sovereign wealth fund and an erstwhile supporter of output cuts, when he conceded that supply cuts may not be required by the next OPEC+ meeting in June.
Taken together, the series of events appear to imply that Saudi Arabia believes Russia’s importance in global oil markets is only temporary; for its part, Russia is increasingly frustrated with OPEC+-mandated production limits. Such sentiments are underlined in a recent analysis demonstrating that Saudi Arabia has shouldered a disproportionate proportion of production cuts in 2019 while Russia has only met half of its obligations. At stake is not just the outcome of the OPEC+ meeting in June but broader issues related to the current relevance and future sustainability of Russian-Gulf energy relations.
Contemporary Russian-Gulf energy relations are significant because both parties have a common interest in monetizing the value of their oil and gas resources in a world that increasingly privileges low-carbon energy. Keeping consumers the world over well-supplied with affordable fossil fuels extends the hydrocarbon age and its centrality to modern lifestyles. This in turn sustains prosperity and social peace in Russia and the Gulf states and underwrites economic diversification in preparation for a post-hydrocarbon era.
While seeking out third-party interlocutors, Russia and the Gulf states have also concluded bilateral energy deals. The purchase in 2018 by Abu Dhabi’s sovereign wealth fund of a 44 percent stake in Russia’s Gazpromneft-Vostok as well as the multibillion dollar sale of 19 percent of Rosneft to Qatar freed up cash that Russia can use to develop new oil fields, in efforts to offset the long-term decline in its oil production. For Abu Dhabi, the fact that some of the fields owned by Gazpromneft-Vostok feed into the east Siberian pipeline that delivers oil to China makes this a sound, long-term investment opportunity outside of the traditional Western and Middle East markets. In the case of Saudi Arabia, it has expressed interest in acquiring Russian-built nuclear reactors to replace domestic consumption of oil-fueled electricity. This will allow the kingdom to retain its pre-eminent position as an oil exporter within OPEC – where Iraq is already the second largest oil producer – and in global markets. The Saudis are also considering a stake in Russia’s liquefied natural gas plant Arctic LNG-2 in Yamal, which will serve energy-hungry Asia; this reflects a shrewd bet that gas-fired power plants will continue to be the preferred baseload source of power because they are able to quickly balance out variable output from solar and wind energy, thereby stabilizing electric grids.
In light of this active cooperation over energy, the Saudi- and Emirati-backed proposal to formally institutionalize OPEC+ is something of a red herring. OPEC+ is likely to remain, in the words of Russian Energy Minister Alexander Novak, as “some mechanism of cooperation: to convene, to discuss, adopt some memorandums, joint resolutions” rather than a formal organization. This reflects the approach known as “sovereign globalization,” whereby Russia welcomes selective aspects of economic globalization to increase national wealth while limiting political vulnerability to such global interdependence. In 2007, President Vladimir Putin declared that Russia has always been privileged “to carry out an independent foreign policy,” and “we are not going to change this tradition today.” This statement is likely relevant in considering the proposed oil alliance.
Nevertheless, there are challenges to the sustainability of energy cooperation between Russia and the Gulf states. In the first place, they are partners but also rivals engaged in a common bid to lock-in demand for oil and gas from their largest customers. As of 2016, Russia replaced Saudi Arabia as China’s top oil supplier thanks to oil-for-loans arrangements and the construction of an oil pipeline to China; over 40 percent of Rosneft’s oil sales in 2017 were to China. To regain market share, the kingdom is trying to acquire stakes in China’s privately owned refineries that have been enthusiastic buyers of Russian crude to secure demand for Saudi oil instead. A similar competition is playing out over stakes in oil refineries in India. Furthermore, Russia is wary that its lucrative trade in pipeline gas to Europe may be undermined by the latter’s imports of Qatar’s liquefied natural gas; sentiments such as “if Europe succeeds in getting only one-half of Qatari LNG exports, its full gas independence from Russia will be achieved” are a case in point. However, LNG is considerably more expensive than pipeline gas. LNG also cannot fully substitute for pipeline gas since Europe currently has enough import and re-gasification capacity to cover only 40 percent of its gas demand, and construction to increase capacity will be costly.
Second, energy cooperation is limited to hydrocarbons and, to a lesser extent, nuclear energy, with little synergy in renewables. Russian companies have been slow to embrace renewable energy unlike counterparts in Asia and Europe that have formed joint ventures with Gulf entities to develop solar and wind projects in the Middle East, North Africa, and Europe. Given that long-term oil demand is expected to grow 0.5 percent per annum compared to 7.1 percent for renewable energy, Russia and the Gulf states are losing out on a lot of opportunities for nonhydrocarbon energy cooperation.
Third, energy cooperation has yet to translate into concrete, major, and consistent dividends in economic, political, or strategic relations. The Gulf Arab states accounted for 0.5 percent of Russia’s overall trade in 2018; this is up from 0.1 percent in 2012, but it is still much less than Russia’s trade to Egypt or Turkey was in 2018 (1.1 percent and 3.8 percent, respectively), partly due to the complementarity of their energy-based economies. Russia has repeatedly signaled it will not be enticed away from Iran or Syria, much to Saudi Arabia’s chagrin. The flurry of deals concluded during King Salman bin Abdulaziz’s historic visit to Russia in October 2017 remain on paper for the most part. Comparing Saudi Arabia and Qatar, one observer noted that “the Saudis keep feeding Moscow promises of huge investments in the Russian economy but never deliver on these promises … by 2017, the volume of Saudi investments in Russia reached $600 million against Qatar’s $2.5 billion.” The exception here is the strategic partnership between Russia and the United Arab Emirates, which is underpinned by robust growth in non-oil trade, direct investments, the presence of 25,000 Russian nationals in the UAE, joint ventures in developing combat aircraft, and alignment of perspectives over Syria, Libya, and terrorism.
Energy cooperation between Russia and the Gulf states is important for energy market stability, global growth, and the finances and non-oil development of hydrocarbon exporters. OPEC+ has certainly been more durable and successful than previous attempts at coordinating oil production levels. While energy cooperation will probably remain pragmatic and driven by commercial realities more than strategic calculations, the Gulf states have at least ceased to perceive Russia purely as an adversary, which was the case during the last century; it is regarded today as a reliable international partner but also a competitor.
Biden will likely put weapons sales to the Gulf on the back burner, but, at the end of the day, the administration’s positions on arms sales will reflect continuity, not change.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More