Russia playing energy chess game with Iran and Saudi Arabia

Workers rest at Ras Tannura's oil production plant near Dammam in Saudi Arabia's eastern province.

Workers rest at Ras Tannura's oil production plant near Dammam in Saudi Arabia's eastern province.

AFP / East News
As OPEC nations continue to fret over the rock-bottom price of oil, Moscow is engaging Saudi Arabia while at the same time making overtures to Iran with the aim of developing energy ties with both countries. But can Russia really succeed in building meaningful interaction with the two regional rivals?

This week’s annual OPEC meeting in Vienna to discuss production quotas comes as a culmination of chaotic efforts to regain control over sliding prices and place the organization back at the wheel of managing global oil markets.

With OPEC desperate to regain its role of rules-setter, Moscow is engaging its informal leader, Saudi Arabia, while fostering a privileged relationship with another huge energy player on the rise, Iran.

At the meeting of the Saudi-Russian intergovernmental commission in Moscow last week, Energy Minister Alexander Novak announced Russia’s readiness to cooperate with Riyadh on supplies of liquefied natural gas (LNG). Novak revealed that Russia’s “main strategic area is the construction of LNG plants” and added that “in case Saudi Arabia’s needs [arise]” Moscow would “be ready to consider commercial agreements as well.”

The conciliatory tone and offer by Novak came in the wake of an accusation that Saudi Arabia was encroaching on Russia’s time-honored and most lucrative markets in Europe by “dumping” its oil there. The disclosure was followed by a tough warning by Igor Sechin, CEO of Rosneft, Russia’s number one state oil company, who claimed the Saudis’ tactics would “backfire.”

However, the Russian energy minister has left the issue to be dealt with by business alone, saying it was not a matter to be addressed by the governments. This laid-back attitude could be indicative of the high stakes attached by Moscow to engaging Saudi Arabia. Both sides have just agreed to set up a “working group” to review issues related to oil and gas markets.

Soon after the meeting between Russian President Vladimir Putin and Deputy Crown Prince and Saudi Defense Minister Mohammad bin Salman Al Saud in June this year, economic cooperation started to gain momentum. The Saudi Public Investment Fund signed an agreement with Russia’s Direct Investments Fund to inject some $10 billion into various projects, most notably in infrastructure, logistics and agriculture. The latter is no surprise because the largest single commodity in the trade turnover is grain, which amounts to almost 40 percent of Russia's exports to the desert kingdom.

At the same time, Putin’s recent visit to Tehran to attend the session of the Gas Exporting Countries Forum highlighted a steady rapprochement between the two nations. “It is necessary for countries that produce and export energy to coordinate policies for the sake of stability and balance of the market,” Iranian President Hassan Rouhani said at the forum. Iranian Oil Minister Bijan Zangeneh went further, emphasizing that “Russia is considered a long-term and strategic partner for Iran in all areas.”

The latter statement should not be underestimated against Tehran’s strategic plan to surge crude exports by as much as one million barrels per day. Is this feasible? Provided foreign-made mature technologies find their way to the energy sector, yes. After all, Iran used to be the second-largest OPEC producer after Saudi Arabia.

How can Moscow possibly handle the delicate engagement with two regional archrivals like Saudi Arabia and Iran and cooperate with them on such a divisive issue as hydrocarbon exports, the bone of contention among the producers, shippers, buyers and even end consumers? Is it not a pre-doomed enterprise, let alone a conflict of interest, when it relates to Saudi Arabia, with its track record of unfriendly policies toward Russia?

Mikhail Krutikhin, an energy expert and partner at the RusEnergy company and a reputed critic of Gazprom and Kremlin policies, shared his views with Troika Report on the intricacies of energy diplomacy.

“I think that it is not exactly a ‘conflict of interest.’ Relations between the two countries reflect several realities: First, it is the state of play on the global oil market. Both countries are oil exporters. With oil prices likely to remain low for a decade or at least for several years, both countries, just like other producers, are keen to keep their production level and preserve their market niches, or even to expand them. This is why the two countries are reluctant to cooperate for the sake of decreasing production in order to push up prices. Basically, this is the relation between all oil producers. Each of them is defending its market share. There is no solidarity either within OPEC or among the non-OPEC players.”

– Can Moscow manage to balance its interaction with two major energy players like Iran and Saudi Arabia at once?

“I don’t think so. Iran will increase its oil deliveries to the global market since many companies are eager to cooperate with its energy sector. This will put pressure on oil prices. Russia is going to suffer as a result of Iran’s ‘resurrection’ as a big oil exporter. It means that no one is going to cooperate with anybody on the market.”

– What is your stance on OPEC? Some claim it has been reduced to a non-entity while others believe it still has leverage to influence the global oil market. Where do you stand in this debate?

“OPEC was important as a cartel which could manipulate the price of oil globally. This was the case some 10 years ago. Right now it is no longer a cartel but some sort of club. Each club member stands its own ground with no sign of solidarity. For instance, while Venezuela urges cutting production quotas to up prices, other member states vote to maintain them. Today, OPEC has become sort of a discussion club.”

OPEC or no OPEC, Russia cannot relieve itself overnight from its dependence on oil exports revenues. Likewise, Moscow has no alternative but to play a sophisticated geo-economic chess game with Iran and Saudi Arabia simultaneously, bearing in mind that the two counterparts are arch-enemies in the Islamic spiritual dimension and in the regional pecking order, which is now in flux.

Against these odds, the only thing cementing the double-track trialogue between Moscow, Tehran and Riyadh is the long-term interest of the world’s three leading hydrocarbon producers and exporters in seeing, if not presiding over, the recovery of oil prices.

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