For Mr. Putin, the deal with OPEC has lifted oil prices, liquidated a global oil glut, and paid dividends in the form of improved relations with Saudi Arabia, boosting Russia's real and perceived influence in the Middle East. At this juncture, however, the benefits for Russia and thus Mr. Putin may be more fleeting. The expected deal to extend production cuts would further postpone significant Russian production capacity increases, especially for the influential Rosneft. On balance, we believe the deal will be extended, perhaps in phases, but Russian producers will increasingly resist compliance, leading to its eventual unraveling in 2018.

One year ago, President Vladimir Putin's personal involvement brought Russia into the OPEC-non-OPEC production agreement. It is noteworthy that in the weeks leading up to the original deal, Rosneft CEO Igor Sechin, who in the past has often been entrusted with sensitive issues in Russian energy relations, opposed Rosneft and Russian production cuts. Other Russian producers including Lukoil, Surgutneftegaz and Novatek encouraged the deal. Mr. Sechin has again spoken out against prolonging the deal, but, like last time, his position is unlikely to prevail, at least in the beginning. Developments at a handful of Rosneft greenfield projects makes Mr. Sechin's opposition to prolonging the deal understandable. For Rosneft, the longer Russia freezes production, the more disruptive it will be to the development of these projects. For example, there are five Rosneft greenfield projects that together should add 260,000 b/d of new production in the 2018-2019 time frame. The chart below highlights pre-December 2016 production, current production and targets planned for either 2018 or 2019

Vulnerable Capacity Expansions
The current production agreement has already disrupted recent projects. Rosneft cut production at the Vankor cluster of fields by 60,000 b/d. Yet, its investment plans include starting production at two new fields that are part of the cluster, Tagul and Erginskoe, in 2018 and 2019, respectively. Rosneft's approximate plan for the cluster is to maintain production at 450,000 b/d. Meanwhile, Uvat production reached and maintained its 230,000 b/d peak production rate at the start of 2015. Exactly one year later, it cut production by 50,000 b/d to adhere to production cuts.

The backlog of unrealized production will only grow if an extension of the deal causes Rosneft to postpone other projects. Rosneft planned to increase production at the newly started Russkoe field, lately producing less than 2,000 b/d, to 26,000 b/d in 2018. Rosneft just launched production at the first of several fields comprising Kondaneft, and tentatively plans to expand that unit's production. In 2019, Rosneft is supposed to begin producing and exporting oil from YurubchenoTokomskoe, which along with Slavneft's Kuyumba project will fill the Kuyumba-Taishet pipeline feeding the ESPO Pipeline. Meanwhile the production agreement presents a similar quandary for Gazprom Neft. Its CEO announced that the company's production will increase in 2018 regardless of whether there is a deal.