OPEC optimistic an agreement will be concluded in Vienna

Sunday 27/11/2016
Saudi Arabia\'s Energy Minister Khalid al-Falih

Beirut - Oil ministers from the Or­ganisation of the Petrole­um Exporting Countries (OPEC) held intensive consultations last week prior to their decisive November 30th meeting in Vienna. The min­isters are optimistic a deal to cap output and strengthen prices can be reached.

There are still many details that need to be agreed upon and it will take Herculean efforts to square all the circles prior to the meeting. It is difficult to see OPEC leaving Vienna without an agreement; otherwise the markets will drive prices down as they lose trust that the organisa­tion member states can resolve their problems.

Saudi Arabia’s Energy Minister Khalid al-Falih said, in an interview in Doha with Al Arabiya satellite TV, that he was optimistic OPEC would limit output in accordance with the lower limit of 32.5 million barrels per day (b/d) agreed upon on Sep­tember 28th in Algiers. The details, he added, would be finalised when OPEC ministers gather in Vienna on November 30th.

Non-OPEC member Russia has had unprecedented cooperation with the cartel in the past two months, aiming to achieve market stability. But Moscow has yet to pledge concrete oil steps, especially since it has raised production to a post-Soviet-Union record of more than 11 million b/d.

Most oil-producing countries are facing difficult financial conditions. Several states have resorted to bor­rowing and downsizing or freezing development projects. Payments to companies for completed pro­jects are overdue. Low oil prices are threatening the political stability of a number of producing countries, such as Venezuela and Iraq. The failure of a production agreement in Vienna could very well see prices collapse once more.

The consultations have focused on the following parameters: Curb­ing OPEC production to 32.5 million b/d compared to OPEC’s October production of 33.6 million b/d; all the member countries are to partici­pate in capping output; and, the per­centage cuts should be the same for all the 14 OPEC member states.

Four countries have asked to be exempted. Nigeria and Libya have already been exempted from cutting production. Their output has al­ready declined significantly during recent months because of domestic armed conflicts. Niger Delta mili­tias attacked Nigerian oil surface facilities, lowering production from about 2.4 million b/d to approxi­mately 1.6 million b/d, The civil war in Libya since the 2011 overthrow of despot Muammar Qaddafi led to a decrease in production from around 1.6 million b/d to as low as 200,000 b/d.

Iran has asked that it also be ex­empted because of the impact of international sanctions on limiting its production capacity. Tehran said it would not participate in an agree­ment until its output reaches 4-4.2 million b/d and its production con­stitutes 12.7% of OPEC’s production. Iran wanted to reach the same level of production and regain the market share it had before sanctions.

The Gulf Arab states have re­fused the Iranian demand, arguing that current Iranian production has peaked at around 3.6-3.8 million b/d. They have suggested that Iran’s production should be capped at 3.92 million b/d.

Iranian Oil Minister Bijan Namdar Zanganeh said in Tehran, following consultations with OPEC Secretary- General Muhammad Barkindo, that “it is highly likely OPEC oil and en­ergy ministers will reach an agree­ment” on November 30th.

Algerian Energy Minister Noured­dine Bouterfa told Reuters in Doha the issue of Iran’s production would not undermine a deal. “There is strong consensus among OPEC producers for a freeze. Iran is not a problem. Iran is a particular situa­tion and needs particular treatment. They will not have the same rule for the reduction. We will study what is the best solution for Iran.”

Iraq has also asked not to have its production capped. It questioned the 3.3 million b/d production figure being attributed to it by the energy media. Iraqi oil officials said their country’s September production was more than 4.7 million b/d and the State Oil Marketing Organisation (SOMO) listed Iraq’s September pro­duction, field-by-field.

SOMO estimated the Iraqi Kurd­istan Region September production at about 546,000 b/d, saying that the Kurdistan regional production is an estimate based on average pro­duction for 2013 and 2014. Kurdish authorities later said September oil production in the territory they con­trol was 209,000 b/d less than that of SOMO. The Kurdish figures also included production from the Kurd­ish-controlled Bai Hassan and Avana fields in Kirkuk province.

Baghdad has asked for an exemp­tion from the agreement due to the high costs of its military campaign against the Islamic State (ISIS).

Iraqi oil officials project output to increase in 2017 by around 150,000 b/d, approximately 70,000 b/d of which will be from fields recaptured from ISIS. OPEC Secretary-General Muhammad Barkindo met Iraqi Prime Minister Haider al-Abadi in October, who told him Iraq insists on being exempt from OPEC’s pro­duction agreement, but that Bagh­dad will not be an obstacle to an OPEC agreement.

OPEC has faced many challenges since its establishment in the early 1960s. The November 30th meeting is encountering two in particular: A structural change in the world oil in­dustry. US shale oil production will increase again as prices rise over $50 a barrel; and, a difficult financial situation in most of the producing countries. OPEC members’ diffi­culty is to create a balance between raising prices modestly to support their budgets, but not high enough to raise US shale oil production to pre-2014 levels. OPEC members also have to keep an eye on their market shares. One thing that OPEC cannot afford on November 30th is a failure to strike a new production agreement that would have prices collapse again.