OPEC’s new strategy: Contain differences and calm markets

Sunday 12/06/2016
Khalid al-Falih, Saudi minister of Energy, Industry and Mineral Resources, at the start of the meeting of the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, on June 2nd.

Beirut - The Organisation of the Pe­troleum Exporting Coun­tries (OPEC), during its June ministerial meeting in Vienna, soothed mar­kets and has crude oil prices contin­uing to hover around $50 per barrel.

The organisation achieved these goals despite not resolving the dis­pute between Saudi Arabia, which wants producing states to maintain a similar production level to that of January, and Iran, which refuses to restrain production expansion.

Tehran plans to increase produc­tion to 4 million barrels per day (bpd), a level achieved before in­ternational sanctions were levied against it because of the nuclear dispute. Iran was producing 3.2 million bpd under sanctions. It has raised production levels since to 3.6 million bpd and is projected to reach its 4 million bpd target within weeks. Tehran aims to increasing production to 4.6 million bpd by 2020.

OPEC suspended its production ceiling in December 2015. Several OPEC members failed to adhere to the ceiling and most produced at capacity, hoping fruitlessly to make up the difference to compensate for low oil prices. Others ignored pro­duction ceilings or quotas and were building new production capacities for their countries.

Differences between Riyadh and Tehran paralysed OPEC. Markets expected the disagreements to con­tinue during the June 2nd meeting. What transpired is that the dispute continued but has been contained. Markets reacted positively. Oil pric­es have remained at about $50 per barrel.

The organisation’s harmony oc­curred despite the different major goals of Saudi Arabia and Iran be­cause of the changing global supply and demand and the outlook for the 2016 market conditions.

Energy ministers observed that non-OPEC supply, in response to market conditions, has declined by 740,000 bpd in 2016. Among the reasons for the production de­cline are the wildfires in western Canada that shut down about 1.3 million bpd of tar sand oil. Some OPEC members have suffered low­er production because of political instability. Nigeria’s production reduced about 1.2 million bpd be­cause of force majeure declared in the Niger delta after attacks on oil installations. Libya’s oil production has been reduced to 300,000 bpd because of the country’s civil war.

Projections indicate that 2016 demand will increase more than 1 million bpd from peak levels at the beginning of 2015. The healthy demand increase is expected to be sustained throughout this year despite recent negative economic concerns in some of the major in­dustrial countries.

Saudi Arabia’s new Energy min­ister, Khalid al-Falih, assured col­leagues that Saudi policy did not aim to flood markets. Falih ex­plained in an interview with Argus Global Markets prior to the OPEC meeting: “In the long term, our stance reflects our principles and interests. For decades, we have said that we want to balance the inter­ests of producers and consumers and that we seek a balanced market so that it grows and remains healthy because that serves our long-term interests and that of consumers.”

Saudi Arabia produces about 10.2 million bpd. Saudi Aramco has been building capacity to eventu­ally reach 12.5 million bpd.

Iran, while expected to approach its target of 4 million bpd this sum­mer, could face a problem sustain­ing that level. International oil companies (IOCs) have been ne­gotiating for months trying to gain a foothold again in the Iranian oil industry, after leaving it because of the sanctions. Iranian oil authori­ties have been negotiating with Eu­ropean and Asian IOCs to enhance production of developed fields, dis­cover new fields or produce from deep-water fields.

No upstream accord has been signed. Iran announced five times that it would have symposiums to announce the details of its model upstream agreement with the IOCs. All five conferences were cancelled. No formal announcement of the details of the model agreement has been made although information about contracts has been leaked to the media.

The Saudi ministry in charge of oil is encountering pressures from conservative forces to amend draft contracts. The ministry has been asked to add to the contracts a clause obliging the IOCs to continue working in Iran even if new sanc­tions are imposed.

IOCs are under pressure to reduce upstream investments because of low oil prices. The IOCs are also worried about a clause that Tehran has added to the model contract giving the national oil company the right to nominate a local firm to partner with the IOCs.

The IOCs are worried that Iran’s national oil company would pro­pose the local partner be Khatam al-Anbiya — a company affiliated to the Islamic Revolutionary Guards Corps. Khatam al-Anbiya remains on the United States’ black list. It is expected that much hard bar­gaining and time-consuming nego­tiations would take place, delaying Iran’s production capacity plans.