Saudi Arabia, Russia, Venezuela and Qatar agree on oil production freeze

Friday 19/02/2016
Russia’s Energy Minister Alexander Novak (2nd R), Qatar’s Energy Minister Mohammad bin Saleh al-Sada (C), Saudi Arabia’s Oil Minister Ali al-Naimi (2nd L), and Venezuela’s Oil Minister Eulogio del Pino (L), attend a joint news conference following their m

London - Oil ministers from Saudi Arabia, Russia, Venezue­la and Qatar announced an agreement to freeze their oil output levels provided other major producers fol­low suit.

The deal would keep Saudi and Russian production at the record rates reported in January but is un­likely to be accepted by Iran in its current form since the country es­caped from international economic sanctions only in January.

The agreement depends on ad­herence from other oil producers and is unambitious — freezing rath­er than cutting production — which has led to questions as to its impor­tance.

However, experience suggests production agreements are normal­ly reached in stages, often after ear­lier attempts failed or were partially fruitful.

Successful agreements often ex­ploit the temporary weakness of specific producing countries and at least some past participants have reserved the right to increase out­put beyond agreed levels in the fu­ture.

Successful production agree­ments are usually of limited scope and duration, deferring more com­plicated and intractable issues about production allocations for later. In that sense, the production freeze announced in Doha on Feb­ruary 16th could be seen as a step­ping stone towards a more ambi­tious and comprehensive deal.

The depth and duration of the price slump have taken produc­ers by surprise and are inflicting intense pain on oil companies and exporting countries.

The Organisation of the Petro­leum Exporting Countries’ (OPEC) original strategy of maintaining high production envisioned a mod­est and brief drop in prices that would quickly curb output from US shale formations and other high-cost producers and then restore the organisation’s market share.

The strategy may be working, with reports of a downturn in US shale output and a sharp drop in non-OPEC exploration and produc­tion spending. However, the strate­gy has proved far slower and costli­er than thought when prices started to slide in 2014.

There are still doubts about how quickly the market will rebalance and whether prices will recover, with observers predicting no rebal­ancing until the second half of 2016, 2017 or even 2018.

OPEC’s strategy has inflicted a “good sweating” on the oil mar­ket but also on members of OPEC. The good sweating has made many OPEC and non-OPEC producers more flexible and amenable to the idea of a production agreement, at least in principle.

There is a strong incentive to de­clare the current strategy a success — and then quietly modify it. Key oil producers have already travelled some distance along this path.

Saudi Arabia and its close allies the United Arab Emirates and Ku­wait have stressed in recent weeks that the strategy is working and that they can weather the downturn but indicated greater openness to pro­duction cuts in future.

Russia also signalled it might be prepared to join in any eventual production agreement in some un­specified way.

Venezuela, one of the hardest-hit producers, has been marshalling support for a modest production-freezing agreement, culminating in the Doha deal.

If most countries have sent mixed signals about their willingness to reach a deal, that reflects sound negotiating strategy as well as the extent of the remaining disagree­ments. Until now, no country want­ed to be the first to make a concrete production-limiting offer for fear of weakening its negotiating position.

The Doha deal is incomplete in that it relies on concessions by oth­er countries that were not party to the agreement and may not restrict output enough to restore market balance.

Its significance is that it indicated at least a subset of the most impor­tant oil-exporting countries that may be ready to do a deal.

Tehran will probably reject the deal in its current form (as might Baghdad) since it would constrain Iran’s output at an unacceptably low sanctions-era level.

From a Saudi perspective, one of the deal’s attractions is that it shifts some of the responsibility for con­tinued overproduction and price weakness to arch-rival Iran.

The focus will now move to Teh­ran and away from Riyadh and Mos­cow, which is exactly what the Rus­sian and Saudi negotiators want.

The form of Iran’s rejection is what matters. Iran could reject the deal outright and announce it will maximise its production unilateral­ly. Or Iran could accept “voluntary” limits on its production in the short term while announcing its intention to increase output later.

Uncertainty about just how much Iran can actually produce once freed from sanctions is one reason Saudi Arabia and its allies have wanted to defer any talk of production cuts until mid-2016. (Reuters)