OPEC’s meeting this Thursday in Vienna may not lead to an agreement to start reducing production, Iran’s OPEC governor said, as quoted by S&P Global Platts. Hossein Kazempour Ardebili said there were tensions between members of the cartel, with some unhappy about others’ large production increases in recent months.
"The cooperation agreement is unlikely to be renewed," Ardebili said. “At least some member states will not join it, in which case any renewal will be out of the question."
Increasing the heat further, the official said some OPEC members might even decide to follow in Qatar’s footsteps and leave OPEC altogether.
The reason, according to Ardebili, is their limited production capacity, especially spare capacity. "Some producers have limited production capacity. Therefore, they may be faced with lower demand for production, while on the other hand, they lack any spare capacity for increased production, if need be," he said, adding "That strengthens the possibility of exit by minor member states. That is not impossible."
Qatar, which produces around 600,000 bpd, announced its decision to leave OPEC earlier this week, citing a focus on natural gas and maintaining its number-one position as gas exporter in the world.
The cartel is meeting tomorrow to discuss production cuts that may range from 1 to 1.4 million bpd. Russia and another nine non-members will join the talks. There have been reports citing Moscow officials that while last time Russia did not mind its cut quota, which stood at 300,000 bpd out of total cuts of 1.8 million bpd, this time the country may not be so willing to cut so much.
“We think 1 million bpd (cuts) is more realistic, not 1.4 million bpd ... But who is going to do this is another question,” the source said, as quoted by Reuters.
By Irina Slav for Oilprice.com
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The overwhelming majority of OPEC members are not in favour of new cuts.
Instead, they will demand that Saudi Arabia and Russia withdraw the 650,000 barrels a day (b/d) they jointly added to the market in June against OPEC members’ wishes and return them to the original 1.8 million barrels a day (mbd) cut under the OPEC/non-OPEC agreement.
Saudi Arabia will end up doing most of the cutting with some symbolic reduction from Russia estimated between 100,000-150,000 b/d as a show of solidarity with the Saudis.
There is some divergence between the Saudi and Russian approach to the cuts. Saudi Arabia needs an oil price higher than $80 a barrel to balance its budget. On the other hand, Russia can live with an oil price of $40 or even lower having benefited from the diversification drive of its economy since the 2014 oil price crash. Moreover, the bulk of Russian oil production is being carried away with private Russian companies with a small State stake. These companies have invested heavily during the last few years to raise Russia’s oil production to the highest level in the post-Soviet era. They are not keen on cuts as they want to recoup their investments very quickly.
As for other OPEC members leaving OPEC, this is not new. Indonesia left OPEC many years ago when its oil exports declined so steeply so as not to justify its continued membership in OPEC. Also Ecuador left OPEC in 1992 and rejoined it a few years later.
However, if Iran’s OPEC governor Hossein Kazempour Ardebili is insinuating that Qatar may have left OPEC in anger and that some other OPEC members may decide to follow Qatar’s footsteps and leave also in anger, then he is wrong.
Qatar is not a major player in OPEC. Its production in 2017 averaged 600,000 barrels a day (b/d) of which some 466,000 b/d were exported on average according to the 2018 OPEC Annual Statistical Bulletin. And like any shrewd businessman, it has decided to focus its full attention on the business that has enabled it to become as wealthy as it is now namely LNG production and exports.
And while by leaving OPEC Qatar may lose some influence in the global oil market, its strategy to expand its LNG production capacity will not only consolidate its position as the world’s largest producer and exporter of LNG but will more than offset its loss of influence from OPEC and will also enhance its stature as the world leader in the fast-growing global LNG and natural gas market.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London