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Abu Dhabi, UAETuesday 23 October 2018

The weak and powerful nations of Opec

Saudi Arabia, supported by two other GCC members, and Russia share the decisive voice

Iran's Opec envoy Hossein Kazempour Ardebili (L) speaks to journalists during the 10th JMMC meeting in Algiers on September 23, 2018. AFP
Iran's Opec envoy Hossein Kazempour Ardebili (L) speaks to journalists during the 10th JMMC meeting in Algiers on September 23, 2018. AFP

In Thucydides’ famous words, “the strong do what they can and the weak suffer what they must”.

Although in theory a mutual organisation, Opec behaves in the same way. Sunday’s monitoring committee meeting in Algiers confirmed this.

The Joint Ministerial Monitoring Committee (JMMC), an ad hoc body created to oversee the December 2016 “Vienna Group” deal, contains Saudi Arabia, Kuwait, Venezuela, Algeria and the two non-Opec contributors, Oman and Russia. This gives Saudi Arabia, supported by two other GCC members, and Russia the decisive voice. Venezuela, with production plunging and partly beholden to Russian loans, is too weak to do more than protest.

The JMMC does not have decision-making powers; it just reports on compliance and the effect on the market. By June’s Opec meeting, compliance was well above 100 per cent, in comparison to previous Opec arrangements where even “successful” production cuts achieved some 70-80 per cent adherence. Consequently, the group decided to raise production back into line with its desired level.

Iran said it understood June’s outcome to mean that countries that were producing below their target would boost output if they could. But the other key members interpreted the communique to mean they could increase production as long as the Vienna Group as a whole remained below its target - and behaved accordingly. They have consequently taken market share from Iran, where US sanctions have already cut crude and condensate exports from 2.3 million barrels per day (bpd) in July to 1.69 million bpd in the first half of this month, even before the restrictions come fully into force in November.

Iran’s oil minister, Bijan Zanganeh, has pledged to veto any Opec decision against his country’s interests. The organisation operates on a principle of unanimity. But Iran has no power to compel any other member.

Power in Opec rests on three pillars: spare capacity - the ability to put more oil on the market at short notice; the fiscal wherewithal to cut output when the market is in surplus; and the long-term ability to expand output to gain market share and deter competitors.

Saudi Arabia possesses all three capabilities, as does the UAE, though a smaller player. Riyadh is conducting major offshore field expansions currently, though in principle these are only to replace natural declines onshore, and it boosted production by almost half a million barrels per day since May. It has the vast bulk of the world’s spare capacity, some 2 million bpd at current output levels.

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Abu Dhabi, meanwhile, is pushing towards its target of 3.5 million bpd capacity, and the UAE as a whole produced about 2.97 million bpd in August.

Kuwait too has all three abilities in principle, though domestic politics constrain production expansion. But its new light oil output from deep Jurassic reservoirs has hit a not inconsiderable 175,000 bpd.

Russia’s cooperation with Opec shows that, when called upon, it can trim production a little, but its partly privatised industry pushes back against deep cuts. It boosted its output to a post-Soviet record of 11.29-11.36 million bpd this month, following the decision to abandon individual country targets. With plans for another 300,000 bpd of medium-term growth, it could move beyond the peak of 11.4 million bpd it produced in 1987 when still part of the USSR. Long-term, production will continue to creep up, though at higher costs and lower government revenues as it moves into the Arctic and east Siberia, and extends tax breaks for mature and difficult fields.

Iraq is too fiscally weak to cut production much, and it was the weakest Opec adherer to the promised cuts. It has substantial spare production capacity, but some 200,000 bpd of this lies around Kirkuk, which is hostage to a deal with the autonomous Kurdistan region allowing exports via Turkey to resume.

However, Iraq has the best potential for capacity growth of any Opec member. It could reach almost 5 million bpd production by the end of this year, and perhaps more than 6 million bpd by the early 2020s. It needs to fix its creaky export infrastructure in the south, form a new government and deal at least superficially with the deprivation that has triggered widespread protests around Basra.

Libya and Nigeria are wildcards - production is vulnerable to security breakdowns, though both could expand output significantly in the longer term given more favourable domestic politics. The other Opec members, including newbies Congo and Equatorial Guinea, can be disregarded - they are relatively small and mostly struggling to sustain current production, let alone yielding major gains.

In comparison, Iran lacks the basics of Opec power. It is involuntarily cutting exports because of sanctions, but would not do so deliberately. It cannot raise production much, even if it could find buyers. And long-term capacity expansion has repeatedly been stymied by bureaucracy, tough contract terms and deterrence of investors by the shadow of US hostility.

Iran had a window between the adoption of the Joint Comprehensive Plan of Action in January 2016, and the US withdrawal in May this year, but it signed only one major field development project with an international investor, and that was for gas.

But, of course, power within Opec and the oil market is not the only kind of power, particularly for a large country like Iran. Its response to its competitors and to sanctions will play out on the bigger fields of economics, security and geopolitics, as it seeks to avoid the fate of the weak.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis