How OPEC Plans To Keep Rogue Oil Producers In Check | OilPrice.com

OPEC’s “whatever it takes” strategy has so far meant that Saudi Arabia would make additional production cuts where non-complying members failed. Some members are banking on OPEC employing that strategy again, and are using it as negotiating leverage.

This time around, though, the Saudis might not play big brother to their OPEC brethren.

The new threat is that compliance will have to be real this time around–from all members–or the cuts won’t happen at all. How successful OPEC will be in getting its noncompliant members to step in line, and how it will go about doing that remains to be seen.

Does OPEC have any other cards to play, other than Saudi Arabia’s motivation to go it alone?

OPEC’s Problem Child

The problem child of the cartel is Iraq, hands down. The country has consistently—and significantly—failed to adhere to the cuts. Despite this lack of follow through with the cuts, Iraq is in full support of deeper and longer cuts.

And unlike some of the smaller OPEC members, its opinion and adherence to the deal are critical: Iraq produces more oil than any other OPEC member except for Saudi Arabia. Its production has doubled over the last decade, according to the EIA, and it produces nearly 5% of the world’s oil.

Aside from Saudi Arabia, no other OPEC member has as much production cut clout as Iraq.

Unfortunately for OPEC, Iraq’s situation is beyond complicated. To understand just how complicated, and before a solution to their over-compliance can be uncovered, one must understand the nitty-gritty of Iraq’s oil industry.

Iraq’s disastrous political climate has occupied much of the country’s attention. It is unclear just how important, amongst all the civil unrest, the OPEC deal really is to it. What is important to it, however, is generating enough oil revenue to line the pockets of government officials.

Iraq’s oil industry isn’t like Saudi Arabia’s. While Saudi Arabia’s oil production is 100% under government control, Iraq’s state-run oil company controls only bits and pieces. Private oil companies do, and private companies, such as Lukoil’s 75% stake in one of Iraq’s biggest fields (400,000 bpd), West Qurna 2; and Exxon’s six production sharing contracts in the Kurdistan region and stake in West Qurna 1 (465,000 bpd), make it nearly impossible for Iraq to control its output—and that’s not even counting the oil production from the Kurdistan Regional Government, which Iraq has zero control over.

So what can OPEC do to get Iraq to snap to?

Not much, really. OPEC—or rather, Saudi Arabia—must convince the government of Iraq and the foreign oil companies operating in Iraq of two things: 1) that cutting production will lift prices, and therefore doing so is in everyone’s best interest, and 2) that Saudi Arabia will do most of the heavy lifting. And then together, their combined cuts will have more price-moving power. Related: Will OPEC Really Risk An Oil Price Crash?

Still, it’s unlikely that Iraq will be brought into full compliance. Why? Because Iraq and the Exxons and Lukoils of the world know that Saudi Arabia will do most of the cutting, even if they themselves noncompliant. Saudi Arabia needs the cuts more than Iraq does, and more than Exxon and Lukoil does.

There is little OPEC can do to alter the course of Iraq’s oil production.

Russia

On the non-OPEC side, Russia is the heavyweight, and it hasn’t been faithful to the cuts—a fact that has weighed on oil prices throughout 2019. Russia, unlike its Persian Gulf friends, is leery of oil prices that are too high. Higher oil prices would mean higher gasoline prices, and high gasoline prices would unsettle the public—the public that is supportive of Vladimir Putin’s economic policy—for now. Would they be so with higher gasoline prices? Putin is worried about the answer to that question.

Russia’s participation in the production cuts is just as critical, if not more so, than Iraq’s. Without its participation, OPEC members that have fallen on hard times such as Iran and Venezuela may decide not to participate themselves.

So what can OPEC do to sweeten the pot for Russia? First, it could grant Russia’s request to remove condensates from the production cut figures. Technically, this would mean Russia has already been complying, and so granting Russia’s request to remove condensates from the cuts, which none of the other OPEC members take into consideration, would change nothing except for public perception. But it is an important issue for Russia, who has increased its gas condensate production through an East Siberian field that went into production just a couple of months ago.

Even though Russia would still be producing the same amount of oil if condensates were removed from the calculations, the perception would be that two of the heavyweights in the production cut deal—OPEC and Russia—would be in compliance. This would go a long way to bolstering prices, even without a significant change in oil production figures.

Second, OPEC could continue to do what it has been doing all along. Russia, the world’s largest wheat exporter, was no doubt “encouraged” when Saudi Arabia relaxed its pest-damage criteria for wheat imports. Now, Russia has access to the Saudi market—an enticing proposition. Other factors that have helped bring Russia along are billions of dollars in other bilateral deals. Russia’s participation in the OPEC deal seems to have bought it some goodwill.

Other Laggards

There are other chronic non-compliant OPEC members, such as Congo, Ecuador, Gabon, and Nigeria, which were tasked with cutting a collective 85,000 bpd from their reference range.

Nigeria, who was supposed to be cutting 53,000 bpd of that 85,000 bpd, has failed to comply with the cuts all year, and despite promising on October 1 to finally rein in its production to 100% compliance, its October production was 1.811 million bpd, well above its target of 1.774 million bpd, according to the latest version of OPEC’s Monthly Oil Market Report. Related: India Could See Real Growth In Oil Demand Next Year

Nigeria has, however, increased its compliance in the last few months, compared to August when Nigeria produced an average of 1.870 million bpd. Just this week, Nigeria has renewed its commitment to the OPEC deal come what may, and the downward trend for its production over the last few months suggests that it just might be sincere. It also has stated that its November production was indeed at the proper levels, according to S&P Global Platts. Official figures, however, from OPEC have not yet been released for November.

So, for Nigeria, OPEC may not have to do much, other than the nonspecific pressure it has already been putting on the African nation to comply.

Other non-OPEC signatories to the deal that have overproduced their targets are Malaysia, tasked with cutting 15,000 bpd; and Oman, tasked with trimming 25,000 bpd, according to Bloomberg. Of these, Malaysia’s overproduction is most concerning, overproducing by 77,000 bpd in October. Malaysia’s state-run oil company, Petronas, saw its Q3 profit fall by 50%, in part due to a “lower sales volume” of crude oil, but also due to lower oil prices as global oil inventories remained high. Further deals, such as the petrochemical joint venture between Saudi Arabia and Petronas in Pengerang, couldn’t hurt when it comes to prodding Malaysia to produce less.

Any other laggards to the deal are close to inconsequential, individually speaking.

It is unlikely that OPEC will bring more members into the full-compliance fold, aside from perhaps Nigeria. Saudi Arabia, however, is still able to carry the brunt of the production cuts, and it is motivated—no matter what it says—to continue to do so, despite the cheating ways of its lesser motivated peers.

By Julianne Geiger for Oilprice.com

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Have lived and invested in Venezuela full time for the last eight years and visited for each of twelve years prior to that. Studied and closely followed developments in Venezuela since 1996.