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Worst OPEC Meeting Ever: Everyone Loses – Analysis


By Robin Mills

OPEC’s gathering in Vienna last week ended in “one of the worst meetings we have ever had,” according to Saudi oil minister Ali Al Naimi. The lack of a resolution to raise oil production in the face of tightening markets was first received as bad news by consumers, prices rising $2 in response. Yet the real losers are those who said “No” – Algeria, Angola, Ecuador, Venezuela, Iran, Iraq and Libya. Three hours of argument, the loss of all Libyan exports, the undeniable evidence of oil prices nearing $120 per bbl and OPEC’s own research showing increased demand of 2 million bpd in the third quarter this year, failed to convince the refuseniks. The original “Mr. Nyet,” Soviet foreign minister Andrei Gromyko, could not have stonewalled more effectively.

This meeting simply demonstrated what has been evident ever since the 1970s – that OPEC acts effectively only in a crisis. The producers’ organization cut output decisively in March 1999 following the Asian financial crisis, and again in December 2008 when the global recession dragged prices down to $34 per bbl. When times are comfortable, or when a tight market badly needs more oil, OPEC is ineffective due to the basic divergence in interest between its members. The opponents of a production rise simply played a weak hand badly. Had they accepted the clear evidence of need for higher output, they might have been able to reach a reasonable compromise with the Saudis.

Now Saudi Arabia, and its Gulf allies Kuwait, Qatar and the UAE, will simply go ahead and increase production, since they are the only OPEC members able to do so. Before the meeting, analysts were suggesting a possible increase of 500,000 bpd. Saudi Arabia has announced it will raise production from 8.8 million bpd to 10 million, its highest level since at least the early 1980s, and possibly an all-time record. Kuwait has around 290,000 bpd of spare capacity and the UAE 230,000 bpd. The intransigence of the opponents of a production increase means that at least 700,000 bpd more may reach world markets than if they had cut a deal with Al Naimi.

These three Gulf countries would prefer to deploy some of their spare capacity when, as currently, market conditions permit. They are concerned about the potential for expensive oil to push vulnerable economies into a “double-dip” recession and trigger another price slump. In the longer term, they do not want to give further incentive for new technologies that would compete with oil, or for the costly development of unconventional oil and frontier petroleum provinces. Though OPEC repeatedly stresses its worries about price volatility, volatility is in fact the cartel’s friend, by making it more risky for high-cost producers.

Nor, politically, are any of the Gulf Four in a mood to give ground to a geopolitical adversary. Iran’s OPEC governor, Mohammad Ali Khatibi, blamed the Saudi position on political influences, implicitly the United States: “Perhaps there is a pressure on them….Some consumer countries may have exerted pressure on them or they had special demands.” But though the U.S. no doubt expressed its wishes in this case, for once American and Saudi interests happened to coincide. As well as safeguarding the long-term demand for their reserves, it is in the interests of the GCC OPEC members to moderate oil prices in order to weaken Iran.

The non-GCC OPEC members have simply ruled themselves out of having any influence on the organization. They are all producing at capacity, ignoring their quotas. The only way they can negotiate on equal terms with the Saudis in future is to develop realistic, credible, financeable plans for output growth, and then execute them. Angola, Ecuador and Algeria are less significant players and with limited room for expansion, at least until Angola’s latest exploration efforts bear fruit. Libya can be ignored until the war against Colonel Gaddafi is over and exports resume. It was interesting that the issue of Libyan quotas – whether to suspend them as with Iraq since 1990, parcel them out amongst the other members, or leave them unchanged – was not even discussed in Vienna.

Iraq is something of a special case, since it is the only OPEC member executing large expansion projects. The comment by Iraqi oil minister Abdul Karim Luaibi on the sidelines of the Vienna meeting, that the production target would be cut from 13 million bpd to 7-8 million bpd, makes no difference: No analyst thought the higher target was feasible anyway. Setting a more realistic target is, if anything, encouraging for progress. The early redevelopment contracts, with BP and CNPC at Rumaila, ExxonMobil and Shell at West Qurna, and ENI and KOGAS at Zubair, are showing good results, having reached the first contractual milestone of a 10 percent increase in production faster than anticipated. Work on expanding export capacity is also proceeding. Yet Baghdad could have bought itself some goodwill with Riyadh ahead of the inevitable clash over quotas in three or four years’ time, when Iraq is ready to rejoin OPEC’s system. For the first time since the late 1990s, when a pre-Chávez Venezuela was the contender, Saudi Arabia will face another OPEC member with the intention and geology to increase its market share substantially.

Saudi Arabia is not friendly with the Shi’a-led government in Baghdad, suspicious of Iranian influence. The Iranians themselves fear Iraq’s potential to flood the market. This prospect would be even more challenging if it coincided with a return and perhaps renaissance of Libyan production. Already, continuing Brazilian success in the deepwater “pre-salt” area, a resumption of Gulf of Mexico drilling, and booming output from U.S. shale formations such as North Dakota’s Bakken, hint at a more robust non-OPEC contribution over the next few years than many analysts have assumed.

So the spotlight is really on Iran and Venezuela. Through mismanagement, hostility to foreign investment and (in Iran’s case) sanctions, both have failed to make the most of their vast hydrocarbon endowment, even as their budgets become ever more dependent on oil revenues. Venezuela has recently made some progress on signing deals to develop its enormous Orinoco extra-heavy oil deposits, now estimated by the U.S. Geological Survey to hold 513 billion barrels of potentially recoverable oil, almost twice Saudi Arabia’s total. But given the history of nationalization and tax rises imposed on foreign oil companies, and the mixed bag of investors selected for Orinoco, including Iran, Belarus and Russia, countries without the necessary technical skills or, in some cases, financing for such projects, rapid progress seems unlikely. Heavy spending on social programs, the decimation of state oil company PDVSA’s cadres since the 2002 anti-Chávez strike, power cuts, food shortages, high inflation and the flight of the middle class, means Caracas needs $110 per barrel to break-even, as estimated by Credit Suisse.

Iran is thought to need $100 per bbl to balance its budget, given a dismally-managed economy with inflation around 20 percent and unemployment unofficially put at more than 17 percent. Its oil production is slowly declining, although this may be partly offset by reduced domestic consumption following last year’s subsidy reform. Iran’s feeble economy undermines its adventurous, incoherent foreign policy, contradictorily opposing both Colonel Gaddafi and NATO’s intervention in Libya; praising the revolution in Egypt but opposing it in its ally, Syria. President Ahmadinejad had to be represented in Vienna by the hastily-selected Mohammad Aliabadi after the Guardian Council ruled that Ahmadinejad could not constitutionally take the caretaker oil minister position himself. His weakness in the face of a power struggle with Supreme Leader Ali Khamenei makes bold moves on reviving Iran’s oil industry unlikely.

So, the Saudis and their Gulf allies need to meet the challenge of Iraq, to be able to pressure Iran if required, and to threaten other recalcitrant OPEC members. Kuwait must to step up its expansion projects, long-delayed by political wrangling between parliament and factions of the Al Sabah family. Though its oil minister, Mohammad Al Busairi, reaffirmed the commitment to reaching 4 million bpd by 2020, this seems unlikely given repeated delays and the need for contributions from heavy oil and challenging fractured reservoirs. Foreign expertise, however unpalatable domestically, is essential.

Meanwhile, Abu Dhabi’s output continues to inch up, but major expansions are constrained by the delays on renewing or restructuring the concessions with the major oil companies – BP, Shell, ExxonMobil, Total and others – which are due to expire in 2014 (the onshore ADCO concession) and 2018 (ADMA-OPCO and ZADCO offshore).

But Saudi Arabia, as always, is the kingpin. The recent Aramco announcement on accelerating development of the giant Manifa heavy oil-field and rejuvenating the world’s largest offshore field, Safaniya, is just a first step. In order to continue to wield the big stick in OPEC, Saudi Arabia needs to lay out detailed plans to produce 15 million bpd or more, even if not all that capacity is needed immediately. Solving its runaway energy consumption and gas shortages could save another one million bpd from domestic power generation.

Some observers, following the lead of the late Houston investment banker Matthew Simmons, believe, with a distinct lack of evidence and logic, that Saudi reserves are overstated and its fields in trouble. Riyadh has still not been transparent enough with data to convince them otherwise, and this scepticism has been a major factor in shifting long-term price expectations upwards since 2004. And the Saudis’ own budgetary room for manoeuvre is not what it was: Massive state spending to head off discontent has raised their break-even price to $83 per barrel, as estimated by the Centre for Global Energy Studies, founded by former Saudi oil minister Ahmed Zaki Yamani.

The breakdown of the OPEC talks, however predictable, is mildly negative for oil prices. That prices rose only modestly, when the OPEC news coincided with a large U.S. stock draw, demonstrates that markets realize Saudi Arabia does not need permission from Hugo Chávez or Mahmoud Ahmadinejad to boost output. The OPEC unity of 2009 has evaporated, and its members have returned to a zero-sum struggle, at least until the next crisis arrives.

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INEGMA is a Free Zone Limited Liability Company based in Dubai Media City, in the United Arab Emirates. Established in 2001, INEGMA was set up to provide media organizations, think tanks, non-governmental organizations, militaries and governments of the Middle East, and international private companies with various services related to military and strategic affairs.

One thought on “Worst OPEC Meeting Ever: Everyone Loses – Analysis

  • June 13, 2011 at 8:18 pm

    I don’t think the countries opposed the raise in production are losers since raising the prodution would transfer the problems of consumers (west) to these countries’ economic. I think Iran and its allies were the winner.


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