3 August 2020

Monday, 16:53



OPEC+ agrees on another nine months to restrict oil production



Contrary to expectations, the last meeting of OPEC and non-OPEC ministers in Vienna on July 1-2 surprised everyone by the unanimity of decisions vital for the global oil industry. After two years of hard work, oil-producing countries finally agreed on a charter for long-term cooperation, which means supporting countries' energy policy on the long-term use of oil as the main element of the global energy balance.

Answer to the main question — whether the OPEC+ agreement will be extended and for how long – became obvious after the June 30 meeting of the ministerial committee on monitoring the implementation of the deal. Committee recommended that OPEC+ members extend the agreement to restrict oil production for another nine months.


Russia persuades companies

The term of the current agreement signed on December 7, 2018 expired on June 30. The parties have long postponed the conclusion of a new deal because of the uncertainty in the market caused by the escalation of political conflict in the Middle East.

Finally, however, 24 oil-producing countries decided to extend the deal for another nine months on July 2 in Vienna, until the end of the first quarter of 2020, with the same quotas: the cartel countries will cut production by 800 thousand bpd, and non-OPEC members by 400 thousand bpd.

The relevance of new deal was apparent even during the St. Petersburg World Economic Forum in early June, when one of the main initiators of the agreement, Saudi Arabia, declared the need for its prolongation. At the same time, the Saudi Minister of Energy, Khalid al-Falih, stressed that there is no disagreement between the cartel countries on the need to extend the OPEC+ deal, the position of the non-OPEC countries is in question.

On June 29, during a press conference following the G-20 summit in Osaka, Russian President Vladimir Putin said that Russia and Saudi Arabia agreed to extend the OPEC+ deal to limit the production volume to the same amount for a period of 6-9 months. “This has a definite meaning for the market - we agreed: we will extend our agreements,” Putin added.

At the same time, the Russian Minister of Energy, Alexander Novak, summing up the OPEC+ ministerial meeting, said that the decision to extend the transaction was only outwardly easy. For its unanimous adoption, it took two months of hard work and complex negotiations both between the parties and in Russia.

In reality, everything turned out to be more complicated than it might have seemed initially. Criticism of the proposal to extend the agreement within OPEC+ followed, primarily, from such political heavyweights as First Deputy Prime Minister, Finance Minister Anton Siluanov and President of Rosneft, Igor Sechin.

“There is a dilemma: we continue with OPEC to continue to lose the market, which is occupied by Americans, or withdraw from the agreement. Sometime this should happen, although the global demand is somewhere around a million barrels per day, as our colleagues say. But still, we see that American oil increasingly occupies a share in the world oil market. I don’t know if OPEC partners agree with such a further trend,” A. Siluanov said in mid-April.

On the contrary, leaders of other Russian oil companies actively supported the OPEC+ deal. “The mechanism should be maintained. OPEC+ deal has proven itself as a mechanism that regulates prices on the oil market. In principle, the market understands that the parties are ready at any time to respond to any event, including geopolitical, either effectively or by increasing production, or by reducing supply,” said Alexander Neukov, head of Gazprom Neft.

“We have practically eliminated speculators from the crude oil market. We believe that the agreement should act, and today it takes into account the increase in production on the American market,” President of LukOIL Vagit Alekperov said.

Apparently, it was for the development of a unified position on this issue that the conciliation meeting between the heads of the companies was held not by the Minister of Energy, as it was before, but by President Vladimir Putin himself. “I had a meeting on this issue with the leaders of our largest oil companies and government members right before the interview,” he told Financial Times in late June.

For Putin, the deal is important not only for economic reasons, but also for obtaining certain political dividends on international arena. Thanks to the deal, Russia gained some influence in the Arab world and, in fact, together with Saudi Arabia, found itself in a dominant position in relations with oil-producing countries. Russia and Saudi Arabia, having united their influence potential (Russia on Venezuela and Iran, and Saudi Arabia - on the Arab world), became the “think tanks” of the extension. Considering that Saudi Arabia is a long-time strategic partner of the US, Russia's participation in the renewal of the deal was obvious.


Unexpected OK from Iran

The most surprising thing at the ministerial meeting was Teheran’s agreement to extend the OPEC+ deal, especially amidst the statements made by Iranian Minister Bijan Namdar Zanganeh made just before the OPEC meeting that the cartel was dying because Moscow and Riyadh make decisions in the alliance. Iran was angry because Russia and Saudi Arabia had agreed to extend the OPEC+ deal in Japan at the G20 meeting.

“Iran’s position is very clear: we are not against the extension of the OPEC deal, but unilateral decision-making threatens OPEC itself... OPEC is not an organization that receives proposals from non-members of the group and approves them. OPEC is an organization of 14 members who discuss all issues and consult with each other. Iran is not going to leave OPEC, but I believe that when this happens, OPEC will die,” B. Zanganeh said.

“We respect all members of OPEC. The fact is that Saudi Arabia and Russia, as the largest oil-producing countries, reduce production more than anyone else, and we must first agree with each other and then discuss our agreements with our colleagues,” al-Falih tried to explain in response.

By the way, Iran's participation in OPEC+ is formal. Due to US sanctions prohibiting third countries from buying oil from Iran, Tehran is forced to cut production more than it agreed under the OPEC+ deal. According to International Energy Agency, in May oil production in Iran reached only 2.4 million bpd. Before US sanctions, the maximum level of production in Iran was 4 million bpd.

Nevertheless, Iran agreed to extend the deal. Russians appreciated this friendly gesture. A. Novak after a bilateral meeting with B.Zangane noted that everything must be done to save Iran as a full-fledged player in the oil market.

Given that Iran, due to US sanctions, is trying to find ways to export its oil, one of such opportunities may be Iran’s cooperation with Russia under the Oil for Goods program developed in 2014, back in the period of previous anti-Iran sanctions. In May 2017, Russia and Iran reached an agreement to start the supply of Iranian oil in the amount of 100 thousand bpd (5 million tons per year). The first delivery was made in November of the same year (1 million tons). In exchange for oil, Russia supplied Iran with railroad products, trucks and buses, airplanes, equipment for airfields, and pipes. In addition, Russia provided construction services in Iran reaching $45 billion. Novak stated that Iranian oil would mainly be sent for processing to those countries that need oil products.


Azerbaijan supports stability

Apparently, the extension of the deal can create a problem mainly for Kazakhstan, which plans to increase oil production at the Kashagan field. In early June, after a major overhaul, mining at the field was increased to 370 thousand bpd. According to the forecasts of the Kazakh Ministry of Energy, by the end of 2019, oil production at Kashagan could grow to 400-420 thousand bpd. That is why it was important for Kazakhs to extend the deal, but without the need to increase reduction quota. Therefore, the decision made in Vienna completely satisfied Astana.

“For Kazakhstan, this extension means maintaining average production at a level not exceeding 1.86 million bpd. OPEC+ deal significantly influenced the growth of oil prices and gave them an opportunity to stabilize in the range of $60-70 per barrel,” the Ministry of Energy commented the results of the Vienna meeting.

Minister of Energy of Azerbaijan, Parvariz Shahbazov, praised the current meeting of the ministers a historic event: “Azerbaijan joined the decision to extend the deal until the end of the first quarter of 2020. This is an important decision to ensure market balance in the period of ongoing economic and geopolitical uncertainties. Accession of Azerbaijan to this process and the signing of the Declaration of Cooperation is fully compliant with the interests of our country."

In general, the position of Azerbaijan on the OPEC+ deal has not been surprising for a long time. The country has always supported measures to stabilize the oil market, and therefore readily agreed to cooperate with OPEC and even agreed to reduce its own oil production in the first agreement by 35 thousand bpd, and by 20 thousand bpd in December 2018.

The price of oil is in priority for Azerbaijan today, since there is a natural drop in oil production from year to year. It is for this reason that the Azerbaijani side made decisions to reduce the production volume easily, because they allow avoiding falling oil prices below the “red line” - $60 per barrel. This, in turn, enables Azerbaijan to ensure macroeconomic, financial, foreign trade stability, as well as a stable inflow of foreign currency into the country.

Under the terms of the OPEC+ deal in December, Azerbaijan undertook to reduce the daily volume of oil production to 776 thousand bpd. The planned two-week shutdowns of production platforms at the Central Azeri (already completed in April) and West Chirag (expected in October) to carry out preventive works will certainly contribute to the reduction of total oil production in Azerbaijan. After all, according to the results of April, the daily oil production in Azerbaijan reached 683 thousand bpd. In May, this figure rose to 776 thousand bpd, but was still less than Azerbaijan's obligations under the OPEC+ deal. In general, Azerbaijan has fulfilled its obligations to reduce production by 125%.

Interestingly, the average daily oil production volume stipulated in Azerbaijan's oil and fuel balance for 2019 is 776,500 barrels. This is almost in line with the country's obligations under OPEC+. It means that planning has turned out to be very far-sighted, especially considering the extension of the deal. It also means that it will not be difficult for Azerbaijan to fulfil its obligations in OPEC+ at least until the end of this year.