MUTUALLY EFFECTIVE REDUCTION

Although Azerbaijan began official cooperation with one of the most influential economic cartels of the world, OPEC, a little more than a year ago, the organization is now considering the possibility of a membership for the country. During his recent visit to Baku, OPEC Secretary General Mohammed Barkindo underlined the important role of Azerbaijan in the agreement between OPEC and OPEC+ to reduce oil production. However, experts are not yet sure of the expediency of Azerbaijan’s membership in the cartel and support the current level of cooperation.

New OPEC venue

On December 10, 2016, Azerbaijan agreed to limit its daily oil production by 558,000 barrels to contribute to the stabilisation of global oil prices. On May 25, 2017, at the 172^nd meeting of the OPEC Council of Ministers, the member-states agreed to extend the term of existing agreement until the end of the first quarter of 2018. According to the agreement, Azerbaijan agreed to cut its own oil production by 35,000 barrels per day (bpd). On November 30, 2017, at the 173^rd meeting of the OPEC Council of Ministers, the parties agreed to extend the agreement for another nine months until the end of 2018.

Azerbaijan also joined the new agreement and agreed to reduce production by 35,000 bpd. Under the agreements, the country reports to the joint technical commission of the OPEC Monitoring Committee on daily oil production and fulfils its obligations. “The position of the state of Azerbaijan is that the extension of the agreement on reducing production by the end of next year is appropriate, and this decision can improve the results achieved in the oil market, making them more long-term,” said the Energy Minister of Azerbaijan, Parviz Shahbazov.

Initially experts noted that it would not be difficult for Azerbaijan to fulfil its part of the Vienna agreement, as there were no major projects to launch new oil fields that could dramatically increase production in the country.

Moreover, OPEC expects that this year Azerbaijan will reduce oil production by 0.03 mbpd in comparison with 2017. On average, oil production in Azerbaijan is projected at the level of 0.77 mbpd. “The volume of oil supplies from Azerbaijani in 2017 decreased by 0.05 mbpd, that is to 0.80 mbpd,” says the monthly OPEC report.

In any event, the support of the OPEC initiative by Azerbaijan is strategic for both sides. Therefore, the visit of Mohammed Barkindo to Baku and his statements during the visit can be considered as significant in terms of determining the role of Azerbaijan as a global actor in the oil market. “I am grateful to Azerbaijan for supporting this historic agreement, which has played an instrumental role in the most difficult time for the oil market,” said M. Barkindo.

According to Mr. Barkindo, the President of Azerbaijan, Ilham Aliyev, offered to hold one of the OPEC and OPEC+ meetings on freezing oil production in Baku, and, apparently, this proposal will be approved. At the meeting, I. Aliyev reminded about the fulfilment of the undertaken obligations, as well as highly appreciated the coordinated actions to ensure the stability of oil prices, as they give good results. He noted that OPEC and Azerbaijan continue cooperation to determine the most beneficial actions for maintaining oil prices in the world market.

Controlling the oil prices

M. Barkindo also stated that he hopes for the impact of a global deal to reduce production to restore stability in the world oil markets during 2018. According to him, the market is gradually stabilizing, and the participating oil producers are currently focused on expanding the deal until December 2018. He stressed that the extension of the agreement will be discussed at respective conferences planned in June and November 2018 between the energy ministers of the OPEC member countries, as well as the countries participating in the OPEC+ agreement. “We are pleased to report that almost all the countries participating in the agreement to reduce oil production follow their obligations entirely. The OPEC+ countries will continue studying the effectiveness of the agreement and its further extension,” said M. Barkindo. The Secretary General also noted that he planned to visit other OPEC+ signatory countries and expected long-term cooperation with them. According to him, the organization defends the interests of both the oil producers and consumers, and in general, the current market trends show that the decisions made earlier were true.

At the same time, the Secretary General does not deny the existence of different opinions in the market, but nonetheless notes that if 30 countries agreed to cut production, then they could come to a common denominator. Therefore, the cartel will continue its efforts to prevent sharp fluctuations in oil prices. The U.S. welcomes the cooperation of the OPEC member and non-member states (OPEC+), and highly appreciates its role in the current growth in global oil prices. This was stated at a meeting with the Energy Minister P. Shahbazov and the U.S. Ambassador to Azerbaijan Robert Sekuta.

However, experts believe that OPEC is giving up its positions as a coordinating and stabilizing body in the oil market and is already struggling to withstand the pressure of large companies and the U.S. According to the world media outlets, there is no unity among the leading OPEC member-states about the “right” oil prices. For instance, Saudi Arabia would like to see them at $70 per barrel or higher, while Iran would prefer quotes around $60. Iranian Oil Minister Bijan Namdar Zangeneh told The Wall Street Journal that Tehran would work to ensure that OPEC operates in the interests of maintaining prices at $60 per barrel, as he believes that this should curb the growth of shale oil production in the U.S. Meanwhile, in private conversations, Saudi officials say that the price of $70 per barrel is needed to finance budget spending and a successful initial public offering of the state-owned Aramco oil company.

It is also known that Gabon and Equatorial Guinea has recently joined OPEC and the number of its members now reaches 14. Nevertheless, the share of the cartel in world oil production declined from 55% to about 40% in the early 1970s. Therefore, the question is: should Azerbaijan become a full member of the cartel, or the existing level of cooperation within OPEC+ is enough?

To be or not to be?

First, it should be noted that a statement that the level of oil production in Azerbaijan is not sufficient for a membership in the organization is incorrect, since the volume of barrels produced is not the determining factor in this case. For instance, Chad, Congo, and Malaysia have recently applied for membership in OPEC. “The Asian countries, including Indonesia, first withdrew from OPEC to become observers, and now they want to return. But there are others like Malaysia. They have already submitted applications, which we are reviewing now,” said Gabriel Mbega Obiangu Lima, Minister of Mining and Hydrocarbons of Equatorial Guinea. However, these countries plan to increase the volume of production to 3,000-4,000 bpd only in the future.

Azerbaijan, however, as the “cradle of oil production”, has more chances to join the cartel, since its level of production is several times greater than that of the new contenders. According to the head of the Oil Research Centre, Ilham Shaban, “the countries that produce much less oil than Azerbaijan enter the organization. Countries such as Russia and the United States do not belong to the organization. They do not want to limit their development and the opportunities for manoeuvres in certain circumstances.”

In fact, the objective of creating any organization is to use the mechanisms of influence. “From 1961 to 1973, the existence of OPEC has not been tangible at all. But after the conflict between Egypt and Israel in 1973, the Arab world imposed an embargo against Israel and the Western countries. Thus, OPEC has demonstrated a potential to influence the market. But in reality it was not OPEC’s achievement but a secret agreement between the U.E. and Saudi Arabia. Considering all this, Azerbaijan is not interested in OPEC membership, as it does not want to limit its oil policy,” said I.Shaban.

Leading expert of the National Energy Security Fund Stanislav Mitrakhovich also believes that Azerbaijan is more independent now – as an OPEC+ member, it can join the agreement on cutting oil production, and withdraw its membership in case of absence of such an agreement. Azerbaijan's entry into the cartel does not mean that the situation for the country or for the organization will fundamentally change,” believes S. Mitrakhovich.

Thus, the current level of relations with OPEC seems to be the most optimal for Azerbaijan. After all, there is still no official confirmation of the talks about Azerbaijan's application for membership in the cartel...