A latest global oil deal could portray lessons from 1998
LONDON: After a year of secret diplomacy and hushed-up private talks around the world, OPEC’s mighty Saudi Arabia and rival Venezuela were persuaded to cut a deal by non-OPEC Mexico which overcame mutual acrimony and led to a much-needed rise in oil prices.
It was 1998, trust had long broken down within the Organization of the Petroleum Exporting Countries and it took outside mediation as a last resort to stop the squabbling to clinch deals at secret meetings in Riyadh, Madrid and Miami.
Now, with oil prices touching their lowest level since 2003, OPEC officials and deal brokers are looking back nearly two decades and asking whether a behind-the-scenes deal to curb oil output between OPEC and non-OPEC Russia could be struck.
Some see OPEC rifts as insurmountable and Russia as a wild card that cannot be trusted, but others say economic necessity to boost oil revenue could overcome acrimony and distrust and lead to a global deal to cut supply and mop up the glut. There are plenty of reasons, however, to dispel optimism.
Unlike in 1998, the challenge goes beyond rebuilding bridges between just two OPEC producers.
It pitches the interests of Saudi Arabia alongside fast-rising OPEC producers Iran and Iraq as well as non-OPEC Russia, the world’s largest oil nation. All four are involved in conflict in the Middle East but also desperately need money to keep their oil-dependent economies afloat and meet social costs. “The 1997/98 deal brokered between Saudi, Venezuela and Mexico took over a year to negotiate and it was touch and go as to whether it would get done or not,” said veteran OPEC-watcher Yasser Elguindi of Medley Global Advisors.
But low prices are making producers desperate. Prices sank to below $30 per barrel this year from as high as $115 a barrel just 18 months ago due to one of the worst oil gluts in history.
This perfect storm was due to a boom in the extraction of oil from shale rock in the United States and a decision by the Saudi ruling elite to ramp up crude supply to regain market share from higher-cost producers.
Saudi Arabia has pushed its output to record highs over the past year above 10 million barrels per day, almost equal to Russia. Iraq also raised production sharply above four million bpd over the past months as foreign investment in oil fields paid dividends. Iraq expects to raise output further in 2016. Meanwhile, Iran says the removal of European sanctions in January should allow it to claw back oil production and a deal with OPEC is unacceptable until output reaches four million bpd.
“You cannot have a deal with non-OPEC, until you achieve a credible OPEC framework which at the moment is not possible because of Iraq and Iran. Until there can be some framework between Iran, Saudi and Iraq, all this non-OPEC talk is just noise,” said Elguindi.
Saudi Arabia’s Oil Minister Ali al-Naimi, who has been in office since 1995, has said the kingdom would join cuts if key OPEC and non-OPEC players cooperated.
But insiders say, Saudi Arabia and it Gulf allies Kuwait, Qatar and the United Arab Emirates are all deeply skeptical that a workable consensus can be reached. “Iran and Iraq remain the main challenges inside OPEC and Russia won’t agree to a cut and is not to be trusted,” a senior Gulf OPEC delegate told Reuters.
In the past month, however, all parties involved have sent signals suggesting the world oil dynamic may be changing.
Iran’s main oil export official, Mohsen Qamsari, said in January he did not want a price war and might increase shipments gradually to avoid hurting world prices.
And Iraqi Oil Minister Adel Abdul Mahdi also said his country would support an extraordinary OPEC meeting if a joint cut with non-OPEC could be agreed beforehand.
“It is useless to go to a meeting without deciding up front. We said ‘yes’ if others are willing to go but we have to decide before. Otherwise this will backfire on us,” he said. The statements by Iran and Iraq coincided with a change of rhetoric from Russia where the head of its pipeline monopoly and close ally of President Vladimir Putin, Nikolai Tokarev, said joint action was possible to halt slumping prices.
For years, Russian officials said oil production cuts were technically difficult after an ill-fated deal with OPEC in 2001, when Moscow agreed to cooperate but raised exports instead. It was this that created the mistrust that exists today. But back then Putin was only at the start of his first presidential term and had little control of the oil industry, split between various oligarchs following the chaotic privatization after the collapse of the Soviet Union.
Fast forward 15 years, and the oil industry is mostly owned by the Kremlin and Putin has almost absolute power.
“You have to take this seriously now. Key will be if Russia can deliver,” said OPEC watcher and founder of US-based Pira Group Gary Ross, who was involved in the 2001 Russia-OPEC talks. Putin and his ally, head of Kremlin oil major Rosneft, Igor Sechin, have yet to speak about the recent talk of a joint move with OPEC.
But Sechin in the past said he would not support cooperation by Russia, where one popular conspiracy theory maintains that the low oil prices of the 1980s were orchestrated by Saudi Arabia and the United States to undermine the Soviet Union. Sechin has also said OPEC had “lost its teeth”.
A year ago, Putin said it was possible that the current price crash was orchestrated in the same way as the crash of the 1980s, which effectively led to a collapse of the Soviet Union – a huge tragedy, according to Putin.
“There is a lot of talk today about why it is happening. Maybe it is a Saudi-US plot to punish Iran, or put pressure on the Russian economy or Venezuela,” Putin said back then. But with the Russian rouble sinking to a record low and a parliamentary election this year and a presidential election in 2018, pressure is rising on the Kremlin to protect state revenues and limit public discontent.