Can OPEC’s Grand Coalition Hold? – OPEC Grand Coalition - Arhive
OPEC Grand Coalition
An agreement with countries outside the cartel to limit oil output is about to be put to the test
A few minutes after OPEC declared last November that it would cut production to jolt petroleum prices higher, the oil cartel’s president, Mohammed al-Sada of Qatar, faced reporters in Vienna and made a startling admission.OPEC Grand Coalition
“We wouldn’t have an agreement,” he said, without the help of 11 countries from outside the cartel that said they, too, would cut their output.OPEC Grand Coalition
Such is the predicament of the Organization of the Petroleum Exporting Countries in the age of the oil glut.
Once able to bring the industrialized world to its knees by turning off its oil flows, the cartel now is less able to affect global oil markets on its own.
OPEC officials openly acknowledge they must enlist help from oil-producing countries outside of OPEC to have an impact on global supply and prices.OPEC Grand Coalition
The grand coalition that OPEC brought together late last year is the cartel’s future in a world in which oil traders are more focused on the power of U.S. shale producers and enormous stockpiles of crude.OPEC Grand Coalition
“What we did is history,” says Mohammad Barkindo, OPEC’s secretary-general, in an interview. “It’s a complete turnaround, a new chapter. Bringing a broad coalition of global producers to agree on supply adjustments…that’s the way forward,” he says.
Mr. Barkindo launched this new strategy almost immediately after taking office last summer. He and other top OPEC leaders, such as Saudi energy minister Khalid al-Falih, engaged in an unusual level of shuttle diplomacy with heads of state to make the November agreement happen. OPEC Grand Coalition
The six-month deal signed in Vienna, which expires this month, successfully tightened global oil supplies and led to a 20% rise in oil global oil prices.
Still, oil analysts say the strategy is riddled with potential pitfalls and points to an uncertain future for the 57-year-old cartel.
OPEC’s ability to sway the market is largely based on its credibility.
The group’s Arab members made the world take notice in 1973 when its embargo against the West over support for Israel sent oil prices soaring and resulted in gasoline rationing in the U.S.
But over time, the group’s reputation as a potent force has suffered as members repeatedly failed to comply with agreements to hold back production. The rise of powerful new oil producers that aren’t in OPEC, such as Russia, also has weakened the cartel’s credibility as a central authority.
Non-OPEC producers “don’t have a history or habit of even pretending to cooperate,” says Robert McNally, president of energy consultancy Rapidan Group in Washington, D.C.
Such fissures may become newly apparent at a May 25 meeting in Vienna at which OPEC and non-OPEC producers are expected to discuss a possible extension of the November agreement. Whether an extension can be achieved, and for how long, could depend in part on the degree to which each nation has lived up to the production cuts pledged in the original deal. OPEC members were producing 33 million barrels of oil a day before the cuts; non-OPEC nations party to the deal were pumping about 18 million barrels a day.
Despite its members’ shared interest in a stable, healthy oil market, OPEC isn’t a group that can make decisions quickly. Its members span three continents and have strong differences in culture and economies. It took almost a year to reach the November accord. When more countries are added to negotiations, it can slow things down, analysts say.
Meanwhile, there are concerns that the non-OPEC participants aren’t living up to their pledges. According to the International Energy Agency, a Paris-based organization that monitors energy trends for industrialized nations, about 95% of the total cut agreed to by all participants in the six-month deal had been achieved in March, but the non-OPEC producers have hit only 64% of their target. (Some OPEC members had committed to larger proportional cuts than the nonmembers, and some members cut more than they promised to.)
Representatives of both groups, OPEC and non-OPEC, have met each month since November to assess how each country has performed. But while OPEC members use a unified set of independent experts to measure their outputs, making it easier to compare reductions, non-OPEC producers tend to measure output using a mix of their own numbers and external data, making it harder for outsiders to assess their efforts. Estimates of Russian output for March, for example, vary by as much as 300,000 barrels a day—an amount equal to the daily cuts that Russia agreed to in November.
OPEC officials say they have little choice but to try to persuade the non-OPEC countries to continue with their agreements. And despite broad skepticism from analysts, OPEC’s Mr. Barkindo says there is widespread compliance with the current accord.
Meanwhile, if the world’s oversupply of oil doesn’t fall back into balance with demand by next year, Mr. McNally, the Washington consultant, says he expects OPEC’s grand alliance with non-OPEC countries “will fall apart.”
Back in 1960, when the cartel was founded by Iraq, Saudi Arabia, Venezuela, Iran and Kuwait, those members alone controlled more than half of the world’s crude-oil production. Now, even with 13 members, the group controls only about a third of global oil production, including crude and natural-gas liquids, and “has made it clear it would not be able to restore stability on its own,” Mr. Barkindo says.
The key cause in this slippage: technological advances that have given energy companies the ability to extract more oil from the ground and get it to market faster. Until recently, most oil production—in and out of OPEC—came from big projects that produced about the same amount of oil over a long period, often three or four decades if not more.
The spectacular rise of hydraulic fracturing and horizontal drilling—the technology that unlocked the American shale-oil boom—upended that dynamic. Shale wells produce their most oil shortly after being drilled, before heading into a decline. Fracking companies can more easily turn their production on and off, which is why it is often called “short-cycle” production.
When oil prices soared, first to over $140 a barrel in 2008, and then steadily remained over $100 a barrel from 2011 to 2014, U.S. shale producers ramped up output. Production also came flooding in from regions that were once seen as too complicated and expensive to produce oil, such as Canada’s oil sands. The global glut and crash in oil prices that ensued convinced OPEC of the wisdom in keeping a closer watch on production outside the cartel. That, in turn, gave rise to Secretary-General Barkindo’s pursuit of the bigger-tent strategy, which focused on forging cooperation with potential partners similar to OPEC members themselves—largely state-controlled producers. Russia, for instance, which pumps more crude than any other country.OPEC Grand Coalition
“OPEC’s attempt to regain power via a super-OPEC may be a smart strategic move,” says Jamie Webster, an energy analyst fellow at the Center for Global Energy Policy at New York’s Columbia University. But, he adds, “it’s hardly the recipe for a strong organization that can effectively exert itself through market downs and ups.”
Mr. Faucon is a reporter for The Wall Street Journal in London. Email benoit.faucon@ wsj.com.