Opinion

Who is the free rider on the OPEC+ journey?

Who is the free rider on the OPEC+ journey?

Author
Short Url

The journey of the OPEC+ group to cut oil production began in January 2017 and lasted until the end of March 2020. 

This entailed 39 months of collaborated efforts among 24 oil producers outside and inside OPEC.

It amounted to total output cuts of some 1.2 million barrels a day, where OPEC producers agreed to cut 800,000 barrels per day (bpd) and non-OPEC producers by 400,000 bpd. Within this, Saudi Arabia reduced output by 500,000 bpd and Russia by 230,000 bpd. 

At the end of 2019, the agreement was amended to deepen the output cuts by 500,000 bpd to 1.7 million bpd through the end of March 2020.

Who then shouldered most of the burden of the OPEC+ production reduction?

Since the very start of the agreement, the Kingdom of Saudi Arabia has absorbed the lion’s share of the cuts.

It assumed more than 41 percent of the total OPEC cuts, even though its production share was just 31 percent.

Its motivation has always been to ensure the security of energy supplies and balance in oil markets for the good of the global economy.

Russia’s commitment to comply with the OPEC+ output cuts was shaky and questionable from the outset, as some resistance came from the Russian oil companies who tried to hinder these efforts.

Russia also claimed it was difficult to reduce production due to the harsh climate and geological conditions of many production areas during the winter season.

Production figures shows that on average, Moscow produced about 70,000 bpd more than it should under the OPEC+ agreement.

On the other hand, Saudi Arabia committed more than it needed to under the commitment compliance rates.

This over-compliance amounted to up to 185 percent in December 2019, when it produced 9.8 million bpd, while Russia’s commitment to reduce production was approximately 70 percent when it produced 11.2 million bpd.

When comparing the latest oil production data for the month of February 2020, we find that Saudi Arabia reduced its production by 180 percent at 9.7 million bpd while Russia reduced only 44 percent at 11.3 million bpd.

Russia’s commitment to comply with the OPEC+ output cuts was shaky and questionable from the outset

Faisal Faeq

With all that leniency, Russia called for changing the method of measuring its production levels to exclude condensate before the December 2019 OPEC+ meeting. Condensate wasn’t originally considered in the output cuts, representing around 800,000 bpd of the total Russian oil production.

Even Russia’s compliance in the months of May, June, and July of 2019 was not voluntary but was due to the Druzhba pipeline oil-contamination crisis that pushed production below its OPEC+ target, after several European countries halted imports of Russian oil.

Has the US benefited from the agreement? The US was not a part of the OPEC+ journey but benefited the most from the efforts to balance the market and reduce the supply glut, which maintained oil prices at levels that helped the US shale oil industry to prosper. 

This has led US oil production to rise from 8.8 million bpd in 2016 prior to the OPEC+ agreement to a record level of 13 million bpd after 39 months of the agreement, and the majority of this increase in production came from the Permian Basin, whose production rose from 2 million bpd in 2016 to more than 5 million bpd (exceeding Iraqi production).

Has the US threatened the OPEC+ market share? Average oil exports from the US have skyrocketed from 520,000 bpd in 2016 before the OPEC+ agreement to an average of 3 million bpd in 2019. 

The overall increase in shale oil production went to export because it is not a desirable crude oil quality favored by US refineries.

However, shale oil producers were able to sell it at huge discounts to the Asian market where the majority of OPEC production is exported.

 

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. 

Twitter:@faisalfaeq

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

Saudi Arabia pumps 12m barrels of oil for the first time

The Kingdom’s previous record output was about 11 million barrels, achieved only briefly. (Reuters)
Short Url
Updated 02 April 2020

Saudi Arabia pumps 12m barrels of oil for the first time

  • Daily record smashed amid market turmoil
  • Previous record output was about 11 million barrels

DUBAI: Saudi Arabia pumped more than 12 million barrels of oil on Wednesday for the first time in its history.

The Kingdom has vowed to ramp up production as an oil “price war” shakes the global energy industry following the end of a supply agreement with other producers.

Officials at Saudi Aramco, the world’s biggest oil company, and the Saudi Ministry of Energy, Industry and Mineral Resources told Arab News that crude output on the first day of April — when the OPEC+ agreement to limit supply lapsed — was more than 12 million barrels. Some reports put it at 12.3 million.

The Kingdom’s previous record output was about 11 million barrels, achieved only briefly.


SPOTLIGHT: From Middle East to USA, coronavirus impact transforms oil industry’s dynamics


Aramco had pledged to increase its maximum sustainable capacity (MSC) — the level at which it can safely maintain long-term output — to 12.3 million in the coming months; that it has already hit this level is regarded as a measure of its operational efficiency and the Kingdom’s determination to win the battle for market share.

The company released a short video showing laden oil tankers sailing away from Saudi ports. It said it had loaded 18.8 million barrels onto 15 tankers, which would have taken about three days.

 

 

Aramco’s strategy of large output increases and significant discounts to customers — labeled a “shock and awe” play by energy experts — has transformed the oil industry. The price of crude oil plunged as demand for energy was hit by the coronavirus pandemic. Some producers, especially in the US where extraction costs are high, are facing financial disaster.

“If Saudi Arabia sustains this, it would be an unprecedented demonstration of their MSC,” said Robin Mills, chief executive of the Qamar energy consultancy. “Assuming that it is production, and not just drawing down on storage, it’s an impressively quick ramp-up.”

Opinion

This section contains relevant reference points, placed in (Opinion field)

It was also notable that production was unaffected by any lingering issues from terrorist attacks last September on Aramco facilities at Abqaiq and Khurais, Mills said.

Despite the flood of oil onto global markets, the Brent crude global benchmark price rose by about 10 per cent toward $25 per barrel after US President Donald Trump said he thought the price was too low, and offered talks with Saudi Arabia and Russia about the global oil glut.

Shares in Saudi Aramco rose for a third consecutive day, up 1.5 per cent to SR30.6.


European bank ramps up stimulus package

Updated 05 June 2020

European bank ramps up stimulus package

FRANKFURT: The European Central Bank approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War II.

Just months after a first raft of crisis measures, the ECB said it would raise bond purchases by €600 billion ($674 billion) to €1.35 trillion and that purchases would run at least until end-June 2021, six months longer than first planned.

It also said it would reinvest proceeds from maturing bonds in its pandemic emergency purchase scheme at least until the end of 2022.

ECB President Christine Lagarde scotched speculation that the bank could follow the US Federal Reserve in buying sub-investment grade bonds, saying that option was not discussed by policymakers.

The announcement, which comes just weeks after Germany’s Constitutional Court ruled that the ECB had already been exceeding its mandate with a longstanding asset purchase program, prompted a rally in the euro and bond markets.

“Today’s easing measures were another illustration that the ECB means business and stands ready to do whatever is necessary to help the euro area survive the corona crisis in one piece. The ECB will do its part, and it hopes the governments will do their part,” Nordea analysts said in a note.

The bank dramatically revised downward its baseline scenario for euro zone output this year to a contraction of 8.7 percent from the modest 0.8 percent rise it had forecast only in March.

“The euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it,” Lagarde said.

She said she was confident that a “good solution” could be found on the legal stand-off with Germany’s top court.