December 12, 2014
At the OPEC meeting last month, eight member states voted to cut the group’s 30-million-barrel-a-day quota and four states opposed any cuts. There were no cuts.
The key reason no cut was approved is that OPEC requires that all decisions be made by consensus. Thus, there could be no change in the quota without everyone signing on.
And the four Persian Gulf Arab states—Saudi Arabia, Kuwait, Qatar and the UAE—refused to accept the majority position.
Of course, “majority” may be in the eyes of the beholder. A majority of eight of the 12 OPEC member states supported a cut. But a majority of about 55 percent of the cartel’s production opposed a cut.
Iranian Oil Minister Bijan Namdar-Zanganeh told Euro-news, “In outward appearance, OPEC is like a cooperative in that every party, regardless of its output and capacity, can have one vote. However, the truth of the matter is that the level of production, the capacity for production and the power to produce extra, has a determining role in the market and this is something we need to learn from.”
Eight countries—Iran, Iraq, Algeria, Angola, Ecuador, Libya, Nigeria and Venezuela—embraced a reduction, according to five people briefed on the meeting who discussed it with Bloomberg News.
The 8-4 split cemented the formation of two camps that had been brewing for weeks within OPEC: the financially strapped nations pleading for a cut to trim the supply glut and boost prices quickly, and the fiscal powerhouses willing to withstand lower prices for a while in a bid to get US shale drillers to curb their expansion.
The argument of the majority of eight wasn’t helped when two of the eight—Iran and Venezuela—both said they would not join in the production cuts they were demanding that other OPEC members agree to.
Inside the gray, boxy, nine-story building near the Danube Canal that houses OPEC’s secretariat in Vienna, Austria, the ministers sat in alphabetical order in a hangar-like room.
Venezuelan Oil Minister Rafael Ramirez put an output cut proposal on the table without specifying an amount. Others suggested the amount should be 5 percent, or 1.5 million barrels a day, according to Iraqi Oil Minister Adel Abdul Mahdi.
According to the cartel’s own estimates, demand for OPEC’s crude will fall every year until 2017 as US supply expands, eroding OPEC’s share of the global market to the lowest in more than a quarter-century.
The ministers of Kuwait, the United Arab Emirates and Qatar, all members of the Gulf Cooperation Council along with Saudi Arabia, voiced their support for Naimi, according to the five people.
The four nations opposing a cut require the lowest oil prices among the group’s members to balance their budgets, according to figures compiled by Bloo-berg. Therefore, they are best able to ride out a price slide and least threatened by what is happening in the market.
Zanganeh said Iran ultimately backed the decision to maintain output in the interests of OPEC unity.
The accord was “not in line with what we wanted,” Zanganeh said. Allowing prices to tumble in a bid to get shale producers to curb investment is a risky strategy, he said, since no one really knows how far prices will have to tumble to cause American shale oil output to tumble.
“These prices that we see are not a sufficient enough reason yet to say that definitely, within the next four or five months ahead, shale oil output will drop by 1 million or 2 million” barrels a day, Zanganeh said. “There are no facts or figures to say that shale production would definitely decrease.”
A new analysis by IHS, one of the major private energy data analysis firms, is based on information from individual wells. It concludes that 80 percent of the new production of so-called “tight oil” to be brought on line next year will be economic between $50 and $69 a barrel. What’s more, it notes that oil firms are investing in new technology every month to drive down costs.
But there is another possible threat that countries like Iran may face.
Daniel Yergin, the vice president of IHS, wrote last week in The Wall Street Journal, “The biggest impact of lower oil prices on future output may well be not in North America, where many people are looking for it, but in the rest of the world. Even before the collapse in prices, major oil and natural-gas companies had become preoccupied with the continually rising costs of developing new supply and were heeding the call from investors for ‘capital discipline.’
“This price decline will turn this preoccupation into an obsession. The result will be a slowdown and reduction in major new investments around the world. The losers will be the nations trying to woo investment for new oil and natural-gas projects.
“Countries in Africa, Asia and Latin America are already finding that fewer companies are showing up to bid for new opportunities, and such bids that are proffered will be lower, perhaps much lower, than governments were expecting. The days are past when these countries can insist on very tough terms in taxes, royalties and other requirements that drive up costs and cause delay,” Yergin wrote.
Just a few weeks ago, Total’s Middle East head said Total was not champing at the bit to return to Iran and would require good terms before it would agree to do so. That was from the oil firm previously known as the company most eager to do business in the Islamic Republic.
Zanganeh raised the possibility that OPEC may become irrelevant if Yergin’s thesis proves correct. He told Euronews, “One of the important and historical concerns of OPEC has been about its share in the market. In recent years, OPEC’s share in the market has steadily decreased. If this continues and it goes beyond a certain limit, then OPEC’s impact would become trivial.”
In the interview, Zanganeh also mentioned in passing that Iran is dependent on Western firms, something regime spokesmen have been denying for years. Zanganeh said, “We want these international oil companies to participate in our oil industry…. We need the technology and the quality management more than money in order to develop Iran’s oil, gas and petrochemical industry.”
Within Iran, however, the public reliance remained on chest-thumping rhetoric and accusations of foreign conspiracies against Iran. Even President Rohani joined in, accusing “plotting hands” of bringing down oil prices.
Rohani said, “Although plotting hands in the region and the world slashed oil prices and they imagine that they have caused problems for Islamic Iran and the country’s path to development, the Iranian people must know that the budget [for the next fiscal year] will be submitted to the Majlis without any deficit.”