By Syed Rashid Husain
THE OPEC out cut agreement has just gone into effect. And markets appear confident – still – of its success. Initial reaction remains positive. Yet, despite that, the first of the salvos seem to have already been fired – in the output compliance game.
As per the deal, Iraq, OPEC’s second-largest producer, had agreed to reduce output by 210,000 bpd to 4.351 million bpd. But a row seems to be erupting between the central government in Baghdad and the autonomous Kurdish region, on output cut – who needs to cut and by how much. And this could put in question, Iraq’s compliance to the agreement, some insist.
Late last week, Iraq Prime Minister Haider Al-Abadi complained the autonomous Kurdish region was exporting more than its allocated share of oil. “The region is exporting more than its share, more than the 17 percent stated in the budget,” Abadi said. Kurdistan Region exports over 600,000 oil bpd through the Turkish port of Ceyhan in the southeast of the country, accounting for almost 12 percent of Iraq’s total oil output.
However, as recently as Dec. 22, Iraq had underlined its commitment to the output restraint deal. Iraq said most international oil companies working in the country, along with the semi-autonomous Kurdish region, have agreed to cut crude output to fulfill an OPEC accord.
Iraq is fully committed to delivering on OPEC’s Nov. 30 agreement to reduce supplies, Oil Minister Jabbar Al-Luaibi reiterated in Cairo during a meeting of the Organization of Arab Petroleum Exporting Countries, known as OAPEC. “Kurdistan is within Iraq and we are in agreement,” said Al-Luaibi.
This was despite the fact that the Kurdistan Regional Government had underlined on Dec. 5, that it didn’t expect to make any significant cut in output because of the OPEC accord.
Luaibi’s remarks were soon rebutted by KRG officials. On Dec. 28, a Kurdish official denied that the Kurdistan Regional Government has agreed to abide by the OPEC accord. “The Kurdistan Region will continue its oil exports as before and has not decided to abide by the OPEC accord,” Dilshad Shaaban, deputy head of the energy and natural resources committee in the Kurdistan Parliament, told Rudaw news agency.
Shaaban added that the Kurdistan Region is not a member of OPEC and currently has no oil deal with Baghdad to force it to abide by the agreement. He explained that “there is only one way through which the KRG could commit reducing its oil exports and is if it reaches an oil accord with Baghdad. But that is unlikely to happen.”
The relations between the Kurdistan Regional Government (KRG) and the federal government of Iraq have been tense since the beginning of 2014 after Baghdad blocked the federal budget share to the Kurdistan Region, accusing the KRG of seeking to sell its oil independently. Tensions hit a high in 2015 after officials from both sides accused each other of failing to abide by the terms of the oil revenue sharing deal struck in December 2014.
Conflicting reports from Baghdad too continue to cloud the horizon. Back on Dec.5, two weeks ahead of the day the OPEC production cut agreement was set to begin, Wall Street Journal reported that contrary to executing the agreed upon production cut of 210Kbpd, Iraq was actually preparing to boost its exports in January. This began raising questions about Baghdad’s commitment to the OPEC agreement, even before the issue with KRG erupted.
Iraq’s national oil company, the State Organization for Marketing of Oil (SOMO), had plans as of Dec.8, nine days after agreeing to cut production, to increase deliveries of its Basra oil grades by about 7 percent compared to October levels, as per a detailed oil-shipment program viewed by The Wall Street Journal. Those oil shipments represent about 85% of Iraq’s exports.
In order to comply with the agreed output cuts, Iraq also needs to grapple with some other issues, besides the dispute with KRG. Baghdad’s contracts with foreign oil majors include provisions that require the government to compensate them when production is curtailed for reasons beyond the drillers’ control, Reuters reported after viewing contract excerpts in November.
And “of the Middle East producers that agreed to the cuts, it’s probably the one that has the most (international oil company) - operated production,” Jessica Brewer, principal analyst for the Middle East and North Africa upstream oil and gas at energy consultancy Wood Mackenzie insisted. Government-imposed production cuts could trigger those provisions, according to Brewer.
Until now, there are no signs that Iraq has reached a deal to cut output with international oil companies such as BP, Exxon Mobil, and Royal Dutch Shell, Brewer said. Meanwhile, OPEC’s compliance panel is set to meet and make its first assessment of output reductions on Jan. 21 and 22 in Vienna.
In the meantime, Libya, which isn’t party to the OPEC cuts, is ramping up output from its biggest oil field. The country plans to ship nearly 1.9 million barrels of oil this month from the recently reopened Sharara oil field, according to a loading document obtained by Bloomberg.
Libya, one of two OPEC countries exempted from output cuts, has increased its production to 685,000 bpd, an official at the National Oil Corporation said. Besides restarting fields, it has also resumed cargo loadings from key ports.
If sustained, the volume Libya is pumping today would be about 125,000 bpd higher than it was producing in October. Mustafa Sanalla, the chairman of Libya’s National Oil Corp., said Dec. 21 that output would reach 900,000 barrels a day by early 2017. By hitting that target, Libya would replace about one-third of the supplies being cut by other OPEC nations.
And meanwhile, rigs targeting crude in the US too rose last week to the highest level in a year. US oil output went up in October to 8.8 million bpd, the highest since May 2016. “More than half of this growth can be attributed to Alaska and (Gulf of Mexico), but (Lower 48) onshore production is finally showing signs of life,” Barclays said in a note. “Output in several states, including Texas, Oklahoma, and North Dakota, increased in October and is perhaps on the verge of returning to growth.”
Non-OPEC Russia’s oil production in December too remained unchanged at 11.21 million bpd, near a 30-year high, as it committed itself an output cut by 300,000 bpd in the first half of 2017. As per some reports Nigeria has also increased its output last month by 61,000 bpd.
Issues continue to confront OPEC big wigs. It seems to be a bumpy ride. The road to balance is definitely littered with issues.
