Page 6 - LatAmOil Week 29 2021

LatAmOil COMMENTARY LatAmOil

OPEC+ members reach agreement

The group has made compromises to avoid supply shortages – and created another potential headache

THE OPEC+ group this week reached an agree- Abu Dhabi National Oil Co. (ADNOC) has
ment that will result in increased oil production embarked on a $122bn four-year programme
WHAT: as five members saw their baseline output levels which is designed to help it raise output capac-
Both Saudi Arabia and raised after tense negotiations. ity to 5mn bpd by 2030, with the company this
the UAE managed to Under the agreement, the members will col- week announcing more than $760mn in con-
get what they wanted lectively ease their production cuts by 400,000 tract awards to achieve this.
with OPEC+ members barrels per day (bpd) each month from August For Riyadh, the heightened tension is more
agreeing to extend the and push back the current April 2022 end date based in reputation and control. Saudi Arabia’s
deal to ease cuts while until the end of that year. baseline of 11mn bpd has little bearing in real-
higher baseline levels At this rate, it will take nearly 15 months for ity; the Kingdom has exceeded this level only
were announced for the
biggest producers. OPEC+ to increase production by the 5.8mn twice in history, in November 2018 and April
bpd it is still withholding under the agreement 2020, when it hit 12.1mn bpd as it launched a
WHY: reached in early 2020 as they scrambled to bal- price war with Moscow, thereby sending prices
Riyadh’s intention was ance the market. into freefall. In October 2018, it was running at
to maintain adherence Speaking to Russia 24, Russia’s Energy Min- 10.77mn bpd.
to the deal while the UAE ister Alexander Novak said: “Today we made a However, Moscow and others have been
had complained that its decision for the market to restore production to pushing to step up output and Riyadh could not
2018-influenced baseline a pre-crisis level.” be seen to take a secondary position to Russia.
was no longer relevant. Meanwhile, from May 2022, the baseline That said, the closer Saudi production comes to
production levels of the group’s five largest its OPEC+ quota, the less flexibility it can wield
WHAT NEXT: producers will rise by a combined 1.632mn to keep others in line.
OPEC+ will continue bpd. The group’s next meeting is scheduled for Meanwhile, state-owned Saudi Aramco
adding 400,000 bpd of oil September 1 with a thorough review of the deal has a maximum sustainable capacity (MSC) of
production each month planned for December. 12mn bpd. The company has been instructed to
until the end of 2022 with The news marks a significant compromise increase this figure to 13mn bpd by the Ministry
the new base levels to be
implemented in May. following a breakdown in talks two weeks ago of Energy.
as Saudi Arabia and the UAE dug their heels in. The potential upside for Saudi Arabia is that
Riyadh had been pushing for the monthly pro- once Aramco completes the projects to raise
duction increases to be tied to a commitment to MSC, it can produce at a higher level without
extend the existing supply cut, while the Emir- being seen to flout the quotas. However, the
ates had sought an upward revision of its refer- company is still working on a plan to achieve this
ence point for cuts before it would agree to any increase, as maintaining production at mature
extension. assets and tapping the Jafurah basin for gas take
This week’s deal sees both parties get what priority.
they wanted while apparently avoiding the Speaking to NewsBase, Ian Simm, Princi-
potential banana skin of a wholesale push to lift pal Advisor at consultancy IGM Energy, com-
baseline production levels. mented: “This deal lets both the Saudis and the
In May, the reference levels of the group’s two Emiratis claim victory. From Saudi Arabia’s per-
top producers, Saudi and Russia, will increase spective it was able to extend the deal while only
by 500,000 bpd to 11.5mn bpd, with the UAE’s allowing baseline level alterations for key allies.
rising by 332,000 bpd to 3.5mn bpd. At the Even then, the move will have little bearing on
same time, Iraq and Kuwait will also receive Iraq, which has routinely overproduced.”
uplifts of 150,000 bpd each. This will take their Algeria and Nigeria have spoken of their
baselines up to 4.803mn bpd and 2.959mn bpd displeasure about the move, saying that allow-
respectively. ing the bigger producers to raise their baselines
unfairly penalises those with output levels. How-
Rhetoric ever, keeping the top exporters happy appears to
For the UAE, the baseline production level is of have won the day.
great relevance. Its current 3.168mn-bpd level is Meanwhile, Simm added: “With Saudi
based on October 2018 output, but Abu Dhabi unlikely to utilise any of its additional 500,000-
in particular has invested heavily in expanding bpd wiggle room for the time being, allowing
capacity, which now stands at 4mn bpd. other members to add around 1.1mn bpd to
The country’s officials have complained the market from May next year seems like a
about the shut-in of a disproportionate level of deal worth making to maintain co-operation,
output – 35% – compared to other members – providing they are able to keep a lid on the dis-
25% on average. content.” ™

P6 www. NEWSBASE .com Week 29 22•July•2021