Monday, February 24, 2014

Deja vu on system for calculating OPEC oil output quotas

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By Margaret McQuaile in London
February 21, 2014 - Former OPEC delegates and veteran journalists who covered the doings of the oil producer group during the mid-to-late 1980s may have had a sense of deja vu on learning that Iraq has been working on a proposal for allocating OPEC crude production quotas.
Deputy Prime Minister Hussain al-Shahristani, talking to journalists in London late last month, gave no details beyond "we are preparing a proposal for calculating quotas" and saying the discussions could start when Iraqi crude output capacity reached somewhere between 4 and 5 million b/d.
Given the various infrastructural and security constraints that are capping the country's output at around 3 million b/d, those discussions are probably some way off.
Crude oil reserves held by OPEC's Gulf member countries

Source: OPEC Annual Statistical Bulletin
Shahristani gave nothing away about the kind of formula Iraq may put forward for calculating quotas, but if Baghdad is aiming for a model based on a basket of oil-related criteria such as reserves, production capacity, historic share of output, and non-oil-related economic indicators such as population, GDP and external debt, it is probably barking up the wrong tree.
OPEC tried in the mid-1980s to come up with a quota-allocation system that would take into account those very factors. It failed.
Neil Atkinson, head of analysis at Lloyd's List Intelligence, remembers that period well. In late 1985, OPEC abandoned quotas and embarked on its "fair share" policy aimed at recovering market share lost to non-OPEC producers.
Prices spiraled downward through the first half of 1986 to below $10/b for North Sea Brent, but below $5/b for some Gulf grades.
In the subsequent effort to cut back production, OPEC tried to devise a scientifically based system for allocating quotas.
But, as Atkinson recalls, there was nothing scientific about it. It was, he says, "a shambles."
Veteran analyst Mehdi Varzi, now president of Varzi Energy, also recalls previous OPEC efforts to divide production among members and says that any attempt to devise a system for calculating quotas would be "a complete and unmitigated waste of time."
For a start, "every country will put special emphasis on its own strengths," he says, with Nigeria and Iran, for example, likely to want a high weighting for population and Iraq perhaps likely to argue that it is entitled to special treatment because it was out of the market for so long.
What it comes down to, Varzi says, is "who has the muscle, who has the production capacity."
As for reserves, Varzi says: "I question every single number in OPEC. Nothing tallies in OPEC because no one has come in from the outside."
OPEC oil reserves jumps        
A glance at some of the reserves figures published by OPEC, with significant increases declared by some countries between one year and the next without explanation, does indeed raise questions.
Between 1987 and 1988, Saudi Arabia's reserves grew by more than 50%, from 169.585 billion barrels to 254.989 billion barrels.
Kuwait's big year-on-year reserves increase was between 1983 and 1984 when the number jumped by 38.4% to 92.71 billion barrels from 67 billion barrels.
Iran's reserves jumped by 57.4% between 1985 and 1986, from 59 billion barrels to 92.86 billion barrels, while the UAE almost tripled its reserves -- from 32.99 billion barrels to 97.2 billion barrels over the same 12-month period.
Iran also declared a 32% year-on-year reserves increase in the early 2000s -- when it told OPEC that it had boosted reserves to 130.69 billion barrels in 2002 from 99.08 billion barrels in 2001 -- and a 10% hike between 2009 and 2010, to 151.17 billion barrels from 137.01 billion barrels.
Iraq announced significant reserves increases of 38.9% between 1986 and 1987, from 72 billion barrels to 100 billion barrels, and 24.4% between 2009 and 2010, from 115 billion barrels to 143.1 billion barrels.
So, considering the potential for member countries to exaggerate the various data that might be prioritized, is it possible to design a scientifically based quota system?
"I don't think it's politically possible," Atkinson says.
"Quotas that would imply a total ceiling at a reasonable level would mean that some members would have to sacrifice market share and volumes, and this is difficult to see given the current tensions within the organization. And if we look beyond 2015-2016, it's difficult to see these tensions disappearing," he says, highlighting the fractious relationship between Saudi Arabia and Iran.

The Iraqi idea of a system for devising quotas "only makes any sense if their production is going to increase sharply between 2014 and 2015," he says. "Unless there is a big increase in demand, if Iraq is going to produce more, the others are going to have to produce less."
And the only way to bring Iraq -- which has not been part of OPEC output agreements since its August 1990 invasion of Kuwait -- back into the quota system without reducing the existing shares of other members, in particular those unable to increase their capacity levels, will be to make the OPEC cake bigger and therefore easier to divide, he says.
"But it's hard to see how that can be done, given current market conditions, without risking a price collapse."
In the shorter term, OPEC may have more to worry about than the production increases Iraq is anticipating.
Talks now under way between Iran and six world powers on the nuclear issue could lead to the removal of sanctions and more than 1 million b/d of additional Iranian crude returning to the market later this year or early next, and the Libyan authorities could succeed in ending the port blockades and field shutdowns and bringing several hundred thousand barrels of daily production back on line.
On the other hand, lack of progress on the Iranian nuclear issue would mean no increase from Iran while the political chaos in Libya could continue to keep oil output low.
Quotas or no quotas, only one OPEC country -- Saudi Arabia -- has the ability to respond to either scenario.

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