Securing the agreement between OPEC and non-OPEC countries was not easy. Over the course of a month, participants in the deal tried to persuade each other that there was a tangible shortage of supply on markets – one that would worsen as major companies abandoned oil.
The meeting itself went on for more than a week, with energy ministers conferring online, parting ways, holding separate meetings and again joining together in the vast space of the internet in search of a consensus of benefit to all. In the end, the meeting on Sunday 18th July proved to be one of the most significant of the group’s meetings – and shortest, wrapping up in 18 minutes.
Raise it, lower it, onward
According to the agreements struck on Sunday, participants are to raise oil production by 400,000 barrels a day each month — from September 2022 — to that should allow them from September 2022 to eliminate the current imposed reductions of 5.8 million barrels per day. But in order to keep the agreement in place until the end of 2022 against a background of rising production, it was decided that the largest participants would raise their baseline production levels from May 2022.
Saudi Arabia would raise its level from 11 to 11.5 million bpd, the United Arab Emirates would raise its level from 3.2 to 3.5 million bpd, Iraq from 4.65 to 4.8 million bpd and Kuwait from 2.8 million bpd to 2.96 bpd. In this way, OPEC+ can gradually boost oil production and keep control over oil markets. Ministers will keep meeting monthly throughout the duration of the agreement and, after assessing the situation, determine production volumes for the following month, while keeping in place reductions until September 2022.
In December, ministers will assess the situation on markets and the production indicators of participating countries.
Risks of a shortage
After the pandemic-induced collapse of 2020, one of the most pronounced since records were kept, oil markets this year began to recover dramatically. Constantly rising demand for il and oil products spurred prices upward. While in January 2021, oil traders took heart from a price of $55 a barrel of Brent, in July the price of a barrel had soared to $78.
Throughout this period, OPEC+ viewed reacted with considerable moderation to the rising market, offering assurances that there was a long way to go to full stabilisation and noting that “dark clouds” continued to hover over markets. Until the very last – under pressure from Saudi Arabia – participants kept putting off a decision on boosting production.
But by May, commercial oil reserves had dipped below 2015-2019 levels – an indicator used by OPEC+ to assess the effectiveness of their agreement on limiting production. By June, oil shortages were making themselves felt.
Russian Deputy Prime Minister Alexander Novak said in June that oil shortages on markets amounted to 2 million bpd and demand by the end of the year could rise by 5.5-6 million bpd. “In this situation, it important to keep our finger on the pulse and guard against any overheating of the market or any significant shortage,” he said.
By the beginning of July, nearly all participants in the necessary OPEC+ agreement, including Saudi Arabia, had come to the conclusion that raising oil production was necessary – from August. But at the meeting on 2nd July, a decision on that was effectively blocked by the UAE – which was demanding an increase in its baseline production from 3.2 million to 3.8 million bpd without an extension to the agreement in 2022.
Saudi Oil Minister Prince Abdulaziz bin Salman was firm in saying that granting an exception to one country would lead to requests from others. He also said that a decision on boosting production could not be taken without at the same time extending the agreement.
The discussions became deadlocked and the meeting was postponed indefinitely. The Saudi and UAE ministers met separately several times and in the end a compromise decision was adopted at the meeting on 18th July.
According to the provisions of the agreement, Russia will increase its production by 100,000 bpd each month. That will enable Russia in May 2022 to achieve the pre-crisis production level of 10.5 million bpd against the current level of 9.5 million bpd.
”Russia, for example, will reach its pre-crisis level already in May next year and that will enable us each month starting in August, to boost our production by 100,000 bpd,” Novak told the television channel Rossiya 24 after the meeting. “This is quite a large volume, an additional production volume over the course of this year and next amounting to about 21 million tonnes.”
If the increase in production extends through September 2022, Russia will achieve a level of 11 million bpd of oil – a new historical maximum. Even in October 2018, production stood at about 10.7 million bpd.
As Novak explained then to Interfax news agency – when he was energy minister – adopting different baseline production levels for the two leaders of the agreement was done with due account of the potential of each country. “This is also a matter of compromise, taking account of the potential of both Russia and Saudi Arabia in terms of increasing production,” he said. “We therefore came to an agreement in the course of our discussions.”
A gradual increase in production will also channel additional income to the state budget. “With an average price of $60 a barrel, extra income for the budget totals more than 400 billion roubles ($5.36 billion),” Novak said. “This is, of course, a very positive moment as it means restoring investment activity, including in the oil sector. It means additional orders for industry, income for Russian regions.”
What comes next?
As the Saudi energy ministry noted, changing the baseline production levels from May 2022 will have no effect on how fast production is increased – production will continue to increase by 400,000 bpd. If the production cutbacks are to be reduced from 5.8 million bpd to zero, the countries of OPEC+ must increase oil production up to September 2022. As a result, by that time, Saudi Arabia will have achieved a production level of 11 million bpd — and 11.5 million bpd by the end of 2022.
The prince noted that the changes in baseline production levels will mean that OPEC+ restrictions by May will stand at 4.32 million bpd. “I walk, talk and sleep with my calculator and if I am not mistaken the figure is 4.32 billion bpd,” he said. “And you have to understand that it is possible that some countries will not be able to achieve such figures by that time.”
Particular attention will be paid to Iran, with U.S. sanctions possibly lifted. Iran has said several times that once the sanctions are rescinded, it can, in the space of a year, restore production at a level of 4 million barrels per day. Despite adoption of decisions on boosting oil production, OPEC+ will continue to keep track of the situation on markets and, if it proves necessary, to take control of it.