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Opec faces multiple challenges

December 08, 2013

RIYADH: By opting to rollover its current output of 30 million barrels per day (bpd), hopefully until May next, Organisation of Petroleum Exporting Countries (Opec) took the anticipated route last Wednesday.

“We have rolled it over,” veteran Saudi oil Minister Ali al-Naimi, told reporters at the end of three hours of closed-door talks in Vienna. “We are all satisfied.”

Although not much firework was visibly taking place inside the Vienna Opec headquarter conference room, that day last week, yet there are definite hints of skirmishes sooner rather than later.

A number of uncertainties seem challenging the group. Indeed the issue of rising US shale production is now a documented fact, Opec too concedes.

The United States, witnessing a sharp growth in production from shaleformations, is expected to add nearly 1m bpd to its output of oil and other liquid fuels in 2014, after a similar increase this year.

It produced more crude oil than it imported in November for the first time since 1995. More importantly, US oil imports remain well below 2012 levels. Year-to-date, they are 11 per cent lower than in October 2012, as for the first time since the 1990s, the US is producing more crude than it is importing.

In the meantime, the United States, the world’s largest consumer, may also be weaning itself off its addiction to oil. This year consumption of petroleum products is running 10 per cent below its 2005 peak, while cheap and abundant shale gas is finding its way into train and truck engines, making inroads into oil’s monopoly as a transport fuel. Other non-Opec countries like Canada and Brazil are also raising production.

Ominous signs, indeed for the producers’. “The US is saying it will be the largest producer in the world, that it willbecome energy independent and that the world will depend less on imported oil. All of these messages are disturbing,” Mohammad Al Sabban, a senior adviser to the Saudi oil minister from 1986 until last year, was recently quoted as saying.

And although, the Opec Secretary General Abdullah El-Badri refused to be drawn in Vienna in this debate, yet he underlined that Opec would simply wait to see if an oversupply situation occurs. He however, expressed confidence that Opec could accommodate US shale output, currently at 2.7m bpd and set to rise further, yet admitted concerns within, over the rising, non-Opec output.

And in the meantime, Libya is also attempting to get back to normal. Oil minister Abdelbari Al-Arusi said he hoped the country’s production would be back to its normal level of 1.5m bpd within two weeks after plunging to about 250,000 bpd amid deadly fighting between insurgents and the army.

Over the next few months, Opec will also have to surmount the two most important and indeed divisive issues, of the rising output, indeed if and when, from Iraq and Iran.

New output from Iraqi Kurdistan is to add substantially to Iraq’s output. Oil Minister Abdelkarim Al-Luaybi said his country hoped to export 3.4m bpd of crude oil next year, including 400,000 bpd from Iraqi Kurdistan. Compared with 2.38m bpd exports last month, this is a hefty increment of almost 1m bpd.

However, the biggest uncertainty facing the Opec is Iran. Buoyed by an interim agreement on its nuclear programme, Tehran is now aspiring to its raise crude production quickly to 4m bpd from the current 2.7m bpd, if and when if it reaches a deal to roll back sanctions. Speaking in Persian to Iranian journalists before the Vienna meeting, Bijan Zangeneh, Iran’s veteran oil minister, underlined it would increase output even if crude prices tumbled: “Under any circumstances we will reach 4m bpd even if the price of oil falls to $20 per barrel.”

Hamstrung by infrastructure bottlenecks, Iran would need time to ramp back production, if and when the sanctions are lifted, yet it looms large on the horizon.

Opec is faced with headwinds none can deny. And it needs to bring its house in order to ensure a fair return to its priceless asset the black gold.