TORONTO: With Riyadh haggling, arguing, steering, squeezing and leveraging oil producers — Opec and non-Opec alike – an agreement was finally struck last Wednesday in Vienna, taking off a significant 1.8 million barrels per day (bpd) crude from the markets from January 2017.

Markets badly needed this lift. The last two years have been painful. As per the US Energy Information Administration (EIA), Opec is set to earn only $341 billion from oil exports this year. That’s down from $753 billion in 2014, and, a record $920bn in 2012. Without a deal last Wednesday, the crude markets simply would have decimated.

And once the Organisation of the Petroleum Exporting Countries (Opec) had agreed to set for itself the much sharper target of 32.5m bpd from the current 33.7m bpd, major non-Opec producers too consented to reduce their output by 600,000 bpd. World’s largest crude producer, Russia, insisting as yet on freezing output rather than cutting, was crucial to this. It finally relented, agreeing to an output cut of 300,000 bpd, making the total cut number impressive and credible.

The Iranian position was another stumbling block. Tehran kept stressing, it needed to get back to 4m bpd output, before contributing to any output cut. But as the meeting began on Wednesday, positive signs began emerging. Before the onset of the behind the door deliberations, Saudi Oil Minister Khaled Al-Falih indicated the group was moving “close” to a deal, signalling he was working to bridge a gap with Iran.

The Iranian tone also changed. On Wednesday morning, Bijan Zanganeh, Iran’s oil minister, said, all Opec members were ready to compromise and there was a “framework for a deal”.

The Iraqi insistence to be kept out of any output reduction regimen was another issue the ministers needed to handle. And so they did, with Iraq finally agreeing to contribute by reducing its output by 210,000 bpd to 4.351m bpd.

This was music to the markets. By the weekend, Brent was already on track for its biggest weekly rally since 2009, steadying above $51 a barrel. WTI trends were no different. But would the spike hold or is just a momentary reaction? A lot depends on the implementation of accord in letter and spirit.

Yet, issues persist.

Over the past two years, fall in oil prices has put a damper on project investment in places like the United States, Canada, and Brazil, because fracking, oil sands and deepwater projects need relatively high prices. But if Opec successfully throttles back on its output and prices get a boost, could that induce fracking companies in Texas or North Dakota to start drilling again? And if so — supply would rise and prices would fall — at Opec’s cost.

A lot also depends on the “break even” point for shale projects in the United States. As per a Reuters report, in shale fields from Texas to North Dakota, production costs have roughly halved since 2014.

The cost of production in Dunn County in North Dakota is roughly around $15 a barrel — about the same as Iran, and a little higher than Iraq. The County is producing about 200,000 bpd.

The breakeven cost per barrel, on average, to produce Bakken shale at the wellhead has fallen to $29.44 in 2016 from $59.03 in 2014, according to consultancy Rystad Energy.

Wood Mackenzie says technology advances should further reduce breakeven points. Occidental Petroleum Corp claims steady improvement in well productivity and lower drilling and completion costs in the Permian Basin too.

Threat thus remains; once prices firm up, as result of the output cut decision, the steep slide in production costs could encourage additional US shale output. The Russian behaviour is also under the radar. Would Moscow stand by its words and reduce output as agreed? After all, history is not behind Russia, in this regard.

Also, concerns persist about a number of Opec producers not sticking to their output quotas. After all in past some of them were known quota busters. Would it be different this time remains to be seen?

Questions thus linger. The next few months are to be interesting and trend-setting in many ways. For the time being, let’s keep the fingers crossed.

Published in Dawn December 4th, 2016