The Non-OPEC Part of the OPEC Deal – 12/15/16

The emphasis put on Russia and other non-OPEC producers in the most recent OPEC deal shows that all future deals are going to rely heavily on outsiders.

So far non-OPEC nations have pledged 600,000 barrels a day (b/d) in cuts and OPEC itself has pledged 1.2 million b/d for a combined cut of almost 2% of the world’s oil supply. The pact encompasses countries that pump 60% of the world’s oil, but excludes major producers such as the U.S., China, Canada, Norway and Brazil.

The rise of U.S. shale-oil producers has made coordinating with other big producers more important. U.S. output nearly doubled from 2007 to 2015, reaching about 9.4 million b/d last year and briefly surpassing all other nations.

Source: EIA

The rise in U.S. output contributed greatly to the global glut in oil that sent $100 a barrel oil prices in 2014 under $30 before they settled around $50. Under the low prices, U.S. producers reduced output by about 600,000 b/d in 2016 equivalent to the total cuts of non-OPEC nations in the pact making a resurgence in U.S. output a major threat to the deal’s efficacy.

Still, even just getting all the countries to comply will prove difficult as OPEC calls on non-OPEC producers to join output cuts have had mixed results.

In the late 1990s, Norway, Mexico and others cut back during the Asian financial crisis in one example of success for the group. But in 2008 Russia walked back claims about helping OPEC trim global production, and in late 2001 Moscow promised to reduce output only to increase it in 2002. As a free rider, Russia gained market share at the expense of those making the cuts while still benefiting from the higher prices.

This time around Russia has made the ambiguous promise to cut “gradually,” in contrast to OPEC’s hard implementation deadline of Jan. 1. Kazakhstan may also be a source of friction as it is expected to produce 210,000 barrels a day more in 2017 despite pledging a 20,000 b/d cut.

Another major issue: treating naturally declines as “cuts.”

Oil fields subject to a natural decline rate as falling pressure in deposits results in a slower flow of crude to the surface. OPEC officials have long insisted that such declines — already accounted for in forecasts — wouldn’t move the oil price up and shouldn’t count towards cuts, but they appear to have abandoned that criteria for the sake of the deal.

In the deal, Russia pledged to cut output by 300,000 barrels a day next year, Mexico by 100,000 barrels, Azerbaijan by 35,000 barrels and Oman by 40,000 barrels. However, OPEC will accept natural output declines from some of those nations and, so far, only Russia and Oman have agreed to actively cut from production.

Projected natural declines from non-OPEC fields will amount to 293,000 b/d in 2017, or almost all of the cuts required of non-Russia participants, according to data from the IEA.

Mexico’s contributions could be made through “managed natural decline,” meaning near-zero deliberate cuts. Other countries will probably follow the same route reducing the deal’s impact.

The biggest production cuts from non-OPEC producers may actually come from a country not involved in the deal.

China, the world’s fifth-biggest producer last year, has reduced output by about 300,000 barrels a day this year as state-owned firms shut down wells amid low prices. The decline is expected to continue next year, with Chinese production shrinking as much as 200,000 barrels a day, according to consultant Energy Aspects Ltd.

Print Friendly, PDF & Email

Comments are closed.