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OPEC in the 1990s
OPEC in the 1990s lan Seymour There is likely to be surplus oil production capacity in OPEC countries for the rest of the century, a surplus which will be increased by resumption of full production from Kuwait, and possibly Iraq. Although Saudi Arabia has signalled its unwillingness to take on any disproportionate share of the burden of output reductions, OPEC will have to find ways of managing this surplus. Keywords: OPEC; Oil surplus; Output reduction
OPEC, or rather the 11 fully operative members of that organization, excluding Iraq and Kuwait, enjoyed an 18 month holiday from production quotas following Saddam Hussain's invasion of Kuwait in August 1990. Except for a brief interval during the second quarter of 1991, all the OPEC 11 were producing more or less at full capacity during this period. What could have been an extended worldscale oil price catastrophe was averted by the ability contrary to the forebodings of many pundits at the time - of Saudi Arabia, with more modest contributions from a few other OPEC producers, to make up, in remarkably quick time, for some 4.5 million barrels per day (mbbl/d) of lost export supply from Iraq and Kuwait. Now, however, that quota free interlude of all out production by OPEC is over. If a resumption of Iraqi oil exports fails to materialize, some tightness could temporarily reemerge in the market this winter; but, by and large, the outlook for the 1990s presages a persistent and substantial surplus of oil production capacity in OPEC. If OPEC wants to maintain any sort of acceptable price level during this period - and here what is acceptable could, perforce, turn out in practice to be significantly less than a US$21/bbl basket price in real terms - OPEC will have to learn, or rather relearn, the art of managing that surplus capacity. But will OPEC be up to the job in the changed circumstances of the 1990s? For one thing, the -
Ian Seymour is Editor, Middle East Economic Survey, PO Box 4940, Nicosia, Cyprus. 0301-4215/92/010909-04 © 1992 Butterworth-Heinemann Ltd
internal power balance within the organization has shifted decisively. In the old days, it was often possible for OPEC's more activist members to use political pressure to persuade the largest producer Saudi Arabia - to bear the lion's share of output cutbacks to defend prices. But the rules of the OPEC game have changed. Even well before the Gulf War, Saudi Arabia had definitely repudiated its previous onerous role of swing producer. Now, in their strengthened position after the Gulf war, the Saudis are even less inclined to bow to OPEC pressure - either as regards volume cuts or price targets. The politico-economic structure of the Middle East - OPEC's core area - has also been changing in other ways which could make future concerted action by OPEC more problematic. For one thing, low oil prices and two Gulf wars have gravely weakened the financial resources of the major Gulf producers, making them less willing and able to respond to the requirements of oil production restraint. Iraq has been beggared; Kuwait is having to pay out a large chunk of its financial reserves to help meet war costs and to repair the destruction wrought by the retreating Iraqi forces; Iran is still suffering from the aftermath of its calamitous eight-year war with Iraq; Saudi Arabia had to disburse in war-related payments to the USA and others a great deal more than it gained in the price/volume windfall during the Gulf crisis, and is now having to resort to foreign borrowing on a hitherto unprecedented scale. This shortage of funds among the Gulf producers has serious implications for OPEC. On the one hand, the war affected exporters - like Kuwait and Iraq (if and when it reaches a modus vivendi with the UN Security Council) - will be in that much more of a hurry to get back into the market; while those who have expanded their market share -- like Saudi Arabia - will be that much more reluctant to cut back to make room for the re-entry of Iraqi-Kuwaiti supplies. Having succeeded in putting out the oilwell fires in record time, Kuwait is restoring its crude production a good deal faster than originally anticipated and is now confidently expecting to reach the 1.5 mbbl/d 909
OPEC in the 1990s
mark (equivalent to its July 1990 OPEC quota) by the end of this year. Overall Kuwaiti production for 1992 (including its half share of Neutral Zone output) is projected to average around 1 mbbl/d compared with 200 000 bbl/d in 1991. This will mean, in effect, that the increase in Kuwaiti output will account for more than the total 600 000 bbl/d increment in the estimated demand call on OPEC crude supply for 1992. The case of Iraq - still clamped in the vice of comprehensive UN sanctions - is, of course, vastly different. Towards the end of last summer the UN Security Council, under Resolutions 706 and 712, proposed a scheme whereby Iraq would be allowed to export a limited volume of oil - up to a maximum value of US$1.6 billion over a six-month period, equivalent to roughly 550 000 bbl/d at today's prices but subject to highly restrictive conditions with 30% of the proceeds to be set aside for war reparations, a further US$100 million or so to fund UN operations in Iraq, and the remainder to be spent on strictly defined humanitarian supplies whose purchase and distribution in Iraq would be closely controlled and monitored by the UN. So far, these conditions have been rejected by Iraq on the grounds of violation of sovereignty. Whether or not Iraq's deepening financial plight will finally oblige Saddam Hussain to knuckle under to an essentially unchanged UN regime for Iraqi oil sales is still unclear at the time of writing this article (end March 1992). Close observers tend to feel that Iraqi oil will remain out of the market for some time yet. However, what may be postulated with some certainty is that Iraq will not be in a position fully to repair its damaged oil industry or to export its oil without restrictions so long as Saddam remains in power in Baghdad. But, sooner or later, Iraqi oil will have to re-enter the world market. And when that happens events could move very quickly. After Saddam, any new regime in Iraq - provided, of course, that the country does not break apart in the chaos of civil war - is likely to offer very attractive terms to international oil companies to restore and expand oil production and export capacity as rapidly as possible. The reserves in the ground are certainly there (Iraq's claim to 100 billion barrels of recoverable reserves is not generally disputed), and there are quite a few large, already discovered oilfields awaiting development. Given the overwhelming dimensions of Iraq's future financial requirements there can be little doubt that any available oil output capacity will be fully utilized. The absorption of this magnitude of potential supply - over 3 mbbl/d during the next -
910
three or four years, accounting for most of the additional demand projected to accrue to OPEC as a whole - is obviously going to pose an on-going intractable problem for the oil exporters' organization. On the political front, the Middle East minefields have by no means been defused. Although successful in restoring the sovereignty of Kuwait and preventing any damage to Saudi oil facilities, the Gulf War has signally failed to bring stability to the region. For all its vaunted power, the USA has not managed to solve the problem of Iraq. More than a year after his crushing defeat in Kuwait and despite the desperate condition of his country, Saddam Hussain is still master in Baghdad. At the same time, US sponsored efforts to tackle the Palestinian problem appear to be running into a brick wall of Israeli intransigence. Both these time bombs could have a severe blow back effect on the region as a whole, where popular discontent and sheer frustration at the prevailing condition of Arab impotence provide an ideal breeding ground for extreme Islamic fundamentalism. Evidently Saddam is calculating - perhaps rightly that if he can just hold on long enough, the UN sanctions will eventually fade away. If so, who is to say that his regional ambitions will not be rekindled? At the same time, neighbouring Iran is actively rebuilding its military strength with the apparent objective of assuming a dominant role in the Gulf area (to say nothing of ex-Soviet Asian republics). Again, such trends could have a significant influence on OPEC's internal power balance. At present, confident in full support from the USA, Saudi Arabia is playing an assertive role in OPEC. But this could be subject to future challenge as and when Iran, and perhaps Iraq, regain political weight in the region. -
THE SHORT-TERM
OUTLOOK
OPEC's initial effort, in mid-February 1992, at reestablishing a quota system to cut back production in advance of the seasonal second quarter decline in demand has met with only limited success so far. The specified cutback of around 1.2 mbbl/d down to somewhere in the region of 23 mbbl/d (the vagueness stems from Saudi Arabia's rejection of its OPEC proposed quota allocation of 7.887 mbbl/d in favour of its own insistence on 8 mbbl/d - representing a cut of 500 000 bbl/d from the previous output level) has been sufficient to keep prices more or less steady at around US$18/bbl for Brent or US$16.70/
ENERGY POLICY October 1992
O P E C in the 1990s
Table 1. OPEC Supply/demand/capacity projections (mbbl/d).
World oil demand Non-OPEC supply Call on OPEC oil (including NGL) Call on OPEC crude OPEC crude capacity OPEC excess capacity % capacity utilization % Gulf share of OPEC capacity
1991
1995
2O00
66.4 41.4 25.0 23.0 24.5" 1.5 93.9 64.2
70.0 40.5 29.5 27.4 33.3 b 5.9 82.3 70.0
73.8 39.5 34.3 32.0 37.2 5.2 86.0 73.4
Notes: a Iraq (export constrained) at 0.42 mbbl/d and Kuwait at 0.4 mbbl/d. h Iraqi and Kuwaiti capacity restored to pre-war levels of 3.2 mbbl/d and 2.4 mbbl/d respectively.
bbl for the OPEC basket, but nowhere near enough to galvanize a movement towards the US$21/bbl basket level favoured by the price-conscious OPEC majority. No doubt there will be pressure from that majority - particularly Iran and Algeria - on Saudi Arabia and the UAE to agree to further volume cuts when the OPEC oil ministers meet again in Vienna in late April. The Geneva OPEC meeting in mid-February witnessed the start of what will be no doubt be a long running tug of war between Saudi Arabia and the OPEC majority on price and volume objectives. In particular, Saudi Arabia laid down two important policy planks: •
•
That, although the Kingdom would like to see prices moving towards OPEC target levels as a result of the free play of market forces, it is not prepared to participate in any calculated volume squeeze on the market to boost prices artificially. In other words, there will be no adoption of low output ceilings geared below projected market demand for OPEC oil. That any volume cutbacks to defend prices should be shared by all member states in proportion to their shares of current production or production capacity. In other words, Saudi Arabia is serving notice that it is not prepared to assume a disproportionate burden of future output reductions and be forced once again into the thankless role of the sole swing producer on the downside.
These cardinal features of Saudi policy - contested as they are by other OPEC members - may be regarded as the focal points for the OPEC agenda in the 1990s. What will happen to prices for the rest of this year will depend largely on whether or not Iraqi oil re-enters the market. If not, prices will probably
ENERGY POLICY October 1992
remain roughly at current levels (around US$18/bbl for Brent) through the second quarter, strengthening towards the end of the third quarter in anticipation of a fairly tight fourth quarter when the projected 25 mbbl/d call on OPEC crude will be running fairly close to full OPEC capacity (without Iraq). If Iraqi supplies resume at a moderate rate - say around 500 000 bbl/d in the second h a l f - OPEC should be able to handle such extra volume without too much trouble. But anything more than that will definitely pose a tricky volume control problem for the organization. This analysis assumes that the current row over UN sanctions against Libya will not escalate to a point where Libyan oil exports are affected (the actual sanctions resolution does not apply to oil trade). But if, in one way or another, Libyan oil supplies do become involved, we would find ourselves in a new ball game as far as prices are concerned.
L O N G E R - T E R M PERSPECTIVES The longer-term perspectives for OPEC in the 1990s are summed up in Tables 1 and 2 which show the author's projections for oil supply/demand through to the year 2000 (Table 1) and for the development of OPEC crude oil production capacity during that period (Table 2). Such forecasts are inevitably in the nature of very rough guideposts, subject to all manner of battering from actual future developments - particularly if environmentally related restrictions and taxes on oil knock the bottom out of demand growth and render most of OPEC's present capacity expansion plans unneccessary. But these more or less consensus-type
Table 2. OPEC crude production capacity projections (kbbl/d).
Algeria Ecuador Gabon Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia UAE Venezuela Total
1991
1995
2000
800 300 300 1450 3400 420 400 1600 1900 400 8700 2400 2400 24470
800 300 300 1400 4500 3200 2400 18IXI 24(Xl 400 10000 2800 3000 333(Xl
600 250 250 13(XI 45(X) 4500 3000 18(X) 2500 300 12000 30IX) 320(/ 37200
911
OPEC in the 1990s
forecasts do indicate the persistence of a fairly substantial surplus of excess production capacity around 5-6 mbbl/d - for most of the coming decade. This is not a bad thing from the consumers' point of view - after all in percentage terms the surplus only
912
amounts to 14-18% and this can be regarded as a reasonable safety cushion. But it is nevertheless an appreciable surplus in volume terms which will have to be managed by somebody. And the fact is that there is nobody but O P E C to do the job.
ENERGY POLICY October 1992
OPEC, or rather the 11 fully operative members of that organization, excluding Iraq and Kuwait, enjoyed an 18 month holiday from production quotas following Saddam Hussain's invasion of Kuwait in August 1990. Except for a brief interval during the second quarter of 1991, all the OPEC 11 were producing more or less at full capacity during this period. What could have been an extended worldscale oil price catastrophe was averted by the ability contrary to the forebodings of many pundits at the time - of Saudi Arabia, with more modest contributions from a few other OPEC producers, to make up, in remarkably quick time, for some 4.5 million barrels per day (mbbl/d) of lost export supply from Iraq and Kuwait. Now, however, that quota free interlude of all out production by OPEC is over. If a resumption of Iraqi oil exports fails to materialize, some tightness could temporarily reemerge in the market this winter; but, by and large, the outlook for the 1990s presages a persistent and substantial surplus of oil production capacity in OPEC. If OPEC wants to maintain any sort of acceptable price level during this period - and here what is acceptable could, perforce, turn out in practice to be significantly less than a US$21/bbl basket price in real terms - OPEC will have to learn, or rather relearn, the art of managing that surplus capacity. But will OPEC be up to the job in the changed circumstances of the 1990s? For one thing, the -
Ian Seymour is Editor, Middle East Economic Survey, PO Box 4940, Nicosia, Cyprus. 0301-4215/92/010909-04 © 1992 Butterworth-Heinemann Ltd
internal power balance within the organization has shifted decisively. In the old days, it was often possible for OPEC's more activist members to use political pressure to persuade the largest producer Saudi Arabia - to bear the lion's share of output cutbacks to defend prices. But the rules of the OPEC game have changed. Even well before the Gulf War, Saudi Arabia had definitely repudiated its previous onerous role of swing producer. Now, in their strengthened position after the Gulf war, the Saudis are even less inclined to bow to OPEC pressure - either as regards volume cuts or price targets. The politico-economic structure of the Middle East - OPEC's core area - has also been changing in other ways which could make future concerted action by OPEC more problematic. For one thing, low oil prices and two Gulf wars have gravely weakened the financial resources of the major Gulf producers, making them less willing and able to respond to the requirements of oil production restraint. Iraq has been beggared; Kuwait is having to pay out a large chunk of its financial reserves to help meet war costs and to repair the destruction wrought by the retreating Iraqi forces; Iran is still suffering from the aftermath of its calamitous eight-year war with Iraq; Saudi Arabia had to disburse in war-related payments to the USA and others a great deal more than it gained in the price/volume windfall during the Gulf crisis, and is now having to resort to foreign borrowing on a hitherto unprecedented scale. This shortage of funds among the Gulf producers has serious implications for OPEC. On the one hand, the war affected exporters - like Kuwait and Iraq (if and when it reaches a modus vivendi with the UN Security Council) - will be in that much more of a hurry to get back into the market; while those who have expanded their market share -- like Saudi Arabia - will be that much more reluctant to cut back to make room for the re-entry of Iraqi-Kuwaiti supplies. Having succeeded in putting out the oilwell fires in record time, Kuwait is restoring its crude production a good deal faster than originally anticipated and is now confidently expecting to reach the 1.5 mbbl/d 909
OPEC in the 1990s
mark (equivalent to its July 1990 OPEC quota) by the end of this year. Overall Kuwaiti production for 1992 (including its half share of Neutral Zone output) is projected to average around 1 mbbl/d compared with 200 000 bbl/d in 1991. This will mean, in effect, that the increase in Kuwaiti output will account for more than the total 600 000 bbl/d increment in the estimated demand call on OPEC crude supply for 1992. The case of Iraq - still clamped in the vice of comprehensive UN sanctions - is, of course, vastly different. Towards the end of last summer the UN Security Council, under Resolutions 706 and 712, proposed a scheme whereby Iraq would be allowed to export a limited volume of oil - up to a maximum value of US$1.6 billion over a six-month period, equivalent to roughly 550 000 bbl/d at today's prices but subject to highly restrictive conditions with 30% of the proceeds to be set aside for war reparations, a further US$100 million or so to fund UN operations in Iraq, and the remainder to be spent on strictly defined humanitarian supplies whose purchase and distribution in Iraq would be closely controlled and monitored by the UN. So far, these conditions have been rejected by Iraq on the grounds of violation of sovereignty. Whether or not Iraq's deepening financial plight will finally oblige Saddam Hussain to knuckle under to an essentially unchanged UN regime for Iraqi oil sales is still unclear at the time of writing this article (end March 1992). Close observers tend to feel that Iraqi oil will remain out of the market for some time yet. However, what may be postulated with some certainty is that Iraq will not be in a position fully to repair its damaged oil industry or to export its oil without restrictions so long as Saddam remains in power in Baghdad. But, sooner or later, Iraqi oil will have to re-enter the world market. And when that happens events could move very quickly. After Saddam, any new regime in Iraq - provided, of course, that the country does not break apart in the chaos of civil war - is likely to offer very attractive terms to international oil companies to restore and expand oil production and export capacity as rapidly as possible. The reserves in the ground are certainly there (Iraq's claim to 100 billion barrels of recoverable reserves is not generally disputed), and there are quite a few large, already discovered oilfields awaiting development. Given the overwhelming dimensions of Iraq's future financial requirements there can be little doubt that any available oil output capacity will be fully utilized. The absorption of this magnitude of potential supply - over 3 mbbl/d during the next -
910
three or four years, accounting for most of the additional demand projected to accrue to OPEC as a whole - is obviously going to pose an on-going intractable problem for the oil exporters' organization. On the political front, the Middle East minefields have by no means been defused. Although successful in restoring the sovereignty of Kuwait and preventing any damage to Saudi oil facilities, the Gulf War has signally failed to bring stability to the region. For all its vaunted power, the USA has not managed to solve the problem of Iraq. More than a year after his crushing defeat in Kuwait and despite the desperate condition of his country, Saddam Hussain is still master in Baghdad. At the same time, US sponsored efforts to tackle the Palestinian problem appear to be running into a brick wall of Israeli intransigence. Both these time bombs could have a severe blow back effect on the region as a whole, where popular discontent and sheer frustration at the prevailing condition of Arab impotence provide an ideal breeding ground for extreme Islamic fundamentalism. Evidently Saddam is calculating - perhaps rightly that if he can just hold on long enough, the UN sanctions will eventually fade away. If so, who is to say that his regional ambitions will not be rekindled? At the same time, neighbouring Iran is actively rebuilding its military strength with the apparent objective of assuming a dominant role in the Gulf area (to say nothing of ex-Soviet Asian republics). Again, such trends could have a significant influence on OPEC's internal power balance. At present, confident in full support from the USA, Saudi Arabia is playing an assertive role in OPEC. But this could be subject to future challenge as and when Iran, and perhaps Iraq, regain political weight in the region. -
THE SHORT-TERM
OUTLOOK
OPEC's initial effort, in mid-February 1992, at reestablishing a quota system to cut back production in advance of the seasonal second quarter decline in demand has met with only limited success so far. The specified cutback of around 1.2 mbbl/d down to somewhere in the region of 23 mbbl/d (the vagueness stems from Saudi Arabia's rejection of its OPEC proposed quota allocation of 7.887 mbbl/d in favour of its own insistence on 8 mbbl/d - representing a cut of 500 000 bbl/d from the previous output level) has been sufficient to keep prices more or less steady at around US$18/bbl for Brent or US$16.70/
ENERGY POLICY October 1992
O P E C in the 1990s
Table 1. OPEC Supply/demand/capacity projections (mbbl/d).
World oil demand Non-OPEC supply Call on OPEC oil (including NGL) Call on OPEC crude OPEC crude capacity OPEC excess capacity % capacity utilization % Gulf share of OPEC capacity
1991
1995
2O00
66.4 41.4 25.0 23.0 24.5" 1.5 93.9 64.2
70.0 40.5 29.5 27.4 33.3 b 5.9 82.3 70.0
73.8 39.5 34.3 32.0 37.2 5.2 86.0 73.4
Notes: a Iraq (export constrained) at 0.42 mbbl/d and Kuwait at 0.4 mbbl/d. h Iraqi and Kuwaiti capacity restored to pre-war levels of 3.2 mbbl/d and 2.4 mbbl/d respectively.
bbl for the OPEC basket, but nowhere near enough to galvanize a movement towards the US$21/bbl basket level favoured by the price-conscious OPEC majority. No doubt there will be pressure from that majority - particularly Iran and Algeria - on Saudi Arabia and the UAE to agree to further volume cuts when the OPEC oil ministers meet again in Vienna in late April. The Geneva OPEC meeting in mid-February witnessed the start of what will be no doubt be a long running tug of war between Saudi Arabia and the OPEC majority on price and volume objectives. In particular, Saudi Arabia laid down two important policy planks: •
•
That, although the Kingdom would like to see prices moving towards OPEC target levels as a result of the free play of market forces, it is not prepared to participate in any calculated volume squeeze on the market to boost prices artificially. In other words, there will be no adoption of low output ceilings geared below projected market demand for OPEC oil. That any volume cutbacks to defend prices should be shared by all member states in proportion to their shares of current production or production capacity. In other words, Saudi Arabia is serving notice that it is not prepared to assume a disproportionate burden of future output reductions and be forced once again into the thankless role of the sole swing producer on the downside.
These cardinal features of Saudi policy - contested as they are by other OPEC members - may be regarded as the focal points for the OPEC agenda in the 1990s. What will happen to prices for the rest of this year will depend largely on whether or not Iraqi oil re-enters the market. If not, prices will probably
ENERGY POLICY October 1992
remain roughly at current levels (around US$18/bbl for Brent) through the second quarter, strengthening towards the end of the third quarter in anticipation of a fairly tight fourth quarter when the projected 25 mbbl/d call on OPEC crude will be running fairly close to full OPEC capacity (without Iraq). If Iraqi supplies resume at a moderate rate - say around 500 000 bbl/d in the second h a l f - OPEC should be able to handle such extra volume without too much trouble. But anything more than that will definitely pose a tricky volume control problem for the organization. This analysis assumes that the current row over UN sanctions against Libya will not escalate to a point where Libyan oil exports are affected (the actual sanctions resolution does not apply to oil trade). But if, in one way or another, Libyan oil supplies do become involved, we would find ourselves in a new ball game as far as prices are concerned.
L O N G E R - T E R M PERSPECTIVES The longer-term perspectives for OPEC in the 1990s are summed up in Tables 1 and 2 which show the author's projections for oil supply/demand through to the year 2000 (Table 1) and for the development of OPEC crude oil production capacity during that period (Table 2). Such forecasts are inevitably in the nature of very rough guideposts, subject to all manner of battering from actual future developments - particularly if environmentally related restrictions and taxes on oil knock the bottom out of demand growth and render most of OPEC's present capacity expansion plans unneccessary. But these more or less consensus-type
Table 2. OPEC crude production capacity projections (kbbl/d).
Algeria Ecuador Gabon Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia UAE Venezuela Total
1991
1995
2000
800 300 300 1450 3400 420 400 1600 1900 400 8700 2400 2400 24470
800 300 300 1400 4500 3200 2400 18IXI 24(Xl 400 10000 2800 3000 333(Xl
600 250 250 13(XI 45(X) 4500 3000 18(X) 2500 300 12000 30IX) 320(/ 37200
911
OPEC in the 1990s
forecasts do indicate the persistence of a fairly substantial surplus of excess production capacity around 5-6 mbbl/d - for most of the coming decade. This is not a bad thing from the consumers' point of view - after all in percentage terms the surplus only
912
amounts to 14-18% and this can be regarded as a reasonable safety cushion. But it is nevertheless an appreciable surplus in volume terms which will have to be managed by somebody. And the fact is that there is nobody but O P E C to do the job.
ENERGY POLICY October 1992