The Caspian region is rich in oil, which has a large significance for riparian nations, including Azerbaijan. The oil sector provides for 85% of this state’s income, 78% of its GDP and 92% of exports. The country’s government is using petrodollars to maintain political stability, the exchange rate of the national currency, and a more-or-less agreeable standard of living. The reduction of oil extraction might be a heavy blow to Azerbaijan. And not only for this country. Beginning in 2011, low prices provoked a fall in the oil extraction of a number of countries. Venezuela, for example, where the economic crisis has already become a reason for a significant fall in oil extraction, not to speak of Libya and Nigeria. Shale oil extraction companies in the US are also feeling uncomfortable.
At the International Energy Forum of OPEC member-nations and Russia – who is not a member of this organization – which took place in Algeria in September of 2016, several countries voiced an initiative – the key question at the forum – to raise the price of oil, reducing extraction or at least maintaining present levels. For the first time in eight years, the countries of OPEC raised the idea of reducing oil extraction. The forum’s participants believed that if all OPEC members would support the initiative, there was a great likelihood that Russia would join the initiative. At the Word Energy Congress in Istanbul, Vladimir Putin announced on October 10 that Russia was prepared to join the OPEC agreement. As a result, the Brent Crude oil benchmark, and other classifications after it, gained about 6%, even though this was only a
verbal
agreement
to reduce extraction by 700 thousand barrels
. The details will be discussed at the meeting in Vienna on November 30, where there are plans to sign the agreement.
However, several experts express doubt that actions will follow words. The reason for their unsureness is that, in recent years, the countries of OPEC have ramped-up extraction by almost three million barrels per day. Russia is also currently extracting at maximum capacity.
Experts suppose that the Vienna meeting will be aimed at attempting to talk Iran into reducing output. However, Iran intends to set extraction at pre-sanction levels (four million barrels per day). This is the root of the
skepticism, especially if we take into account the fact that the OPEC nations rarely adhere to established quotas, and Russia is unlikely to be a reliable partner. And a number of countries, such as Iraq, Libya, and Nigeria, have reduced their extraction in recent years, for various reasons, and now plan to ramp it up.
The question that is concerning everyone is: can producers be trusted in general, and how long will the positive effect of the agreement continue? A deeper analysis reveals a number of factors that raise doubts.
First of all, and this has been emphasized on multiple occasions, the meeting in Algeria had an informal character, and all the agreements are not official. Correspondingly, the members of OPEC can ignore established restrictions and continue oil extractions at will. Secondly, we should not forget the shale oil extraction in the USA, which continues to be ramped up.
One more factor. According to expert opinion, the main question for many participants of the world market is – when will the oil run out? It’s known, according to OPEC data, that world demand is reaching around 35-36 billion barrels a year. This is almost all the proven reserves of the USA or Nigeria, but only two-thirds the proven reserves of Libya and a third of the reserves of the UAE, and also a minority share for Iran, Iraq, Kuwait and Russia. As regards Venezuela or Saudi Arabia, with such demand they can, theoretically, supply the market for ten years with their oil alone. The countries of OPEC control more than 83% of the proven reserves in the world. Experts confirm that the oil might run out after 50-60 years only in the case that nobody will put more money into oil and gas exploration. In OPEC they believe that discussions about reducing extraction are needed by the USA and, before all else, major corporations, for whom a reduction of extraction in other countries is beneficial, since it allows them to ramp up their own extraction. Naturally, OPEC is very closely following oil and gas policies in the USA and hindering an expansion of the American share of the market, in order to not reduce its own. Clearly the key players don’t with do reduce output. Quite the opposite, even, the majority of countries would like to increase it. And here’s why:
Algeria
(1.01 million barrels a day) supports the agreement, although it is extracting less than any other OPEC country, excluding Indonesia and Gabon. Accordingly, its influence is not great. Obviously the declaration is needed to convince the population of Algeria that the government is doing all it can to improve the economic situation. In reality, in Algeria they are discussing the question of increasing oil extraction.
Venezuela
(2.2 million barrels a day) supports a reduction in extraction. But in recent years, extraction was already reduced by 300 thousand barrels, since the country was forced by necessity to conserve electricity needed for production. The population is experiencing a lack of provision and social tension is growing. In Caracas, anti-government rallies are constantly being held. Especially after parliament’s announcement regarding the necessity of impeaching the president and even of a criminal indictment. Nevertheless, Venezuela signed a contract with the company Schlumberger on drilling 80 new wells in the Orinoco Belt. The goal of the project is an additional 250,000 barrels a day by 2019.
Iraq
(4.35 million barrels a day) supports the agreement on reducing extraction, but with the provision that it will not slow its own extraction, which has already been reduced as a result of many years of war and the present conflict with the Islamic State, which is also extracting oil in amounts of around 0.5 million barrels a day. Iraq is striving to increase output by around 5 million barrels a day and recently signed an agreement with the Kurdistan Regional Government on restoring export of oil from the region controlled by the Kurds.
Iran (3.6 million barrels a day) welcomes any actions
under which other OPEC countries will reduce production, while Iran will ramp up its output, since, because of many years of sanctions, it should restore extraction to its former level of four million barrels. Not long ago, Iran increased this number to five million barrels a day. It even declined a proposal from Saudi Arabia, which will reduce its oil extraction to “winter” conditions (winter is coming and the country needs lesser amounts of oil on the domestic market for air conditioners), if Iran will reduce production to the level of 3.6 million barrels a day. Besides that, Iran wants to independently report on extraction, whereas Saudi Arabia is demanding the involvement of an independent third party. Even if Iran does agree, it’s unlikely that it will adhere to the agreement.
Saudi Arabia
(10.7 million barrels a day) didn’t expect concrete agreements at the Algeria meeting and treated it as consultative, in no way binding. It doesn’t see a pressing need to reduce extraction, but will support the restriction if all the countries of OPEC and Russia join on with the agreement. The Saudis do not agree with any exceptions for other countries and will demand independent verification.
Russia
(11.9 million barrels a day) supported restrictions on oil extraction in Algeria. However, since that time it has reconsidered its position and will not take part in discussions until OPEC allows internal dissent. Rosneft and Gazprom are simultaneously investing in developing new oil fields with difficult-to-extract oil reserves and are sure of their profitability, despite increased expenditures. It’s clear that Russia isn’t striving to reduce extraction and is preparing its budget for the next three years based on a price of $40 a barrel. While it isn’t a member of OPEC, its position is significant because of meaningful amounts of production.
Because of the explosion of infrastructure at oil-extraction plants by the terrorist organization Movement for the Emancipation of the Niger Delta, the amount of oil extracted in
Nigeria
has fallen by 1 million barrels a day and it won’t agree to reduce this further. And
Libya
, which because of military conflicts is extracting a total of 400,000 barrels a day, didn’t even join the negotiations on reducing extraction amounts.
Of course, we cannot fully rule out stable prices, especially if we consider that Brent Crude futures contracts that expire in December have a market demand of around $45 a barrel. Clearly oil producers are not scared by the unprofitability of oil futures contracts in exchange for new markets. However, based on the above-mentioned, it is doubtful that a consensus can be reached in general. The constant tension between Saudi Arabia and Iran, Libya and Nigeria’s requests to be excluded from the agreement, the clear divergences within OPEC, and also Russia, which at the moment of this article’s writing had not provided a particular answer about joining on with the agreement, force one to doubt the possibilities of the Vienna meeting. At the same time, a lack of success will put many countries in a difficult position. Regarding Azerbaijan, we should take into account that it has not become the second Kuwait or Saudi Arabia. Its international weight and economy are determined primarily by its oil potential. In the case of a fall in the prices of oil, will the West’s interest in Azerbaijan decline, especially in the light of the recent statement by President Ilham Aliyev that Azerbaijan doesn’t intend to conclude an association agreement with the European Union and doesn’t see a need to take on obligations of a political character, and that energy and transit projects are enough for cooperation with Europe.
