Home' Trinidad and Tobago Guardian : February 4th 2016 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 4 • 2016
After a year of secret diplo-
macy and hushed-up private
talks around the world,
OPEC s mighty Saudi Arabia
and rival Venezuela were
persuaded to cut a deal by
non-OPEC Mexico which overcame mutual
acrimony and led to a much-needed rise in
It was 1998, trust had long broken down
within the Organisation of the Petroleum
Exporting Countries and it took outside medi-
ation as a last resort to stop the squabbling
to clinch deals at secret meetings in Riyadh,
Madrid and Miami.
Now, with oil prices touching their lowest
level since 2003, OPEC officials and deal bro-
kers are looking back nearly two decades and
asking whether a behind-the-scenes deal to
curb oil output between OPEC and non-OPEC
Russia could be struck.
Some see OPEC rifts as insurmountable
and Russia as a wild card that cannot be trust-
ed, but others say economic necessity to boost
oil revenue could overcome acrimony and dis-
trust and lead to a global deal to cut supply
and mop up the glut.
There are plenty of reasons, however, to
Unlike in 1998, the challenge goes beyond
rebuilding bridges between just two OPEC
It pitches the interests of Saudi Arabia along-
side fast-rising OPEC producers Iran and Iraq
as well as non-OPEC Russia, the world s largest
oil nation. All four are involved in conflict in
the Middle East but also desperately need
money to keep their oil-dependent economies
afloat and meet social costs.
"The 1997/98 deal brokered between Saudi,
Venezuela and Mexico took over a year to
negotiate and it was touch and go as to whether
it would get done or not," said veteran OPEC-
watcher Yasser Elguindi of Medley Global
But low prices are making producers des-
perate. Prices sank to below US$30 per barrel
this year from as high as US$115 a barrel just
18 months ago due to one of the worst oil
gluts in history.
This perfect storm was due to a boom in
the extraction of oil from shale rock in the
United States and a decision by the Saudi
ruling elite to ramp up crude supply to regain
market share from higher-cost producers.
Saudi Arabia has pushed its output to record
highs over the past year above 10 million barrels
per day, almost equal to Russia. Iraq also raised
production sharply above four million bpd
over the past months as foreign investment
in oil fields paid dividends. Iraq expects to
raise output further in 2016.
Meanwhile, Iran says the removal of Euro-
pean sanctions in January should allow it to
claw back oil production and a deal with OPEC
is unacceptable until output reaches four mil-
"You cannot have a deal with non-OPEC,
until you achieve a credible OPEC framework
which at the moment is not possible because
of Iraq and Iran. Until there can be some
framework between Iran, Saudi and Iraq, all
this non-OPEC talk is just noise," said Elguin-
di.Saudi Arabia s Oil Minister Ali al-Naimi,
who has been in office since 1995, has said
the kingdom would join cuts if key OPEC and
non-OPEC players cooperated.
But insiders say, Saudi Arabia and it Gulf
allies Kuwait, Qatar and the United Arab Emi-
rates are all deeply sceptical that a workable
consensus can be reached. "Iran and Iraq
remain the main challenges inside OPEC and
Russia won t agree to a cut and is not to be
trusted," a senior Gulf OPEC delegate told
CHANGE IN DYNAMIC
In the past month, however, all parties
involved have sent signals suggesting the world
oil dynamic may be changing.
Iran s main oil export official, Mohsen Qam-
sari, said in January he did not want a price
war and might increase shipments gradually
to avoid hurting world prices.
And Iraqi Oil Minister Adel Abdul Mahdi
also said his country would support an extraor-
dinary OPEC meeting if a joint cut with non-
OPEC could be agreed beforehand.
"It is useless to go to a meeting without
deciding up front. We said yes if others are
willing to go but we have to decide before.
Otherwise this will backfire on us," he said.
The statements by Iran and Iraq coincided
with a change of rhetoric from Russia where
the head of its pipeline monopoly and close
ally of President Vladimir Putin, Nikolai
Tokarev, said joint action was possible to halt
For years, Russian officials said oil production
cuts were technically difficult after an ill-fated
deal with OPEC in 2001, when Moscow agreed
to cooperate but raised exports instead. It was
this that created the mistrust that exists today.
But back then Putin was only at the start
of his first presidential term and had little
control of the oil industry, split between various
oligarchs following the chaotic privatisation
after the collapse of the Soviet Union.
Fast forward 15 years, and the oil industry
is mostly owned by the Kremlin and Putin
has almost absolute power.
"You have to take this seriously now. Key
will be if Russia can deliver," said OPEC watcher
and founder of US-based Pira Group Gary
Ross, who was involved in the 2001 Russia-
Putin and his ally, head of Kremlin oil major
Rosneft, Igor Sechin, have yet to speak about
the recent talk of a joint move with OPEC.
But Sechin in the past said he would not
support cooperation by Russia, where one
popular conspiracy theory maintains that the
low oil prices of the 1980s were orchestrated
by Saudi Arabia and the United States to under-
mine the Soviet Union. Sechin has also said
OPEC had "lost its teeth."
A year ago, Putin said it was possible that
the current price crash was orchestrated in
the same way as the crash of the 1980s, which
effectively led to a collapse of the Soviet Union;
a huge tragedy, according to Putin.
"There is a lot of talk today about why it
is happening. Maybe it is a Saudi-US plot to
punish Iran, or put pressure on the Russian
economy or Venezuela," Putin said back then.
But with the Russian rouble sinking to a
record low and a parliamentary election this
year and a presidential election in 2018, pres-
sure is rising on the Kremlin to protect state
revenues and limit public discontent.
Russia s latest rhetoric has left OPEC watch-
ers and Kremlinologists guessing if it is just
a verbal intervention to lift oil prices or whether
it is part of a real deal for Putin, which may
also involve a compromise with Saudi Arabia
over Syria or indeed any other "Grand Bar-
Putin has dispatched heavyweight veteran
foreign minister Sergei Lavrov to the Middle
East this week. Lavrov, who has almost never
spoken about oil, will travel to Oman and the
UAE to discuss the oil market.
Meanwhile, Venezuelan Oil Minister Eulogio
Del Pino will visit Russia, Qatar, Iran and Saudi
Arabia this week to drum up support for a
joint cut in oil production.
And just like in 1998, behind-the-scene
talks are gathering pace. When Putin met the
Emir of Qatar last month in Moscow, oil was
on the agenda, according to a senior source
in the Gulf.
And just as in 1998 and 1999, when it took
two years and many secret meetings in Miami,
Madrid, the Hague, Amsterdam and Riyadh
to clinch two decisive supply cuts, the process
in 2016 could be equally painful.
The head of Kremlin-backed Russian Direct
Investment Fund, Kirill Dmitriyev, said a deal
between Russia and OPEC was possible but
at the right time, "maybe within a year", when
the markets rebalance and it became easier to
Goldman Sachs, which is bearish on oil,
said it believes cooperation between OPEC
and Russia would be "highly unlikely" and
also self-defeating as higher prices would bring
shelved output, including in the United States,
back onto the market.
But sceptics could do well to read a paper
by Robert Mabro, founder of the Oxford Insti-
tute for Energy Studies who helped to broker
the 1998 deal. Mabro wrote at the time:
"Changes in policy are always possible, even
likely, when significant revenue losses are at
A new global oil deal could
draw lessons from 1998
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