Big oil is beating at OPEC's door

22 September 1995

OPEC IS WORKING ITSELF up to confront major issues at the November ministerial meeting in Vienna. Oil prices are soft, OPEC's market share is shrinking and quota discipline is a shambles. Gabon is threatening to follow Ecuador out of OPEC altogether unless it is allowed to pay less for the privilege of membership. With so little going its way, OPEC's credibility is wearing thin once again and Vienna will offer an opportunity to restore it.

The quota debate will be of most interest to the oil markets. The current quota was fixed for the whole of 1995 in a bid to bring some stability to prices. It is unusual for OPEC to adopt a fixed ceiling for an entire year and the initiative helped to firm prices for a while. However, it has failed to take the volatility out of prices altogether as the sharp fluctuations of the last eight months have shown (see graph). And the quota itself has been regularly breached. Wellhead production in August was reported to have reached a 15-year high of 25.72 million barrels a day (b/d) which was 1.2 million b/d over the quota for the volume to be delivered to market (MEED, 15:9:95, page 15).

The biggest irritant to OPEC is the rise of non-OPEC production which is steadily eroding OPEC's share of the world oil market. New additions to world oil supply from the North Sea, Africa and the Far East this year exceed 1 million b/d and and are about equal to the growth in world demand. OPEC may be irritated by the increase but it is powerless to do much about it. OPEC oil ministers swing from denouncing non-OPEC suppliers for undermining prices to calling for closer co-operation with them.

Despite the diplomatic posturing, such as this month's meeting of consumers, OPEC and non-OPEC producers in Venezuela, little is likely to come of such appeals. In such circumstances, OPEC's only real weapon is its quota. If the quota cannot be used to shore up prices, the temptation may grow to use it in anger, pushing up production, forcing down prices and undermining the economics of marginal oil projects in non-OPEC countries.

Contrasting options

The two options present a stark contrast. Those arguing in favour of sticking with the current quota believe it offers the best prospect for keeping prices close to current levels. But other voices are suggesting that OPEC should boost production so as to recover market share. They argue that the increase should be equal to the share of new demand that OPEC wants to claim as its own.

International oil companies argue that there is another option. Rather than competing with OPEC they see a convergence of interests developing around OPEC's huge expansion needs. In 1994 the former OPEC secretary- general Dr Subroto estimated that OPEC would have to boost capacity from the current figure of around 28 million b/d to 35 million b/d by 2000. By 2010 OPEC may need capacity of 40 million b/d to meet anticipated demand. Subroto estimated that the producing countries would have to invest $100,000 million in the period to 2000 to achieve the first target. He suggested the figure for investment by the world-wide oil industry would be a staggering $500,000 million in the period to 2000.

To meet this challenge, the OPEC countries will need considerable resources, ranging from vast sums of money to the most advanced technology. This has spawned calls for the reintegration of the world oil industry which was broken up by the nationalisations of the 1960s and 1970s. Nobody is arguing seriously that nationalisation should be reversed but the oil companies are keen to build their own reserves and would welcome the chance to return to the upstream in many of the states from which they were expelled.

Several OPEC states are coming round to the potential advantages of such arrangements and are revising regulations to give foreign oil companies limited access to their upstream assets. In the case of Algeria this has already produced concrete results (see page 14). In Qatar as well, revised production sharing terms have attracted new investors and should help boost recovery rates from mature fields as well as stimulating new developments in marginal areas (see page 17).

In 1994 Venezuela became the first major OPEC producer to open exploration acreage to foreign companies. The actual terms on offer proved unattractive, forcing Venezuela into a swift revision, and the fiscal terms remain severe, but the policy was a clear break with the past and a victory for the arguments in favour of reintegration.

Strapped for cash and anxious to gain access to modern technology, Iran has made similar policy changes for its offshore areas. The deal which gives France's Total access to the Sirri field, signed after a similar agreement with the US' Conoco was vetoed by President Clinton, may soon be followed by one with Shell for other offshore fields (MEED Special Report, France 15:9:95).

Since the end of the Iraqi occupation in 1991 Kuwait has signed technical agreements with The British Petroleum Company (BP), Chevron and Total which were seen as the prelude to a possible upstream opening. That has not occurred and it is now doubted that Kuwait will offer new exploration and development permits, with the possible exception of Ratga, part of the Rumaila field which straddles the border with Iraq.

In Iraq itself French and Russian oil companies are reported to have reached agreements in principle which may lead to their return as foreign equity partners for the first time since the industry was nationalised in the 1970s. However, until Iraq is free of UN sanctions, any such agreements cannot be implemented.

International oil companies have equity interests in many Middle East oil producing states but few of the countries with substantial reserves are keen to offer them any more than they have already. One reason cited by Total for its pursuit of openings in Iran and gas prospects elsewhere in the region is that it cannot expand production in Abu Dhabi, where it has equity interests, because of OPEC quota restrictions.

With the exception of the Arabian Oil Company in the neutral zone, the Saudi Arabian upstream is completely closed to foreign equity participation. The kingdom has a quarter of the world's oil reserves and is OPEC's largest producer but has shown no interest in the arguments for reintegration. State oil company Saudi Aramco is busy focusing on downstream integration and will keep the upstream firmly under national control (see page 20).

Fiscal deterrence

Even those Middle East oil sectors that are open to foreign equity are frequently criticised for the severity of fiscal regimes which tend to deter rather than attract investment. In their 1995 review of petroleum fiscal regimes, Geneva-based Petroconsultants identified Syria, Egypt and Oman among just a handful of countries with regimes that are most likely to cause fiscal deterrence, making projects uneconomic after the state has taken its cut.

Countries which link the 'state take' to project profitability, including Tunisia and Libya, offer far less of a deterrent to potential investors. Algeria has made virtually every element of its regime negotiable. Countries which minimise the deterrence to investment by providing attractive fiscal terms, such as the UK, end up winning the highest levels of investment, as the UK experience in the North Sea has confirmed.

OPEC will be debating market share and oil price targets in November but the slow return of international oil companies to several OPEC states is weakening the ties that have bound the cartel together. With such key members as Iran and Venezuela warming to foreign equity participation again, national priorities are diverging further from the collective interest that gave OPEC what strength it once enjoyed. Whatever impact it can achieve with its next ministerial meeting, its influence over production and prices seems to be fading. More steps towards some form of oil industry reintegration will weaken it further.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications