In new oil world, Russians win role as 'honest broker'

As ministers from oil-producing countries meet Sunday in Doha to discuss a putative production freeze, the time has come to acknowledge that Opec has changed.

Traditionally, Opec has been headed by Saudi Arabia, its largest oil producer and the guardian of spare production capacity. Saudi decisions have influenced the direction of Opec as a whole. If the country wanted to reduce production and others did not, then they faced the power of Saudi Arabia’s vast reserves and low production costs. When the Saudis wanted to increase production, they had the wherewithal to do so alone if necessary. Saudi Arabia led, and others followed – and even if they did not, the kingdom was often prepared to act on its own to stabilize markets.

All that changed in November 2014, when the Saudis declared that they would no longer act as swing producer. Fearing that US shale would swamp any reduction in Saudi output, it stepped back to let the market work.


The market has taken its time. By late last year, Opec producers were financially exhausted and looking for an alternative – perhaps a joint production cut. In January, the Russians (who are not an official member of Opec), in coordination with the Saudis, announced a conditional production freeze. The Saudis stated that they would participate – subject to similar freezes from all the major state producers, including the key Opec members Iran and Iraq.

Saudi Arabia and Russia, as well as the oil analyst community, were aware that Iran would reject the deal, as it would prevent Iran from reaping the benefits of signing the nuclear deal with the United States and other major powers, a key objective of which was raising Iranian oil exports.

In its approach to the freeze, Saudi Arabia ceded its leadership role in two key respects. First, it acquiesced in passively receiving production cut offers from other Opec members. It would follow, but not lead.

Second, the country’s animosity towards Iran means that the Saudis cannot sit atop Opec and coolly orchestrate policy reconciliation. Rather, it are stuck in the trenches of discord, proffering deals that, in the eyes of the greater oil community, lack proportion.

Into the breach have stepped the Russians. Having no direct territorial claim in the Middle East, Russia can speak equally with Saudi Arabia and Iran, and with the authority of a major oil producer. Indeed, the Russians have fielded a lively and creative diplomatic team capable of forging an agreement with disparate Opec members. Given its production heft, its energetic diplomacy and credibility with the range of Opec members, Russia has assumed de facto leadership of Opec. The Russians are the ones crafting policy and forging consensus.

And it gets worse for the Saudis. The Iranians could have rejected the freeze as a cynical ploy. Instead, they are prepared to play. Last week, Iran’s oil minister, Bijan Zanganeh, said Iran’s oil and gas condensate exports last month exceeded 2 million barrels per day, a stunning 600,000 bpd rise over November levels. This is important, because it restores Iran to its export level prior to the 2011 vintage sanctions. Iran is now exporting close to its target rate and certainly near the top of its achievable production capacity over the next year. Therefore, the Iranians are in a position now to sign on to a production freeze at a level implying 2 million bpd of oil exports. Whether they attend the Doha talks or not, in the end the Iranians will be in a position to approve a deal.

And so will the Iraqis. Iraq reported production of 4.55 million bpd in March, which one consultancy describes as “straining credibility”. However, a freeze limit of 4.5 million bpd would be sufficient to allow Iraq to sign on to the deal through to, say, the year’s end.

Thus, the key holdouts of Iran and Iraq have positioned themselves to accept a production freeze at March production or export numbers, as the case may be. The Freeze is on.

How will Saudi Arabia react? The Saudis will have to accept recent Iranian export numbers or undermine the entire initiative. The Saudis could challenge the veracity of Iraq’s production numbers and the validity of leaning on Iran’s export, rather than production, data. But torpedoing the deal will do Saudi Arabia no favours. In killing the deal, it would become increasingly isolated and the leadership would further migrate towards the Russians as the “honest broker”.

Perhaps the Saudis will be lucky and the Libyans, currently producing at a fraction of their formal capacity, will veto the agreement. But given Libya’s inability to get its house in order, diplomatic pressure may well persuade the Libyans to agree, particularly if the deal is set for a limited period. Again, this would leave the Saudis fully exposed to acquiescing in the deal or compelled to strangle it. The Saudis are in a box.

The irony of all this, of course, is that the freeze itself is rushing production to market. The Iranians have boosted exports and the Iraqis have pushed production specifically to be able to agree to the freeze. Just as increased fighting precedes peace negotiations, so will boosted production precede the freeze.

Such actions also underscore the importance of the Doha negotiations. This is not a trivial deal for the Iranians and Iraqis, but taken rather as a de facto reallocation of Opec quotas. As the saying goes, nothing is more permanent than the temporary. Iran and Iraq are preparing for a new world, and the freeze lays down the template.

In this world, Russia is part of Opec – and its leader. The Saudis remain powerful but sidelined by their immovable position, passivity and the loss of US support. The Iranians have regained status, the implicit support of Russia and the knowledge that they can outmanoeuvre the Saudis in the absence of US back-up.

Welcome to the New Opec. The world has changed.

Steven Kopits is the president of Princeton Energy Advisors in New Jersey.

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