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OPEC Guide

A News Feature

OPEC Guide

A News Feature

OPEC still divided even as Saudis see markets settling

February 27, 2015 -- By Margaret McQuaile in London

Comments earlier in the week ending February 27 from two OPEC oil ministers -- the group's Nigerian president and the oil minister of top producer Saudi Arabia -- show just how divided the group remains three months after its decision not to reduce oil output to try to halt the oil price plunge but to allow an oversupplied oil market to balance itself.

Diezani Alison-Madueke said in an interview with the Financial Times newspaper that it was "highly likely" she would have to call an emergency meeting in the next six weeks or so if oil prices slipped further from current levels of around $60/barrel.

Two days later, however, Saudi oil minister Ali Naimi said markets had calmed down and demand for oil was growing.

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Naimi did not directly address the question of an emergency meeting ahead of OPEC's scheduled conference in early June but his remarks can be interpreted as a clear signal that the kingdom believes its controversial market share strategy is working and that it will give short shrift to any attempt to reverse OPEC's November decision to maintain official output at 30 million b/d.

Indeed, a Gulf source said a day after Alison-Madueke's interview that Saudi Arabia and its Gulf Arab neighbors were unlikely to agree to an extraordinary meeting.

In theory, OPEC's 12 member countries have equal voices when it comes to making decisions about output policy. In practice, Saudi Arabia has the biggest production and the loudest voice.As US investment bank Tudor Pickering Holt put it, "Rule number 1 of OPEC -- only listen to what the Saudis say."

Alison-Madueke may well have been speaking -- at least in part -- to a domestic audience that will elect a new president on March 28.

Nevertheless, her comments will have resonated among OPEC's non-Gulf members, most of which do not have the vast financial resources of Saudi Arabia, Kuwait, Qatar and the UAE to help them weather the storm that has blown oil prices from $115/barrel in the middle of last year to around $60/b now.

Badly affected

Among OPEC members, Nigeria has been particularly badly affected by the growth of shale oil production in the United States, which has been absorbing any increases in global oil demand and reducing US reliance on imported crude.

As recently as 2007, Nigeria was supplying more than 1 million b/d of its light, premium-quality crude to the US. By 2013, the volume had dropped to 239,000 b/d.

Over the first 11 months of 2014, the average was just 54,000 b/d, with no Nigerian crude imported during July.

Also vocal about the impact of plummeting oil prices on their economies have been Venezuela and Algeria.

And earlier this week, the president of Ecuador, OPEC's smallest producer, said his country would support an emergency OPEC meeting, as mooted by Nigeria.

Prices are "unnecessarily low" but could rise to a "reasonable" level as a result of an output cut, President Rafael Correa said.

"This is the proposal that we want to take to OPEC and it is timely that Nigeria requested that meeting, coinciding with what Ecuador and Venezuela have done," he said.

"Hopefully it [the summit] will go ahead."

If Ecuador's Correa and other OPEC heads of state were to put pressure on Saudi Arabia for an emergency meeting, it could prove difficult for Riyadh to ignore such a call, but there is no sign -- so far, anyway -- that any momentum is building for an extraordinary session.

And, despite the turmoil that the price collapse has inflicted on their economies, most OPEC members will not have failed to notice that international oil companies have been slashing their capital spending budgets and that rig counts are plummeting in the US.

In any case, as former Qatari oil minister Abdullah al-Attiyah said this week, an emergency OPEC meeting would not dissolve the current volume of oversupply, which he put at more than 2 million b/d.

"OPEC has to wake up, we cannot be dreamers" Attiyah, who heads Qatar's administrative control and transparency authority said, quoted by The Daily Telegraph.

"OPEC has to be pragmatic and reform itself. $60-$70 a barrel is a reasonable price for producers and consumers," he said.

How long Saudi Arabia intends to maintain the pressure on high-cost non-OPEC production remains unclear.

Naimi said in December that the kingdom's policy was not just aimed at defending market share but was "also a defense of high-efficiency producing countries."

US importing less

Declining reliance on imports has forced former suppliers to the US to turn to Asia, resulting in a diminished share of this still-growing market for Saudi Arabia.

In energy-hungry China, for example, OPEC members Iran and Iraq have boosted their share of imports, along with non-OPEC Oman, Russia and Colombia.

Yet Saudi Arabia's share of imports dropped by 3% between 2013 and 2014, even as Beijing's total import volume climbed by 9% year on year.

Latest official Saudi data published by the Joint Oil Data Organizations, a Riyadh-based transparency initiative, show that the kingdom's crude exports dipped to 7.1 million b/d in 2014 from 7.54 million b/d in 2013.

However, as additional comments by oil minister Naimi indicated this week, the kingdom's battle for market share will not be fought only in terms of the volume of crude it supplies.

Two of three new 400,000 b/d-capacity refineries are already on line in the kingdom -- the Satorp and Yasref joint ventures with France's Total at Jubail and China's Sinopec at Yanbu, respectively -- and the third, being built by Saudi Aramco at Jizan in the southeast of the country is slated to come into operation around 2017-2018.

"Once these projects are completed the kingdom's refining capacity will rise to over 3 million b/d, making the kingdom among the five biggest refining nations in the world and the second biggest exporter of refined products after the United States while remaining the world's top exporter of crude," Naimi said.

But, in the meantime, even Saudi Arabia is feeling some pain from the oil price collapse. On February 26, US driller Hercules Offshore said Saudi Aramco had terminated a drilling contract for one of three rigs operating in the kingdom and was seeking a reduction in rates for the other two.Like other oil companies, Saudi Aramco has been reviewing its investment plans and trying to cut costs.

Chief executive Khalid al-Falih said in late January that the state oil company had sufficient cash to fund its 2015 capital program but would have to re-examine its approach to a number of projects as a result of the price crash.

Next article: OPEC more optimistic about demand for own crude this year

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