Time may be running out for a January oil production agreement

Members of the Organization of Petroleum Exporting Countries must reach some agreement with non-OPEC members on oil production cuts this week if logistics are to be arranged by January for a combined reduction of 2 million b/d, said Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London.

Sam Fletcher
OGJ Online

HOUSTON, Dec. 12 -- Members of the Organization of Petroleum Exporting Countries must reach some agreement with non-OPEC members on oil production cuts this week if logistics are to be arranged by January for a combined reduction of 2 million b/d, said Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London.

"The three dimensions of the issue at the moment are deadlines, quantities, and duration," Horsnell said in a report issued Tuesday. "Beyond this coming weekend, it will become difficult to achieve much of a cut in January given the need for tanker scheduling at ports and the normal process of notifying customers about lifting allocations."

He said, "That process can be, and indeed already has been, delayed a little. But some certainty is now needed fairly quickly."

In an effort to boost world prices for oil, OPEC ministers agreed at their Nov. 14 meeting in Vienna to reduce production quotas by another 1.5 million b/d effective Jan. 1, but only if major non-OPEC producers would also cut back by 500,000 b/d to prevent further loss of the cartel's market share. The average price for OPEC's basket of seven benchmark crudes has remained well below that group's targeted price range of $22-$28/bbl since Sept. 24.

OPEC members already had slashed production quotas by 3.5 million b/d, or 13%, on three earlier occasions this year while non-OPEC producers increased production by 500,000 b/d during the same period.

The International Energy Agency reported Wednesday that total world oil production increased by 290,000 b/d during November, despite an output quota cut of that same amount among the 10 unrestricted OPEC members. Oil exports from Iraq, the eleventh OPEC member, also were down by 50,000 b/d during the same period under the UN-administered oil-for-aid program.

However, those cuts were more than offset by a sharp rise of 630,000 b/d in non-OPEC oil production during November, said IEA officials.

Much of the recent increase in non-OPEC production has come from Russia. In negotiations with OPEC officials since Nov. 4, Russian companies agreed to curtail their oil exports first by 30,000 b/d, then 50,000 b/d, and finally by 150,000 b/d, starting in January. That's still below the 200,000 b/d reduction that OPEC had requested from Russia.

But now a statement by Norway as to the exact size of its proposed production cut is the "key to making further progress," Horsnell said. "Without confirmation from Norway, nothing else can be pinned down."

Norwegian officials earlier said they anticipate a production cut of 100,000-200,000 b/d and promised a decision "well before Christmas."

Most analysts assume Norway will opt for a reduction of 150,000 b/d, the same amount promised by Russia. Oman has already reduced its production by 25,000 b/d, Horsnell said, and Mexico promised to curtail its output by 100,000 b/d. That would total a reduction of 425,000 b/d, less than the 500,000 b/d demanded by OPEC members as a prerequisite for lowering their production quotas by 1.5 million b/d in January.

OPEC might "try to tease a further 75,000 b/d out of somewhere," said Horsnell. "At this point that does look unlikely, but the gap is small enough to leave the possibility of a surprise."

If not, he said, OPEC has three alternatives:

-- A pro rata cut equaling 85% of the promised quota reduction, or 1.275 million b/d, to match the rollbacks promised by non-OPEC producers.

-- Extend the deadline for another month while they continue negotiations with nonmember producers.

-- Call the whole deal off.

The first option "would be the most likely, unless there is a major hiccup with the Norwegians," Horsnell said.

During negotiations with non-OPEC producers, OPEC ministers have called for reductions to remain in effect through the first half of 2001 to dry up surplus oil inventories prior to an expected recovery of the world economy.

But Horsnell said a 3-month production agreement is all that's required at present. "There is an OPEC meeting (scheduled) Mar. 12, and it should be clear to all concerned by then whether an extension of cuts is needed," he said.

Since "a major disruption of Iraqi exports is likely to loom large by the middle of the second quarter, it is too early to pin down" other production levels in that period, Horsnell said.

Moreover, he said, "The OPEC communiqué following last month's meeting did not make explicit mention of duration, and its introduction at this stage seems to be somewhat over-egging the bargaining position."

Contact Sam Fletcher at samf@ogjonline.com

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