Robin Mills: Three groups and three agendas at Algiers oil talks

Opec is larger than ever, with the return of Ecuador, Indonesia and most recently Gabon joining Angola. But three camps within it really matter – the status quo powers, the two challengers and the wild cards.

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Algiers later this month is the next destination for a cavalcade that has already visited Doha, Vienna and Moscow this year.

From a discussion over freezing Opec’s production, thoughts now seem to have turned to agreeing on informal caps for each major producer. But so much has changed since individual country quotas were abandoned in 2011. A new production framework will be a Herculean task to build, inevitably hurting some members as it benefits others.

Opec is larger than ever, with the return of Ecuador, Indonesia and, most recently, Gabon joining Angola. But three camps within it really matter – the status quo powers, the two challengers and the wild cards. Alongside these, non-Opec Russia is playing a growing role as producer and arbiter.

The status quo Opec producers are Saudi Arabia and its allies the UAE and Kuwait. All producing at near-record levels, and with large, low-cost reserves, they nevertheless plan only measured increases in output. But they certainly do not wish to concede ground to their rivals by cutting production.

The two challengers, Iran and Iraq, are not able to increase production much in the near term but both have great long-term potential. Although its output has plateaued at about 3.6 million barrels per day (bpd) after rebounding since sanctions were lifted, Iran has said it would have to produce 4 million bpd before agreeing to a freeze, with unofficial comments suggesting a target of 4.2 million to 4.3 million bpd. It will not achieve that without significant international investment.

Iraq's progress on reaching an agreement on renewed investment, with the foreign oil companies developing its largest fields, could bring further production next year.

The wild cards are Libya, Nigeria and Venezuela. Beset by political problems, production has slumped in all three – catastrophically in Libya, sharply in Nigeria and slowly in Venezuela. Their economies are not likely to improve while oil prices remain low.

But they need flexibility in case of a resolution of domestic crises, which could add a million or more bpd to markets and overshadow any effect of a freeze by others. Under a different government, Venezuela in particular could eventually boost its extra-heavy oil output perhaps more than any Opec rival other than Iraq and Saudi Arabia.

The fringe Opec producers can be discounted. Their reserves are too small and usually too expensive to produce to make much difference to the organisation’s overall output. They should therefore carry little weight. Some members – including this month’s host, Algeria, Gabon, where recent presidential elections have been disputed, and Angola – might present more risk of losing production if they stumble into political or economic troubles.

Finally, there are the three non-Opec producers that have been in serious discussions with the organisation – Oman, Mexico and Russia. Oman and Mexico have gone quiet since Opec’s April meeting, leaving Russia as the key player. Its crude production is second only to the Saudis globally.

The oil minister, Alexander Novak, was burnt by Saudi Arabia’s sudden decision in April in Doha to not back a freeze without Iran. But since then, Moscow has engaged with Riyadh and Tehran, even venturing an opinion on intra-Opec deliberations in support of Iran’s right to regain its pre-sanctions output.

So what might work? A logical medium-term framework could be a freeze by the status quo players and Russia around current levels, with flexibility to boost output in case of losses from other members. Iran, Iraq and Venezuela would be given some modest headroom, which they probably will not use soon.

Such an accord would present no practical obstacle to current production, and would not support prices. Yet, embellished with real numbers, it would be very difficult to reach, and Saudi Arabia would baulk at conceding even rhetorical ground to Iran. Opec needs new thinking at Algiers, or the oil ministers are likely to accumulate a lot more air miles attending fruitless meetings.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis

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