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Opec's risky metamorphosis

The urge to create a bigger producer group based on the Declaration of Cooperation is changing Opec's power politics

The Opec meeting of 22 June was less than 12 hours away and the Joint Ministerial Monitoring Committee was in session deep inside the group's central Vienna headquarters. Things got testy. Iran's oil minister, Bijan Namdar Zangeneh walked out and a few minutes later arrived at the Kempinski hotel nearby to tell reporters that Iran might kill Saudi Arabia's plan to get Opec support for an easing of the cuts the next day. 

The JMMC was formed in late 2016, part of the Declaration of Cooperation between Opec and non-Opec countries, and its original task was to keep tabs on producers' compliance with quotas. It meets every two months. And because Saudi Arabia and Russia are permanent members, it has become an inner circle for discussions of policy. Its summits are now at least as significant as the official biannual Opec meetings.

 But not everyone is part of the clique. Iran is on the outside. It demanded—and was granted—the right to attend on 21 June. But when Zangeneh asked to address the JMMC, it is understood, Saudi oil minister Khalid al-Falih denied him the floor. That's when Zangeneh left. 

The JMMC gives Russia a role in Opec policy that would once have been unthinkable. "Core Opec"—Saudi Arabia, Kuwait and the UAE—is no longer the sole locus of power in the group. Russia's wish to see production rise by 1.5m barrels a day, for example, is a key reason why the voluntary cuts will now end, whether this is announced officially in the Opec communiqué on 22 June or not. 

It's all a bit ironic. Because although other multinational pacts—the G7, Nafta, Nato, the UN, the Trans-Pacific Partnership, the JCPOA, the UN, Brexit-lashed EU—are under assault these days, Opec has by comparison been a paragon of multilateralism. It remains one of the grand old institutions of the global economy. 

Twirling batons 

But Opec itself is going through a metamorphosis and frictions are reappearing. They aren't enough to ruin the group—ask any Opec minister or delegate, and he (they all tend to be men) will tell you how important the organisation is to his country. 

For now, Opec is basking in its collective success. Ahead of its producer meeting, it used the Opec Seminar, a big triennial oil-industry conference, to project unity. "Cooperation for a sustainable future" was the event's slogan. The glitzy opening included women twirling batons representing each member-state, a family photo-op, and ministerial speeches proclaiming how the Opec+ deal "rescued the oil market from collapse". 

'Core Opec' is no longer the sole locus of power in the group

The cheer was understandable. The cuts Opec agreed with Russia and a host of other countries in 2016 have been successful. The glut in stocks is gone and the price of Brent, now trading for about $75 a barrel, is 50% above its level just before Moscow and Riyadh struck their deal in Algiers in September 2016.

This has been a diplomatic triumph, not least for secretary general Mohammad Barkindo, oil's most popular figurehead. Corralling the group's rivals hasn't been easy. Its most important member, Saudi Arabia, is fighting a war in Yemen against Houthis backed by one of Opec's other founder-members, Iran. The kingdom has also led a bitter campaign by other Gulf Opec members to punish its neighbour (and another Opec member) Qatar. Riyadh and Moscow, its new energy partner, have supported opposing sides in the Syria war. Two Opec members, the UAE and Qatar, back rival militias in a third, Libya.

A unified purpose—ending the oil-price downturn—allowed Opec and its partners to operate collectively despite the bloodletting off stage. The group has been through this before, enduring full-scale wars between member states. 

The super-producers

No wonder then that the seminar this week was also an opportunity for Opec to showcase its Declaration of Cooperation—the pact that enabled the success of the past 18 months. Indeed, the Declaration is starting to look like more than just an agreement. It's becoming the foundation for a future producer group.

As Roger Diwan, a veteran Opec watcher and vice president at IHS Markit pointed out in Vienna, the Declaration now even has its own brand—front and centre alongside Opec's own logo. At an invitation-only gala dinner on 20 June in a Viennese ballroom, the speeches and even the performance art celebrated the partnership. 

The perception that Russia and Saudi Arabia are ending the cuts to satisfy Trump is politically radioactive

Some in Opec want to institutionalise the Declaration itself. There is talk of the Opec+ group of 24 countries (the 12 Opec members and the 12 non-Opec countries that joined the cuts over the past 18 months) becoming the "G24", which might even get its own secretariat.

It's not hard to see how this new big producer group would appeal across the member-states. For many smaller oil producers, the Opec+ arrangement has given them international cachet, a forum with real power, and the chance to rub shoulders with officials from energy superpowers and talk up investment prospects.

But it's also not hard to see how this new super-producer group could transcend Opec itself. That won't make everyone happy—especially if the agreement to raise supply at this Opec meeting is a sign of things to come. 

'Depoliticising oil'

That policy reversal, just months after Saudi Arabia was telling the market that the cuts would endure at least to end-2018, suggests to some producers, like Iran, that far from gaining strength, Opec+ is now beholden to the US. For all the talk of "depoliticising oil" this week in Vienna, events suggest the opposite—that Trump tweeted, and Moscow and Riyadh acted. 

The perception that Russia and Saudi Arabia, the two dominant producers in this putative G24, are now ending the cuts to satisfy the Trump administration is politically radioactive in Opec. Two of its five founder members—Iran and Venezuela—are under sanctions from the White House, even while the US Congress resurrects legislation that would subject Opec to American anti-trust legislation

All this is not enough to tear apart a group that has enjoyed so much recent success. But it points to an underlying shift in producer power politics; one that will be reinforced if the G24 overtakes Opec as the true broker. The Declaration of Cooperation may be the foundation on which Opec wants to build its much more inclusive future. But Iran and others might ask with whom the big Opec+ leaders are supposed to be cooperating with—other producers, or the American president?

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