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OPEC non-OPEC Deal; Attractive but Challenging Idea

A landmark deal between OPEC and non-OPEC oil producers on reducing oil output to help shore up prices is viewed as a significant event in world markets. Oil prices have rallied and the oil market has entered a new phase.

OPEC non-OPEC Deal; Attractive but Challenging Idea
(Sunday, April 8, 2018) 17:23

In addition to the production cut deal extension by the end of the year in favor of market balance, some OPEC members have made remarks hinting at the start of a new phase in cooperation between OPEC and non-OPEC states.

In light of new developments, it would be extremely important to find an answer to the following question: Can OPEC and non-OPEC deal on output levels lead to their sustainable cooperation?

In their November 30, 2016 ministerial meeting, member states of the Organization of the Petroleum Exporting Countries agreed to reduce their output by 1.2 mb/d to bring their output to 32.5 mb/d. Ten days later, OPEC won over non-OPEC oil producers Russia, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Sudan and South Sudan. The non-OPEC producers agreed to cut their total output by 600  tb/d; therefore, global oil supply was slashed by 1.8 mb/d at the start of 2017.

In its 172nd ministerial meeting, OPEC agreed to extend the deal up to March 2018 and then decided in its 173rdmeeting to prolong it up to the end of 2018, and non-OPEC oil producers agreed with this decision.

The agreement was achieved amid growing speculation about the possibility of some OPEC and non-OPEC countries pulling out of the deal.

Attractive Idea

The extension of the deal and remarks by the United Arab Emirates minister of energy, Suhail al-Mazrouei, about the possibility of further cooperation between 14-member OPEC and 10 non-OPEC producers have strengthened the possibility of persistence of existing cooperation. The Emirati minister, who is currently holding the OPEC presidency, told the International Petroleum Week conference in London that some of the world’s biggest producer nations were looking to establish a “structure” for long-term co-operation, following a supply curb deal among 24 countries: OPEC and outside OPEC.

He said leaders of the UAE, OPEC’s biggest producer Saudi Arabia and non-OPEC member Russia support extending energy cooperation beyond 2018.

Meantime, Saudi oil minister Khalid al-Falih has called on oil producers to push ahead with their cooperation beyond 2018. He acknowledged that such cooperation may be envisaged within the framework of a new agreement instead of extending the current pact which began in January 2017, and will run until the end of 2018.

Undoubtedly, cooperation on the part of a politically influential oil producer like Russia would add to the weight and influence of OPEC in global energy markets, both politically and in terms of decision-making.

Furthermore, continued OPEC non-OPEC cooperation would send a direct message to countries like the US who plan to lift their shale oil production.

OPEC and non-OPEC oil producers may decide not to limit their agreement to output levels and introduce new elements into the agreement, like limiting shale oil production.

Apart from that, OPEC's willingness to expand cooperation with non-OPEC producers indicates a serious change in the member states' views. In the past, discrepancies between some OPEC members had blocked achievement of any comprehensive agreement within this organization. But under new circumstances, OPEC has not only reached a solid agreement, but also is determined to extend its cooperation to other countries. It shows that OPEC has entered a new phase of cooperation, in which the economic interests of member states are favored over their political differences and tendencies.

Obstacles and Challenges

In spite of all advantages of convergence between OPEC and non-OPEC oil producers, there are challenges and obstacles to such cooperation. For instance, a clear mechanism is yet to be worked out to show which rules OPEC and non-OPEC oil producers will need to follow in their future decision-making processes and discussions.

Yet it is not clear either whether all countries would give their nod to the new trend of convergence, particularly due to deep-seated differences between OPEC members. It is not known either whether all 10 non-OPEC oil producers would agree with this plan or a limited number of them would close ranks with OPEC.

It remains to be known whether such cooperation would push some non-OPEC countries to consider OPEC membership in the future. Throughout turn of time, cooperation between OPEC and non-OPEC oil producers may drive them to the conclusion that they need to dissolve OPEC and establish a broad-based organization subject to new rules and regulations. The issue of right to vote would be of high significance for both OPEC and non-OPEC nations in key decision-making processes. It has yet to be known which areas OPEC and non-OPEC cooperation would cover and which areas would be sidelined.

In conclusion, a logical and accurate mechanism needs to be worked out for future cooperation; otherwise, OPEC and non-OPEC cooperation would face tough challenges. Furthermore, any convergence between OPEC and non-OPEC countries requires full satisfaction of all member states and any unilateral action has to be avoided because that would lead to gaps within and even collapse of OPEC. 


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