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OPEC: better than expected.

The ministerial meeting held by Opec in Geneva at the end of September resulted in a heartening compromise which reined in individual members' quota ambitions. Telephone conversations between the Saudi, Iranian and Kuwaiti heads of state appear to have sealed an agreement which, for once, has a chance of sticking.

OPEC'S REGULAR half-yearly production accords are generally greeted with a dose of well-justified scepticism by the markets. No matter what output ceiling the organisation agrees upon, several dissatisfied members can almost be guaranteed to cheat and produce beyond their allocated quotas. This time round, it might just be different.

After much argument before and during Opec's ministerial meeting in Geneva which concluded at the end of September, the slack cartel agreed on a new collective production goal of 24.52m b/d which will operate from October to March. This is higher than the much-abused ceiling of 23.5m b/d, but Opec members hope that by allowing themselves to produce more they will actually reverse the steady erosion of prices.

There is a paradoxical logic to this. First, the permitted increase will take place over the winter when demand for Opec crude can be expected to increase. But second, and far more important, the agreement reached in Geneva represents an acknowledgment of realities. It is far better to set a target which is attainable than one so low that the individual producers are bound to overshoot.

A ceiling determined by quota allocations which Opec members feel are not discriminatory is one with a better chance of securing adherence, even if it means raising the output ceiling. That in itself is a stabilising factor in the markets. If Opec can stick to this goal, it will go a long way to clawing back some of its influence on market fluctuations. One reason for optimism is that the final deal was apparently hammered out at the highest level between Saudi Arabia, Kuwait and Iran.

It was consummated by telephone calls between Kind Fahd, Sheikh Jaber al Ahmed and President Ali Akbar Rafsanjani, outside the conference hall.

According to Mehdi Varzi, research director at Kleinwort Benson Securities in London, "the three heads of state are tied to the accord... the agreement is the best from a psychological point of view since the end of the Gulf war." If this tripartite accord sticks, Opec could finally reconcile the dilemma between output levels and prices as the best means of achieving adequate revenues for individual producers. The coordination between the heads of state of the three countries most strongly protecting their rights lays the foundation for cohesion. As one Gulf delegate was reported as saying at the Geneva meeting that after all "you just need self-interest to make this work, not political will." Higher oil prices, and higher revenues, are the key to preventing over-production.

Opec representatives in Geneva were forced to compromise by the prospect that another inconclusive meeting would have sent prices plumetting. "If we had started throwing punches, the price would have collapsed to $10 a barrel," said Nigeria's oil minister, Don Etiebet. Opec's president, Jean Ping of Gabon, neatly summed up the cartel's credibility problem at the opening session of the meeting when he announced baldly that "the market perceives Opec to be an organisation under siege by its own membership."

The conference had three chief objectives. First, it needed to convince the markets this time that chronic over-production could be curbed. The flouting of quotas by members such as Iran and Nigeria has added extra downward pressure on oil prices which are already weak. Second, Opec urgently needed to reintegrate Kuwait into the quota system after it pulled out in a huff last June. Third, it had to start serious consideration of how to deal with the eventual return of Iraq to the markets once agreement is reached with the United Nations to ease sanctions.

On the production issue, a potentially acceptable agreement has been reached. Kuwait has been producing at a rate of about 2.16m b/d since it went its own way in June, and wanted this level to be officially recognised in place of its former quota of 1.6m b/d. Reflecting on the experience, one Kuwaiti delegate in Geneva observed that "we enjoyed being out of the arrangement - it was quite painless." Kuwait insists that it should be given special consideration because of the loss of production during and after the Iraqi invasion of 1990. At the Geneva meeting, it was initially offered a revised quota of 1.9m b/d. This was dismissed out of hand by Ali Ahmed al Baghli, the Kuwaiti oil minister, who declared that "we want to be reintegrated but not at any price." Kuwait eventually compromised on a quota of 2m b/d.

However, there was a crucial caveat to its tactical retreat. The Kuwaitis insist that when another ceiling is set, its original demand for 2.16m b/d must be treated as the base for future quotas. Iran also gave way on its earlier demands. It has been exceeding its previous quota of 3.34m b/d by at least 300,000 b/d in recent months. Iran wanted Opec to match any increase in Kuwait's quota with at least a proportionate rise in its own allocation. It even held out for 4m b/d, but eventually settled for 3.6m b/d as a result of the flurry of telephone calls between Gulf capitals.

Perhaps most important, Saudi Arabia agreed to keep its output at 8m b/d, a level which it has frequently surpassed. The kingdom suffers no loss of face by committing itself to this limit, which is important since it is resolutely determined never again to become Opec's "swing producer", solely bearing the burden of matching supply with overall demand for Opec crude exports. If Saudi Arabia can be seen to be strictly honouring the Geneva agreement, there is all the better chance of Kuwait and Iran following suit.

Smaller producers within the organisation settled for only modest increases in their quotas. It is doubtful if most of them have the capacity anyway to boost output significantly, and exports are likely to shrink as domestic demand grows. One indication of this trend is a gloomy prognosis for Indonesia produced last month by the US embassy in Jakarta. It said that oil companies are scaling back operations in the country and have completed only half their budgeted annual exploration programmes in 1992.

Oil and condensate production fell 5% in 1992 to an average of 1.5m b/d. (Under the Geneva agreement, Indonesia's crude output allocation is 1.33m b/d.) According to the report, industry analysts expect production to be held at this level until 1995, before declining to 1m b/d before the end of the month. Net crude and condensate exports fell 17.6% in 1992 to 700,000 b/d as a result of an 8% increase in domestic consumption.

Indonesia is expected to become a net oil importer by the end of the century. Technically, it will then forfeit its right to membership of Opec, and other producers are proceeding along the same route. If the organisation has any future, it will increasingly be as a club for Gulf producers, plus Venezuela and perhaps Nigeria.

Estimates of September production by the cartel show output running at 24.7m-24.8m b/d, compared with 24.49m b/d in August and a high of 24.79m b/d the month before. The August dip has been attributed to an only temporary cut in Iranian production.

This means that the organisation has some way to go in curtailing exports if it is to meet the new overall ceiling of 24.52m b/d which came into force at the beginning of October.
Bending the rules

Opec oil production allocation,
Oct 1993 - Mar 1994 (millionb/d)

Saudi Arabia 8.000
Iran 3.600
Venezuela 2.359
UAE 2.161
Nigeria 1.865
Kuwait 2.000
Libya 1.390
Indonesia 1.330
Algeria 0.750
Iraq 0.400
Qatar 0.378
Gabon 0.287
Total 24.520

Source: Opec Secretariat, Vienna, September 1993
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Title Annotation:Business & Finance; Organization of Petroleum Exporting Countries
Publication:The Middle East
Date:Nov 1, 1993
Previous Article:Ready for a new role.
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