OPEC: the impact of recent geopolitical changes on the Organization

The 177th meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) was held in Vienna on 5 December 2019, under the Chairmanship of its outgoing President, HE Manuel Salvador Quevedo Fernandez, People’s Minister of Petroleum of Venezuela. The meeting came at a critical time as the Organization was facing both internal and external challenges. The meeting’s outcome had major implications at a national, regional and international level, which can be better understood by making a short review of the Organization’s history while at the same time analyzing the role it played in international relations and the trends currently developing within the Group, which can significantly affect global oil markets.

Kuwait, Saudi Arabia, Iran, Iraq and Venezuela first founded the OPEC in 1960 at a time when the international community was undergoing significant geopolitical changes, which the decolonization process had set in motion. Several newly independent states gained full sovereignty over their natural resources and came together under the OPEC umbrella while wrestling power from oil giants (the “Seven Sisters” of Anglo Iranian, Gulf Oil, SoCal, Esso, Socony, Texaco and Royal Dutch Shell dominated the market). The Organization grew to a total of 14 members, i.e. the original five founding members and Nigeria, the Republic of the Congo and the United Arab Emirates, Ecuador, Equatorial Guinea, Gabon, Libya, Algeria and Angola. For nearly 60 years the OPEC focused on promoting a common economic interest, but the global energy geography has been undergoing major changes and the powerful oil cartel is going through a critical period that started as early as 2014. Following the U.S. shale gas revolution Saudi Arabia engaged in some muscle-flexing cutting oil production with a view to limiting the impact of shale gas competitors. The original overarching goal to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry” was being challenged. The Saudi-led action failed to succeed and with it also the regional hegemony of Saudi Arabia started to show some cracks. Ever since 2016 the OPEC Member Countries and major non-OPEC oil producers had to agree on periodic production cuts to boost prices. Further to it, economic, political and religious rivalries among OPEC Members intensified over time thus eroding the Organization’s mission to act as a unifying force. Qatar is a case in point.

Qatar joined OPEC in 1961 but ever since 2017 it suffered a major fall out with the Saudi-led Gulf Cooperation Council (GCC) that led it to being ostracized by Egypt, the UAE and Saudi Arabia on the ground of supporting Islamist terrorist groups that wanted to destabilize the region. Riyadh cut trade and transport ties with Qatar accusing the country of supporting its regional rival, Iran. In 2018 amid a diplomatic feud between the Gulf nations, al-Qahtani, a senior adviser to Crown Prince Mohammed bin Salman, was quoted calling the Salwa island project: “a great historic project that will change the geography of the region” and turn the neighboring Qatari peninsula into an island. The plan still stands and the 41-mile land border between Qatar and Saudi Arabia is among the tensest places on earth at the moment.

In December 2018 Qatari Minister of State for Energy, H.E. Al-Kaabi, announced that Doha would leave the Organization in 2019. The decision, he was quoted saying, was not driven by politics but to focus all efforts on liquefied natural gas (LNG), of which the country is the world’s biggest exporter. Further to it, Minister Al-Kaabi recognized it was not practical “to put efforts and resources and time in an organization that we are a very small player in and I don’t have a say in what happens.” If followed by other small producer countries, this could have a great geopolitical and economic impact on the Organization and Saudi Arabia itself and lead to a more independent approach to energy policy planning and implementation. Qatar was never a big producer – only 2% of the Organization’s output, but it did play a major role in it. There is another element that is challenging Saudi Arabia’s leading position, i.e. the killing of Jamal Khashoggi, a staunch critic of the Saudi regime, for which Riyadh has been subject to harsh criticism.

Adding to a difficult situation, climate change challenges should also be considered especially in the light of an ever-growing global awareness and accountability as show during the Madrid COP-25 United Nations Framework Climate Change Conference.

In such an uncertainty-ridden scenario, the Organization is considering incorporating Brazil as a new member. Today OPEC Member countries account for 73% of the world’s proven reserves and 44% of the world’s total oil production – Brazil’s current output would make it the Organization third-largest producer (after Saudi Arabia and Iraq). Brazilian President, Jair Bolsonaro, expressed his interest in joining the Group during the Future Investment Summit (FII) that was held in Riyadh. He made his comments ahead of a significant auction of oil rights in Brazil. It should be noted that becoming an OPEC member would probably entail limiting oil production and consequently hindering future expansion plans. Brazil’s current output is by far higher than that of members such as Equatorial Guinea and Congo and it would make the country a valuable asset for OPEC. According to the International Energy Agency, oil output has been rising in Brazil from offshore fields; production went from 220,000 barrels per day (bdp) to 3.1 million bdp – all of this would mean that Brazil would account for more than 10% of the OPEC current output.

Bearing this in mind the OPEC conference discussed the latest market developments since it last met in Vienna on 1 July 2019. It also reviewed the oil market outlook for 2020 based on future projections for oil demand, which is expected to grow by 1.1 mb/d, while the global economic growth will remain stable at 3%. The situation calls for a careful analysis and monitoring of several key variables such as trade-related negotiations and macroeconomic developments to better assess the potential impact on the industry sentiment as well as on global inventory levels. Member Countries reaffirmed their commitment to being reliable suppliers of crude oil and products to global markets while vowing to focus on fundamentals to ensure a stable and balanced oil market. The Organization also underlined the results of the ongoing inclusive coordination and consultations with consuming countries. All OPEC Member Countries agreed to recommit to the Declaration of Cooperation (DoC) with a view to achieving and maintaining market stability. They also acknowledged the major role played by non-OPEC countries such as Russia, which often works closely with Saudi Arabia (Crown Prince Mohammed bin Salman and President Putin have agreed recently to “extend” a deal to limit oil production) and is the bigger crude producer allied to the cartel.

The Conference also discussed the way negotiations were developing at the COP-25 United Nations Framework Climate Change Conference in Madrid while reiterating that OPEC continues to be committed to achieving sustainable development and promoting environmental protection by supporting international instruments like the Paris Agreement. During the UN conference, HE Mohammad Sanusi Barkindo, OPEC Secretary General, spoke about the fundamental role played by technological innovation, enhanced investments for energy access and improved energy efficiency to face up climate change. He also added that the oil industry must be part of the solution while explaining that the energy transition must be holistic, inclusive, fair and equitable in accordance with the UNFCCC principle of common but differentiated responsibilities and respective capabilities. Madrid closed with mixed results. Many countries declared they want to move forward, but the conflict with countries such as U.S., Russia, Brazil, Australia and Saudi Arabia, where the business model is strongly connected with the fossil fuel industries, is unresolved. Climate Change is a global issue that needs to be addressed with determination and fast. The COP-25 final declaration called for fresh proposals on pledges on reducing carbon emissions to be in place by next year’s COP26.

What is underway at the international level might affect considerably both the Group and the global oil market. Qatar is not a major oil producer when compared to other OPEC members, but its total energy output is on course to produce more than 6 million barrels of oil equivalent per day by 2022. By focusing on LNG, Qatar might affirm itself as one of the world’s major energy suppliers. According to some energy experts, like J. Critchlow, Doha also plays a major role due to the strategic approach it has been showing in recent years in negotiating energy policies with regional rivals. It is evident that Qatar, said Critchlow, often acted as a “diplomatic bridge” in the Middle East-dominated group.

On the other hand, by accepting Brazil as a new member, OPEC would increase its world oil market share. Brazil is most certainly a bigger energy supplier than many that left and joined the cartel in recent years. In his claims, Mr. Bolsonaro said that the global energy market was stabilized and benefitted from the country’s cooperation with the top six producers in the world. Nevertheless, the President has to face a strong opposition where key figures, such as Economy Minister Paulo Guedes, might maintain that joining the OPEC would mean cutting production, thus reducing international investors’ interests in the country and affecting the national economy – as sustained by Senior Fellow at the Policy Center for the New South (PCNS) Francis Perrin.

It remains to be seen to what extent both the Group and the global energy market might be affected by the recent internal and external developments. Besides Qatar, also Ecuador plans to exit the Group in 2020 whereas the Republic of the Congo joined last year and Equatorial Guinea did the same in 2017. Hence, Qatar’s radical move might cause other Members to follow and at the same time, Brazil’s sudden interest in joining the cartel might cause a growing number of oil producing countries to do the same. Most certainly such developments would have significant economic as well as socio-political consequences at a national, regional and international level.