How oil-producing countries are violating the OPEC + agreement

The participants of the ministerial meeting of the OPEC + member states on February 2 decided to increase production by another 400,000 barrels per day (b / c) in March, Interfax reported. This increase in production within the parameters of the OPEC + transaction should occur on a monthly basis. But in January 2022, the parties to the agreement were able to increase it by only 210,000 bps.

In January, a significant increase in production was observed in Saudi Arabia (+100,000 bpd), Nigeria (+50,000 bpd), Kuwait and the UAE (40,000 bpd each), according to Reuters. However, OPEC + members were still unable to fully choose the increased quotas, including due to a drop in production in Iraq by 30,000 bpd and Libya by 40,000 bpd. Russia does not choose its quota either. In December 2020, Russian Deputy Prime Minister Alexander Novak, who is in charge of the fuel and energy sector, said that the country could increase production by 125,000 bpm per month as part of the deal, but in fact has been increasing it more slowly since August: by about 100,000 bpd.

As a result, the volume of oil production in OPEC + member countries in January 2022 was 2.8 million bpd below the level of the end of 2019 (taken as a baseline for a gradual increase in production).

The OPEC + deal has been in effect since 2017. In April 2020, after the reform of the agreement, the producing countries agreed to reduce oil production by 9.7 million bpd from the base level of the end of 2019 with a gradual increase in production from May 1, 2020 to 1 May 2022. From August 2021, OPEC + raises total quotas by 400,000 bps per month. Despite the difficulties that arose in the fall of 2021 (in particular, the emergence of a new omicron strain of coronavirus and the US announcement of its readiness to launch up to 50 million barrels of oil from strategic reserves), the parties continued to follow the plan.

Some participants in the OPEC + deal could not cope with the implementation of the plan to increase production since the end of summer 2021, said senior analyst at Alfa-Bank Nikita Blokhin. According to him, this lag was most noticeable in December 2021. According to Interfax, which refers to the information of the OPEC + technical committee, in December 2021 the parties to the deal increased production by only 270,000 bpd, in January – at 210,000 bps.

Blokhin notes that in January, Russia, like many other participants in the OPEC + deal, continued to lag behind the schedule, supplying the market with 5-10% less than the allowed quota. Vygon Consulting senior consultant Marina Mosoyan objects: “In January, Russia managed to increase its average daily oil production and meet its OPEC + quota. However, in November and December 2021, despite plans to increase, oil production remained at the same level.

Today, according to Blokhin, only Saudi Arabia, Iraq and the UAE, which still have free oil production capacity, can increase production quickly. Other countries, including Russia, have almost exhausted them, he said.

Bank of America (BofA) analysts wrote in their review that Russia will not be able to increase oil production quickly. They noted that production in Russia will grow almost entirely at the expense of two companies – Rosneft and Gazprom Neft (Vedomosti reported on February 2). In August-December 2021, Russia, according to BofA, increased oil production by 455,000 against the plan of 500,000 bpd. According to bank analysts, Russia has almost fully used the reserve capacity of existing fields, and most of the reduction in production in 2020 fell on mature fields, as companies stopped the least profitable projects.

The main problem for Russia was that with a sharp decline in production in 2020, it was necessary not only to postpone plans for new wells or even entire projects, but also to preserve existing ones, agrees the head of “Decarbonization and Climate Policy” of the Skolkovo Center Ekaterina Grushevenko. According to her, now this situation has led to the fact that producers do not have time to invest in drilling and begin to lag behind in production, which is exacerbated by the winter period, which is traditionally characterized by a slight decline in production in Russia. “There is a high probability that Russia will be able to return production to the required level only in the second half of 2022,” she concluded.

Blokhin agrees that with the current investments of oil workers in production, even by August 2022, it will not be possible to reach the target. According to his calculations, Russia will be able to reach the base level of more than 11 million bpd by the end of 2022 while maintaining significant investments. In the medium term, Russia will be able to increase production through new projects such as Rosneft’s Vostok Oil .

Blokhin also added that against the background of outpacing growth in oil demand, the actions of OPEC + “no longer determine the pricing policy in the oil market.” According to the ICE exchange, on February 2, April Brent futures cost $ 89.8 per barrel. At the end of December 2021, Brent traded below $ 80 per barrel, and in mid-December – at around $ 70.

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