Qatar Exit A Harbinger For OPEC And OPEC+?

What a difference one OPEC+ meeting makes.

The group — comprising OPEC’s 14 members and its 10 non-OPEC partners  —  rubber-stamped a backroom deal between Saudi Arabia and Russia to increase production by roughly one million bbls/d when it met in Vienna, Austria in June. They did so to avoid a possible crude price spike with the U.S. reimposing economic sanctions on Iranian oil exports. OPEC also agreed to immediately admit the Republic of the Congo to the organization, making it the fifteenth member.

Another backroom OPEC+ deal appeared to be in the offing for the December meeting. At the G20 Summit the week before Russian President Vladimir Putin said that he and Saudi Crown Prince Mohammed bin Salman (MBS) “have agreed to extend our agreement" to control output following the worst two-month oil price collapse since last decade’s global financial crisis  —  partly due to the U.S. extending far more generous exemptions for Iranian oil than expected.

But, on the eve of this meeting, longtime member Qatar announced it was exiting OPEC, effective January 1 of next year, cutting the organization’s membership back down to 14. Then it took marathon talks over two days for OPEC+ to agree to a 1.2 million bbl/d reduction in crude production for the first half of next year in an attempt to support crude prices.

These developments suggest the relative rise of OPEC+ over the more institutionalized OPEC could contribute to more fractious decision-making by the expanded group in coming years as smaller producers increasingly stand up to Saudi Arabia and Russia, making it more difficult to manipulate crude production and prices as output of U.S light tight oil (LTO) continues to rocket higher.

There has been talk by the energy ministers of Russia and Saudi Arabia, Alexander Novak and Khalid al-Falih, of creating a joint organization for continuing long-term co-operation between OPEC and non-OPEC countries, given the overall success of OPEC+ since first agreeing to cut crude production by roughly 1.8 million bbls/d in December 2016. “We are now thinking about a format for co-operation which could be for the longer-term, which would include the possibility of market monitoring, information exchange and if needed the implementation of some joint actions,” Novak said in March.

Novak appeared to up the ante in a speech in Vienna to the 7th OPEC Seminar on June 20, when he said “we need to build upon our successful co-operation model and institutionalize its success through a broader and more permanent strategically focused framework.” Al-Falih echoed his comments at the seminar.

It was reported that Saudi Arabia and Russia were considering inviting all 24 OPEC+ countries  —  at the time  —  to join a permanent organization with its own constitution and secretariat. But the new body as envisioned by the two oil kingpins would not be based on consensus decision-making and the principle of one member, one vote, like OPEC. Instead, the new organization would be based on some form of majority, or supra-majority rule, with the votes of larger producers such as Saudi Arabia and Russia given more weight.

On July 23, Novak suggested the new OPEC+ organization could start work at the beginning of 2019, despite having yet decided its name and location for a headquarters. The Russians and Saudis have since gone silent on their new organization, possibly for reasons that relate to Qatar’s announced departure from OPEC.

Qatari Energy Minister Saad al-Kaabi, speaking at a news conference in Doha on December 3, initially provided a bland political rationale for his country’s decision to leave OPEC after almost six decades of membership  —  a desire to focus on natural gas development. He explicitly said politics played no role in its decision despite Saudi Arabia, its OPEC sidekick UAE, and a number of other Muslim-majority countries imposing a political and economic blockade on the tiny Persian Gulf country since June 2017.

"A lot of people will politicize it," al-Kaabi said. "I assure you this purely was a decision on what's right for Qatar long term. It's a strategy decision."

Qatar is a minnow in terms of crude output, producing a mere 600,000 bbls/d or around two per cent of OPEC’s total, but it is the largest LNG exporter in the world with annual LNG output of 77 million tonnes presently, with plans to increase it to 110 million tonnes by 2024. But Qatar’s membership in OPEC in no way impedes the country’s development of natural gas, as production quotas in times of excess world oil supply are on member country’s crude output, not condensates or natural gas liquids.

Instead, it appears the major reason Qatar is leaving OPEC is because Saudi Arabia  —  in conjunction with Russia now that the two kingpins are attempting to balance against U.S. LTO  —  has come to dominate the organization’s decision making, and in the process decreased the benefits of membership for smaller crude producers.

"We are not saying we are going to get out of the oil business but it is controlled by an organization managed by a country,”al-Kaabi said in response to a question later in the news conference, apparently referring to Saudi Arabia. He went on to say it was not practical for Qatar "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."

Despite being from a relatively large oil producer, Hossein Kazempour Ardebili, Iran's longtime OPEC governor, appeared to support this line of thought when he said: “With [Saudi Arabia's and Russia's] behavior, for small producers there is no merit to stay in OPEC.”

Algeria’s former energy minister and OPEC president, Chakib Khelil, said Doha’s exit would have a “psychological impact” on OPEC and could prove "an example to be followed by other members in the wake of unilateral decisions of Saudi Arabia in the recent past."

It is important to note that Qatar still attended the OPEC meeting earlier this month, and prior to the meeting al-Kaabi said his country would abide by any crude production cuts agreed at the meeting. Hence, at least for the moment, Qatar has simply shifted its commitment from OPEC to the currently less institutionalized non-OPEC component of OPEC+.

Albeit speculative, anti-domination thinking as expressed by Qatar, Ardebelli and Khelil could be a major factor impeding the greater institutionalization of OPEC+, especially as envisioned by Russia and Saudi Arabia, at the present time. In combination with the potential of Qatar and other small OPEC producers shifting from OPEC to the non-OPEC component of OPEC+, these factors could potentially lead to greater instability and uncertainty in the world oil market by making it more difficult for Saudi Arabia and Russia to impose production decisions, especially in the longer term.

In the short term, the pact by OPEC+ to cut crude production by 1.2 million bbls/d, in conjunction with Alberta’s decision to curtail 325,000 bbls/d, at least through the first quarter of next year, should provide a good bounce for crude prices at least through the first half of next year.

See Neither Stratosphere Nor Depths For Global Crude Prices for Geopolitics Central’s short-term outlook for spot WTI prices, as well as U.S. President Donald Trump’s current role in oil price formation.