OPEC’s bumpy road ahead

The Organization of Petroleum Exporting Countries (OPEC) is expected to wrestle more with its earnings in the coming year amid growing concerns over its shrinking market share and a possible opening up of a Pandora’s Box called the organization’s quota system.
According to a recent forecast by the US Energy Information Administration, OPEC member countries’ expected income next year will top $ 955 billion against $ 1.052 billion in 2012 in nominal terms — the figure more or less similar for 2011 that amounted to $1.027 billion.
Revenues are usually products of two factors — volume and price.
By all accounts, OPEC’s output is exceeding its self-imposed ceiling of 30 million barrels per day (bpd). In fact, it went as high as 32.4 million bpd in August before being restrained again and is estimated to be currently more than 31 million bpd. Prices have been fluctuating but remained high and things are expected to become tougher in both areas.
First, there is the growing domestic production inside the US, a major consumer. This year, it managed to add a mammoth 760,000 bpd seen as the highest addition since oil started to be drilled commercially more than 150 years ago. Thanks to technological advances, in particular hydraulic fracturing — better known as fracking — huge volumes of resources trapped in rocks can be tapped.
In a market dictated by perception in many cases, the United States’ newly found additional supplies will definitely have an impact on prices.
But that will not be the only reason.
More concern is about the growing domestic consumption, especially in Gulf states, which are burning more oil and gas to generate electricity, run their water desalination plants, aside of course from sheer consumption to operate the land transport system, be it for personal use or for general transportation.
However, the sticky issue that is expected to prevail and have growing attention will be the Iraqi production.
After years of sanctions and restrictions on its production that led OPEC to exempt Iraq from its quota system, the past few years saw Iraqi oil production climbing gradually and confidently thanks to opening up of its doors to international oil companies after lifting the sanctions.
Majors such as ExxonMobil, BP and Royal Dutch Shell are all flocking in one way or another trying to gain a foothold on OPEC’s second country with remarkably proven reserves after Saudi Arabia. They are coming mainly through service contracts that have been signed over the past years, guaranteeing a certain level of profit to these companies, regardless of the barrel price at the time.
These companies are said to have injected remarkable investments during the past three to four years. And the result speaks for itself as production is believed to have climbed from around 1 million bpd to more than 3.4 million bpd currently, of which 2.9 million bpd is exported.
Moreover, it is expected to reach 3.7 million bpd next year. This is a significant figure because it stands close to the symbolic 3.8 million bpd achieved 34 years ago, back in 1979 to be exact.
Iraq’s attempt to pump more oil will call into question the issue of getting it back into the OPEC’s quota system. Already, and in a typical way, it was brought under the theoretical 30 million bpd ceiling, though that move remains an academic exercise in the absence of a specific quota.
However, that will not be an easy decision to make given the tough Iraqi position on the issue.
Iraq adopts the official line that it needs to compensate for decades of lower production. Also, it believes its production level is a sovereign to be decided only in Baghdad and not in Vienna‚ the headquarters of OPEC. Anyway and by all accounts, Iraq feels that the issue is not going to crop up until 2014.
But most analysts expect that the volume issue and the need for OPEC to consider its output capacity seriously may not wait until the group’s next meeting scheduled to take place at the end of May.
In the real world of the industry, things don’t go in a smooth and logical way and this has been the case throughout the oil industry’s history. ‘Lady Luck’ may play a role in balancing the market somehow.
There are two possibilities. The first is how far the sanctions on Iran would go, and their impact on Iran’s production and its supplies to the market. And the second relates to Iraq. Iraq still faces an uphill battle in terms of providing security and overhauling the industry’s infrastructure.
Most importantly, the relationship between the central government in Baghdad and Kurdistan, which wants to deal directly with foreign companies, also plays a role in Iraq’s oil sector.

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