Why OPEC+ often clashes over oil production capacity
OPEC+ is an alliance of the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers like Russia. The group collaborates to manage oil production and stabilize global oil prices. Deciding on each member's oil production capacity, which is crucial for setting output targets, often leads to internal conflicts.
Oil production capacity refers to the maximum amount of oil a country can produce. OPEC+ uses these capacity figures to set output targets and determine production cuts, which are distributed proportionally. Higher capacity allows for higher output targets even after the percentage cuts are applied, giving countries a financial incentive to claim higher capacity figures.
Historical Context of Tensions
In the past, OPEC+ members self-reported their capacity figures, leading to disputes. To mitigate these disagreements, OPEC+ has engaged three independent consultancies— IHS, Wood Mackenzie, and Rystad — to assess each member’s capacity. These assessments are due by the end of June but won't be available for the upcoming OPEC+ online meeting on June 2. Accurate capacity assessments are crucial for setting future production targets after current cuts expire at the end of 2024.
Motivations and Challenges for Members
Many OPEC+ members rely heavily on oil revenues, creating a strong incentive to push for the highest possible production quotas. For example, Saudi Arabia, the de facto leader of OPEC and the world’s third-largest producer, argues that countries investing in capacity expansion should be rewarded. The UAE, having significantly increased its capacity, seeks to raise its production quota to recoup its investments.
Conversely, countries like Nigeria face difficulties meeting existing targets due to underinvestment and maintenance issues. These nations resist having their notional capacity reduced by OPEC+ because it would lower their production quotas. Angola's departure from OPEC in December 2023, following disagreements over its assigned capacity and the consequent deeper cuts, highlights the sensitivity of these negotiations.
Declared vs. Real Capacity
Declared capacity often differs from actual production. For instance, Saudi Arabia's declared capacity is 12 million barrels per day (bpd), close to the 11.5 million bpd used as a reference by OPEC+. Currently, Saudi Arabia produces about 9 million bpd, or 75% of its capacity. The kingdom recently halted plans to increase capacity to 13 million bpd, reallocating funds to other projects.
The UAE, with a reference production of around 3.5 million bpd, claims to have nearly reached a capacity of 5 million bpd. However, it produces 2.9 million bpd under current cuts, only 60% of its claimed capacity. Countries like Iraq and Kazakhstan also seek higher production capacities.
Trust Issues and Historical Distrust
OPEC has long struggled with trust issues regarding members’ self-reported data on production and capacity. For example, in June 2023, OPEC+ adjusted production targets for Nigeria and Angola due to their failure to meet previous targets, leading to Angola’s exit from the group. During the same meeting, the UAE’s output targets were increased.
Russia, another key member, faces reduced production capacity due to the war in Ukraine and resulting Western sanctions, affecting its oil industry.
Future of Capacity Assessments
When the independent consultancies submit their reports, OPEC+ will average the three assessments to determine each member's capacity. Capacity discussions are further complicated by differing oil price preferences among members. Some members prefer higher prices and lower output, while others are willing to accept lower prices for higher production. For instance, the International Monetary Fund estimates that Saudi Arabia needs oil prices at $96.20 per barrel to balance its budget, whereas the UAE requires $56.70 per barrel for its 2024 budget.
In conclusion, OPEC+ frequently clashes over oil production capacity due to the financial implications of output targets, historical distrust among members, and varying national interests and economic needs.
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