Freeze – a wrong innovation in OPEC

Business Materials 3 September 2016 12:03 (UTC +04:00)

Baku, Azerbaijan, Sept. 2

By Dalga Khatinoglu, Mehdi Sepahvand – Trend:

While OPEC members and some non-member oil producers are preparing for an upcoming non-official OPEC meeting in Algeria to decide a practical move on oil output freeze and prepare the ground for improving prices, Iran has announced its intent to recover its pre-sanctions output.

In 2008, Iran used to produce up to 3.9 million barrels per day (mbpd) of crude, which plunged to 2.8 mbpd under sanctions and now stands at 3.7 mbpd.

Iran plans for the current year to add 90 thousand barrels to its output from West Karun fields and to increase output at these fields from 450 thousand barrels to 700 thousand in 2018. Iran also plans in the meantime to increase its gas condensates output from 450 thousand barrels to 1 million per day. There are other fields as well, such as the Changuleh and Salman that Iran is developing.

At the same time, OPEC Secretary General Mohammed Barkindo will travel to Tehran Sept. 5 ahead of the Algeria summit – to be held Sept. 8 – to talk the member state into a freeze.

Dr. Fereydoun Barkeshli, president of Vienna Energy Research Group in Austria and the National Iranian Oil Company’s former general manager for OPEC and international affairs, told Trend Sept. 2 that the level of a freeze does not apply to capacity-building in OPEC members.

“Investment aimed at boosting production capacity by Iran or other OPEC members does not interfere with the freeze or the management of production,” Barkeshli said. “Countries do not necessarily use their entire capacity. The OPEC quota established in the early 1980s was meant to serve this very point. For what was said, the National Iranian Oil Company’s measures to create capacities do not go against Iran’s accompaniment of the freeze plan or any policy to limit the OPEC output.”

He believes, nonetheless, that regard for OPEC’s policy of introducing a restrictive plan is generally positive, preventing investment for the creation of capacity that would not serve any demand from the market.

“The reason for mentioning this is to point to the fact that Iran’s investment in various fields, including those it shares with the neighboring Iraq, does not interfere with its policy of supporting the freeze plan,” he said.

The OPEC basket plunged from over $105 in the first half of 2014 to $45 now. The reason has been the continued presence of surplus oil in the market and an increase of supply vis-à-vis demand.

Barkeshli says, “As for the structure of Iran’s oil fields, it is necessary to note that most of Iran’s major oil fields are in their second half of lifetime and are experiencing output decline. Most of Iran’s big, old fields lose 250,000 to 300,000 bpd of their production capacity each year. These fields take a lot of gas and steam injection. Also, it is necessary to use advanced technologies to prevent the deterioration of the wells and refurbish their structures.”

It is necessary for the Iranian oil industry to rapidly invest in, explore, and tap new, green fields.

“It should be admitted that the era for big, high-yield fields is over not only in Iran, but in most places around the world, necessitating investment in smaller fields. Of course Iran should also put its shoulder to the wheel to develop its gas industry, since now Iran’s success in the oil industry is closely associated with its development and use of the gas sector,” Barkeshli added.

Barkeshli says that the freeze plan is a recent innovation in the OPEC.

“OPEC has lacked such a thing as freeze so far. OPEC’s management of the world oil market is executed via the quota system. OPEC last defined and passed member quotas in the summer of 2013. After international oil sanctions were implemented, some countries started a race to gain some of Iran’s share. Of course the greater part of Iran’s quota went to Saudi Arabia which enjoyed a considerable surplus output capacity.”

He believes this is why Iran’s official and reasonable position now is for all OPEC members to restore their official and legal 2013 quotas and the collective output ceiling of 30.45 mbpd.

“In case this output ceiling and a return to the legal and official quotas is agreed upon, the members would be able to negotiate for and demand a rise in quota with regard to the current status of the world market and prices.”

OPEC’s output in July stood at 33.44 mbpd.

Barkeshli also says the freeze is a wrong innovation for OPEC.

“OPEC is an organization with collective responsibility to manage the market and adjust supply, demand, and prices. The innovation of freeze hurdles OPEC out of its organizational structure with no control over price or expendable supply,” he said. “In the meantime, Iran is ready to accept a phase of passage, whereby it hopes other OPEC members, too, would admit the need for Iran to regain its lost market.”

Russian President Vladimir Putin also told Bloomberg on Sept. 2 that Iran can be exempted from the freeze plan.