Understanding Energy: OPEC’s role in the current crisis and what it means for Guyana

THE past few months have been some of the most chaotic that oil markets have seen in years, with the COVID-19 pandemic driving down demand and a Saudi-Russian price war driving up supply. As Guyana becomes an oil exporter in its own right, it’s worth understanding how major industry powers such as OPEC, Russia and the U.S. shale producers can impact Guyana’s future.

First, it’s useful to know how the current international landscape took shape. The Organisation of Petroleum Exporting Countries (OPEC) includes 14 of the world’s largest oil- producing nations. It was established in 1960 by five nations — Iran, Saudi Arabia, Iraq, Venezuela, and Kuwait — as a way for major producing nations to coordinate and manipulate price and supply. Nations such as Saudi Arabia, where oil production and government are deeply intertwined, dominate the group’s decision-making and have the power to move global prices with a word or two to the media.

Although it is often described as one of the world’s most powerful international cartels, OPEC no longer has the dominance in the oil markets that it once did. One of the most significant developments in global markets over the past decade has been the growth of non-OPEC producers.

Many large producers – like the United States, Norway, Russia and Canada – are not members of OPEC. Many newer oil producers like Ghana and Brazil have also declined membership. There has also been a minor exodus from OPEC, with Ecuador, Indonesia and Qatar leaving over the past few years.

With much of the world’s new oil production coming from non-OPEC countries, the cartel has seen its power over the oil market diminish as its attempts to limit supply and boost prices have less of a a lasting impact. The organisation is also plagued by the refusal of several of its members to adhere to their production quotas.

Guyana itself is adding to the non-OPEC supply and is set to surpass the production levels of several OPEC members, such as Libya, Gabon and possibly even Venezuela by the late 2020s, according to estimates from international analysts. However, Guyana’s production will still be small compared to major players such as the US, Russia and Saudi Arabia, who each produces more than 10 million barrels per day. For comparison, the Liza Phase 1 development will produce around 120,000 barrels per day when it hits its peak.

“OPEC+” refers to a newer collaboration between OPEC and non-OPEC producers such as Russia, Malaysia and Bahrain. While these countries are not members of OPEC, they sometimes agree to participate in collective production quotas to drive up prices.

A dispute between Russia and Saudi Arabia ignited the recent price war when Russia snubbed a Saudi-led OPEC plan to cut global production. A supply free-for-all ensued, leading to the massive price fall, before top producers agreed to massive global output cuts on April 10. Many non-OPEC+ members such as the US, Brazil and Norway also independently cut their own production. The cuts could help stop the sharp price decline, but with COVID-19 crippling demand, the impacts have not been as positive as many had hoped.

The price war was inextricably linked to the explosive growth of US shale oil over the past few years, a major source of non-OPEC production. Shale oil and other “unconventional” oil produced onshore from rock (shale) through the use of hydraulic fracturing has flooded the market. As a result, the US pushed past Saudi Arabia and Russia to become the world’s largest oil producer in 2018, contributing to the current glut in supply.

Many analysts have speculated that part of the reasoning behind Russia’s recent aggressive push to reduce prices might be to drive US shale producers out of business. America’s shale oil is generally more costly to produce.

Plus, some shale producers are small, privately held companies focused on a particular state or shale basin and do not have the deep pockets and diverse assets of the major oil companies, or the state backing of Russian companies.

Robert McNally, an energy markets expert and former White House official, addressed what the shifting geopolitics of energy markets mean for Guyana directly, at the University Guyana in January.

According to McNally, Guyana would suffer as part of OPEC and OPEC+ since collective production cuts are such a routine tool used by the groups to help prices globally. Countries such as Saudi Arabia have decades of stockpiled revenues to draw on to make sure production cuts or price drops don’t impact their economies too badly. But as an emerging producer, steep production cuts could be difficult and expensive for Guyana.

McNally did say that observer status at OPEC could be a good opportunity for Guyana, giving government officials a front- row seat for negotiations and helping them understand the markets and the geopolitics without taking part in mandatory quotas or paying membership fees.

While the outcome of the production- cut deal should hopefully stabilise prices, it is also a reminder that global markets are largely out of Guyana’s control. As Guyana works to establish itself as an important and dependable supplier to the market, it is critical to maintain transparent and fair rules of the game that ensure continued investment and development, even during difficult times for the industry.

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