Regional rivalry between Saudi Arabia and Iran could scuttle OPEC production deal

Bad blood between Saudi Arabia and Iran could threaten to halt yet another OPEC production deal. Reports from Reuters indicate that Saudi Arabia has threatened to increase production even further in an attempt to damage Iran’s oil profits if the Islamic Republic does not agree to cap its production near current levels. This would be the second time that a disagreement between the two regional rivals sunk a wider OPEC production deal.

Iran, OPEC


Tension between the two countries runs deep, but the current standoff between the Iran and Saudi Arabia dates back to the 1979 Iranian Revolution, which removed a Western ally from power in the country, and replaced him with a government Riyadh feels threatens the monarchy. The two softened their positions recently when Saudi Arabia agreed to support a production deal to raise prices.

Working through the details of that deal has sparked renewed problems between the OPEC members, however. At a meeting of OPEC experts last week, sources who were in attendance said Saudi Arabia threatened to use oil prices as a weapon against Iran.

“The Saudis have threatened to raise their production to 11 million barrels per day and even 12 million BOPD, bringing oil prices down, and to withdraw from the meeting,” one OPEC source who attended the meeting told Reuters.

The threat was issued after Iran said it was unwilling to freeze its output, the same position it held the last time OPEC tried to negotiate a production freeze, which ultimately led to the demise of that deal. Iran has argued that it should be exempt from a production freeze until it regains its lost share of the group’s production following the end of international sanctions.

OPEC’s most recent monthly report pegs Iran’s production around 3.67 MMBOPD, but the Islamic Republic reported output at 3.85 MMBOPD in September. Iran has said it will only cap production once it reaches 12.7% of OPEC’s total ceiling – or 4.2 MMBOPD.

The Saudi threat to raise output came as a surprise even to Riyadh’s Gulf OPEC allies, sources who attended the meeting of experts on October 28 said.

One source said the Saudi OPEC delegation has asked to call off the next day’s meeting with non-OPEC producers, including Russia, on October 29 since Iran was objecting to a deal. But they were convinced by other members to attend it in order not to embarrass the group.

“We felt as if they (the Saudis) wanted the meeting to fail,” said a third, non-Iranian OPEC source.

OPEC Secretary General Mohammed Barkindo denied that the Saudis threatened to raise output.

Data released by Platts Friday showed OPEC raised production 300 MBOPD in October. The data was based on a survey of OPEC and oil industry officials, Platts said in a press release. The Platts data came out ahead of OPEC’s official monthly report, which will be released next Friday, November 11.

Oil is becoming a new front in the conflict between Iran and Saudi Arabia

Rhetoric between the two countries is becoming increasingly aggressive, with Managing Director of the National Iranian Oil Company (NIOC) Ali Kardor saying: “Working in oil industry is like operating at war fronts and we have to preserve our trenches by raising our production capacity as much as we can. The next OPEC meeting is near and we will never cease to recapture our quota in the organization.”

Using the analogy of a war is not entirely unfit for relations between the two countries, which have been fighting proxy wars in Syria and Yemen as well.

Oil was meant to be an area the two countries could cooperate, but so far there has been little progress.

“[Iran and Saudi Arabia] were hoping to build cooperation based on oil,” Iran Professor of International Business and International Affairs at The George Washington University Dr. Hossein Askari told Oil & Gas 360® in an interview earlier this year, “but they haven’t even been able to make it to first base.”

CRS Sunni Muslims in ME

North Sea production set to increase 10% month-over-month further complicating matters

Adding to OPEC’s internal dilemmas, shipments from the North Sea, where the Brent international crude oil benchmark originate, are set to increase 10% to 2.2 MMBOPD in December, according to data compiled by Bloomberg. The increased production from a country outside of OPEC, and not among the group of non-OPEC producers like Russia which have agreed to take part in a production deal, means the Saudi-led group will have more barrels to keep in mind as it tries to negotiate production limits.

“If OPEC is really interested in reducing stocks and bringing the market into balance, they’ll have to make deeper cuts than promised before,” said Senior Market Consultant at KBC Energy Economics Ehsan Ul-Haq.

Shipments of Brent crude are expected to slow in December as maintenance at the Cormorant Alpha platform north of Scotland begin this month, but other grades are set to increase. At least 25 shipments from the U.K.’s Forties field are now scheduled for December, the most since February 2011, while loadings from Norway’s Grane field are set to rise to 10, the most since Bloomberg began tracking the grade in 2010.

Source: Statoil Trestakk field development

Source: Statoil Trestakk field development

North Sea production could potentially increase even further moving forward, too, with Statoil (ticker: STO) submitting a plan to develop the Trestakk field this week. The field holds 76 MMBOE of recoverable oil, according to the company. Lower-than-expected costs and a low-risk operating environment are providing a “window of opportunity” for more investment in the region, analysts at BMI Research, a unit of Fitch Group Inc., said Thursday in a note to clients. Statoil is estimating costs of 5.5 billion NOK ($670 million) on developing the field.

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