Energy Capital & Power

OPEC Faces Pressure

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OPEC Faces Pressure” is part one of a multi-part series that examines the shifting role of the Organization of Petroleum Exporting Countries in the global oil market throughout its pre-COVID-19 history.

OPEC’s rise to global oil markets domination following the oil shocks of the 1970s was short-lived. The crash of 1986 following a global oil glut marked the end of oil prices’ steady increase: from $35 in 1980, they went down to below $10. OPEC’s response to decrease its oil production to boost prices only translated in its loosing of additional market share. Its share of global supply fell even lower as newly discovered oilfields went into production in Norway, the UK, the Gulf of Mexico and the Soviet Union. In addition, smaller producers came to the market throughout the 1980s and 1990s, including Brazil, Egypt, India, Malaysia and Oman. As a result, the 1980s saw OPEC’s international strategy re-adapting to new market conditions as the Organization started reaching out to non-OPEC members for cooperation on market stability. 

More recently, the surge of non-OPEC supply has been led by tight oil from the US. In fact, and against all odds, non-OPEC supply prospects keep being revised up sharply as US tight oil in particular outperforms expectations. Such prospects remain strong in the medium-term given tremendous advancements made in operational efficiencies and technology adoption by American tight oil producers, despite financial prudence. OPEC’s latest World Oil Outlook 2019 clearly states that “US tight oil supply is seen expanding sharply in the medium-term, rising by 6.7 md/b (…) by 2040, US tight oil production is seen at 14.5 mb/d” (OPEC Secretariat, 2019). Additional producers such as Canada, Brazil, Norway and Kazakhstan also pose a challenge in the medium-term to OPEC’s global influence. The expectations of a return to growth in some of these key mature producers in addition to new fields coming on stream in countries like Guyana, Ghana and elsewhere, mean that other sources of non-OPEC supply will also likely have a meaningful medium-term impact on OPEC’s ability to meaningfully impact global supply. As a result, OPEC’s market share has been on a steady decline since its very early days. 

The constant increase in non-OPEC oil and liquids supply has put pressure on the Organization’s market share of global crude oil production and global liquids supply. In the 1970s, the Organization is believed to have controlled about 70 percent of world oil supply. But from very early on, that market share started eroding. While OPEC’s market share for the year 2019 stood at an average of 31 percent, it decreased to only 29.5 percent for the month of October 2019, the first time to go below the 30 percent threshold. In comparison, that market share stood at over 38 percent about a decade ago. Unrest in Venezuela and Libya, along with instability and sanctions in Iran, coupled with repeated production cuts under the Declaration of Cooperation, have only further eroded OPEC’s market share while doing little to restore global oil prices.  

OPEC’s own forecast predicts that its market share will keep declining. In fact, most OPEC members are faced with maturing oilfields and decreasing production, such as Equatorial Guinea, Gabon or Angola who are all struggling to maintain current production levels. Other key producers such as Venezuela, Libya or Iran are in the middle of deep political and social instability, or faced with sanctions that severely limit their ability to increase production and exports. As a result, OPEC’s production of crude oil and other liquids is expected to decline over the next five years, falling from about 35 million bopd in 2019 to 32.8 million bopd in 2024. The departure of Ecuador in January 2020 removed another half a million barrels of oil per day off OPEC’s share. 

Figure: OPEC’s Market Share of Global Oil Supply

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Source: compiled from OPEC’s Monthly Oil Monitoring Reports since 2001

OPEC Attempts to Increase Market Share 

New membership has done very little to increase OPEC’s global market share and concrete ability to manage the market and impact crude oil prices. For over three decades since Gabon’s adhesion in 1975, OPEC did not welcome any new members. The 21st century saw, however, three new African countries joining OPEC: Angola in 2007, Equatorial Guinea in 2017 and the Republic of Congo in 2018. However, these new additions did very little to help OPEC increase its market share of global output and regain the influence it was losing. 

Angola was producing 1.66 million bopd in 2007 when it joined OPEC, which represented 5.3 percent of OPEC’s daily production of 30.955 million bopd at the time and 1.9 percent of global supply. Angola was only the ninth biggest producer at OPEC in 2007 and this output, while relatively significant for a sub-Saharan African country, was too small to make a big difference. Angola is now faced with decreasing production and struggles to maintain its current output levels. 

Even though the joining of OPEC’s latest two members, Equatorial Guinea and the Republic of Congo, showed OPEC’s continued openness to new members, their own production was far too small to make a difference. When it joined OPEC in 2017, Equatorial Guinea produced an average of 135,000 bopd, or 0.4 percent of OPEC’s daily production. Similarly, the Republic of Congo was producing an average of 318,000 bopd in 2018 when it joined OPEC, which represented 0.99 percent of OPEC’s daily production that year. 

While the joining of new members used to be a way for OPEC to grow as an organization, the newest members are too small to make a notable difference. In fact, in order for OPEC to truly make an impact, it would have to regain a market share of over 50 percent of global production and supply. To reach this threshold, OPEC would have to welcome new members whose production amounts to over 21 million bopd, the equivalent to the US and Russia’s production combined. Faced with the dilemma of needing to increase its market share, but not able to attract sizeable members, OPEC then turned to international cooperation. 

New Strategies for Success: International Cooperation 

While relatively efficient and a true demonstration of the power of international energy cooperation, the Declaration of Cooperation has also shown the limit of OPEC to act as a single organization. OPEC’s international cooperation and its reach out to non-OPEC members for the implementation of coordinated initiatives is not new. In the 1980s for instance, a real OPEC/non-OPEC dialogue emerged around the best ways to stabilize the market after prices started crashing. However, it took the oil prices plunge of 2014 to formalize this dialogue into the Declaration of Cooperation of 2016, which OPEC described as “an idea whose time has come”. A combination of speculation and oil glut caused the oil prices to fall from mid-2014 onwards, forcing OPEC to seek the restoration of market stability. While the OPEC Reference Basket stood at $107.89 per barrel in June 2014, it had shrunk to only $42.89 per barrel in September 2016 (OPEC Research Division, October 2016). On its own however, OPEC’s efforts to bring back prices to sustainable levels were pointless. In OPEC’s own words, “there was no mechanism to phase the onslaught of the supply cycle that had started in 2014”.

Figure: OPEC’s member countries’ daily oil production in thousands barrels per day (October 2019)

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Source: OPEC’s Monthly Oil Monitoring Report, November 2019

The Declaration of Cooperation followed the OPEC joint-conference held in November 2016, during which members decided on a production adjustment of 1.2 million barrels a day starting January 2017. The Declaration was then agreed upon during the Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting of December 10, 2016. In effect, it formalized the wish of 10 non-OPEC producers to joint OPEC efforts to stabilize the market by agreeing to reduce their own production by a total of 558,000 bopd over a six-month period. These producers initially included Azerbaijan, Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, South Sudan and Equatorial Guinea. The Declaration was then amended to provide a further nine-month extension on May 25, 2017 (starting July 1, 2017) and to eventually take effect throughout 2018. It was deemed historic not only because it was the first time ever that OPEC managed to coordinate a concerted effort to stabilize the market with non-OPEC oil producing countries, but also because the output cuts agreed on were as high as 1.8 million bopd. On top of the 10 initial non-OPEC producers supporting the Declaration, additional countries later joined the movement, including Chad, Congo, Egypt, Turkmenistan, Uganda and Uzbekistan. But how useful was the Declaration in actually restoring market stability and bringing oil prices back up? 

The Oxford Institute for Energy Studies’ analysis of the Declaration of Cooperation’s impact provides useful insights in this regard. While Andreas Economou and Bassam Fattouh recognize the impact of the DOC on restoring market stability and accelerating oil prices recovery, they make it clear that “in the absence of non-OPEC participation in the Agreement, OPEC oil producers alone would not have managed to set a price floor at $70 per barrel in 2018”. Put simply, OPEC on its own does not have much leverage on the market. OPEC needs non-OPEC countries to regulate the market through the Declaration of Cooperation, dubbed as a “functioning mechanism to regulate global prices” by current Secretary General Mohammad Sanusi Barkindo. The Declaration of Cooperation personifies a new age and strategy for OPEC, opening up the organization to outside influences and assistance to accomplish a shared goal — oil market stability. 

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Caty Hirst

Caty Hirst

Programming Director.