Agreement on oil production freeze well worth the wait

While last month’s meeting of oil producers in Doha ended in disarray, it is quite possible that an agreement on a proposed production freeze will be reached by July.

Let me explain.

First, there are many reasons why the Doha talks failed.

​For starters, Iran had stated, very clearly and more than once, its intention of increasing production to pre-sanctions levels before considering joining any production management scheme. In reaction to this position several producers made Iran’s participation a condition for their participation, which effectively gave the Doha meeting a false start before its opening.

​Mohammed Al Sada, the Qatari minister of energy and industry, the incumbent president of the Opec conference and host of the Doha meeting, made two very important and pertinent statements: (1) “We need more time to construct the outlines of a deal to freeze output”; and (2) “Improved market fundamentals make immediate agreement unnecessary”.

​We cannot but agree with him that more time, and hard work, are needed to prepare a comprehensive and detailed scheme – and not only an outline of an understanding to freeze production.

​The draft agreement should clearly state whether freezing means not increasing production beyond that of an agreed date, which could mean allowing new production to compensate for any production decline because of natural depletion.

​The agreement should have a clear time, or phase schedule, that will help participants with their investment programming, especially for long lead time projects. It should also include a system of periodic reporting for ascertaining adherence.

​It will also be useful if the agreement was to indicate a procedure or rates for increasing production on completion of the freeze phase, that preserve the equilibrium established between supply and demand.

While many factors are important, it is necessary to consider how and when to recognise that the production freeze had achieved its objectives. Once the supply is in balance with demand, demand growth will cause prices to rise. How high do we want prices to go before we stop the freeze?

​Setting a trigger price might be the hardest and most time consuming task. Logically, it should be below the level that will allow the return to the market of supplies that caused the glut and price collapse. The price must also be rewarding for investors to add capacities that meet future demand and avoid another cycle of high prices followed by a collapse.

​We are not oversimplifying the task of preparing a full detailed scheme. Because of the price issue, which cannot be left out, it is doubtful that a full document for signature could be ready for the Opec meeting in early June.

​It is, therefore, most likely that the price issue may be debated in the June meeting and a document is prepared for a July signature meeting after Ramadan.

​It is also possible that by June 7, Iran and others would have sold most of their stored old production and more expensive oil facilities are shut to reduce the pressure on prices.

​If that trend continues, we might not need the production freeze scheme. Setting a price ceiling that will keep facilities that caused the price collapse out of business might become the issue for future discussions.

​If and when a price barrier is set, it will have to be adjusted periodically for inflation and other factors, so as to maintain the purchasing power of the value of the oil barrel, which might also mean accommodating some of the mothballed costly production facilities.

​We are not to forget that whatever deal is eventually made, it will be between competitors with different production costs, political agendas and financial needs.

​It will be an achievement worth waiting for.

The writer was an adviser to Qatar’s minister of energy and industry. He has also been the deputy secretary general of Opec and the chief executive of Iraq’s State Oil Marketing Organisation.

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