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 It was 1998, trust had long broken down within the Organization of
the Petroleum Exporting Countries and it took outside mediation as a
last resort to stop the squabbling to clinch deals at secret
meetings in Riyadh, Madrid and Miami.
Now, with oil prices touching their lowest level since 2003, OPEC
officials and deal brokers are looking back nearly two decades and
asking whether a behind-the-scenes deal to curb oil output between
OPEC and non-OPEC Russia could be struck.
Some see OPEC rifts as insurmountable and Russia as a wild card that
cannot be trusted, but others say economic necessity to boost oil
revenue could overcome acrimony and distrust and lead to a global
deal to cut supply and mop up the glut.
There are plenty of reasons, however, to dispel optimism.
Unlike in 1998, the challenge goes beyond rebuilding bridges between
just two OPEC producers.
It pitches the interests of Saudi Arabia alongside fast-rising OPEC
producers Iran and Iraq as well as non-OPEC Russia, the world's
largest oil nation. All four are involved in conflict in the Middle
East but also desperately need money to keep their oil-dependent
economies afloat and meet social costs.
"The 1997/98 deal brokered between Saudi, Venezuela and Mexico took
over a year to negotiate and it was touch and go as to whether it
would get done or not," said veteran OPEC-watcher Yasser Elguindi of
Medley Global Advisors.
But low prices are making producers desperate. Prices sank to below
$30 per barrel this year from as high as $115 a barrel just 18
months ago due to one of the worst oil gluts in history.
PERFECT STORM
This perfect storm was due to a boom in the extraction of oil from
shale rock in the United States and a decision by the Saudi ruling
elite to ramp up crude supply to regain market share from
higher-cost producers.
Saudi Arabia has pushed its output to record highs over the past
year above 10 million barrels per day, almost equal to Russia. Iraq
also raised production sharply above four million bpd over the past
months as foreign investment in oil fields paid dividends. Iraq
expects to raise output further in 2016.
Meanwhile, Iran says the removal of European sanctions in January
should allow it to claw back oil production and a deal with OPEC is
unacceptable until output reaches four million bpd.
"You cannot have a deal with non-OPEC, until you achieve a credible
OPEC framework which at the moment is not possible because of Iraq
and Iran. Until there can be some framework between Iran, Saudi and
Iraq, all this non-OPEC talk is just noise," said Elguindi.
Saudi Arabia's Oil Minister Ali al-Naimi, who has been in office
since 1995, has said the kingdom would join cuts if key OPEC and
non-OPEC players cooperated.
But insiders say, Saudi Arabia and it Gulf allies Kuwait, Qatar and
the United Arab Emirates are all deeply skeptical that a workable
consensus can be reached. "Iran and Iraq remain the main challenges
inside OPEC and Russia won’t agree to a cut and is not to be
trusted," a senior Gulf OPEC delegate told Reuters.
CHANGE IN DYNAMIC
In the past month, however, all parties involved have sent signals
suggesting the world oil dynamic may be changing.
Iran's main oil export official, Mohsen Qamsari, said in January he
did not want a price war and might increase shipments gradually to
avoid hurting world prices.
And Iraqi Oil Minister Adel Abdul Mahdi also said his country would
support an extraordinary OPEC meeting if a joint cut with non-OPEC
could be agreed beforehand.
"It is useless to go to a meeting without deciding up front. We said
'yes' if others are willing to go but we have to decide before.
Otherwise this will backfire on us," he said.
The statements by Iran and Iraq coincided with a change of rhetoric
from Russia where the head of its pipeline monopoly and close ally
of President Vladimir Putin, Nikolai Tokarev, said joint action was
possible to halt slumping prices.
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For years, Russian officials said oil production cuts were
technically difficult after an ill-fated deal with OPEC in 2001,
when Moscow agreed to cooperate but raised exports instead. It was
this that created the mistrust that exists today.
But back then Putin was only at the start of his first presidential
term and had little control of the oil industry, split between
various oligarchs following the chaotic privatization after the
collapse of the Soviet Union.
Fast forward 15 years, and the oil industry is mostly owned by the
Kremlin and Putin has almost absolute power.
"You have to take this seriously now. Key will be if Russia can
deliver," said OPEC watcher and founder of U.S.-based Pira Group
Gary Ross, who was involved in the 2001 Russia-OPEC talks.
Putin and his ally, head of Kremlin oil major Rosneft, Igor Sechin,
have yet to speak about the recent talk of a joint move with OPEC.
But Sechin in the past said he would not support cooperation by
Russia, where one popular conspiracy theory maintains that the low
oil prices of the 1980s were orchestrated by Saudi Arabia and the
United States to undermine the Soviet Union. Sechin has also said
OPEC had "lost its teeth".
A year ago, Putin said it was possible that the current price crash
was orchestrated in the same way as the crash of the 1980s, which
effectively led to a collapse of the Soviet Union - a huge tragedy,
according to Putin.
"There is a lot of talk today about why it is happening. Maybe it is
a Saudi-U.S. plot to punish Iran, or put pressure on the Russian
economy or Venezuela," Putin said back then.
But with the Russian rouble sinking to a record low and a
parliamentary election this year and a presidential election in
2018, pressure is rising on the Kremlin to protect state revenues
and limit public discontent.
"GRAND BARGAIN"
Russia's latest rhetoric has left OPEC watchers and Kremlinologists
guessing if it is just a verbal intervention to lift oil prices or
whether it is part of a real deal for Putin, which may also involve
a compromise with Saudi Arabia over Syria or indeed any other "Grand
Bargain".
Putin has dispatched heavyweight veteran foreign minister Sergei
Lavrov to the Middle East this week. Lavrov, who has almost never
spoken about oil, will travel to Oman and the UAE to discuss the oil
market.
Meanwhile, Venezuelan Oil Minister Eulogio Del Pino will visit
Russia, Qatar, Iran and Saudi Arabia this week to drum up support
for a joint cut in oil production.
And just like in 1998, behind-the-scene talks are gathering pace.
When Putin met the Emir of Qatar last month in Moscow, oil was on
the agenda, according to a senior source in the Gulf.
And just as in 1998 and 1999, when it took two years and many secret
meetings in Miami, Madrid, the Hague, Amsterdam and Riyadh to clinch
two decisive supply cuts, the process in 2016 could be equally
painful.
The head of Kremlin-backed Russian Direct Investment Fund, Kirill
Dmitriyev, said a deal between Russia and OPEC was possible but at
the right time, "maybe within a year", when the markets rebalance
and it became easier to reach agreements.
Goldman Sachs, which is bearish on oil, said it believes cooperation
between OPEC and Russia would be "highly unlikely" and also
self-defeating as higher prices would bring shelved output,
including in the United States, back onto the market.
But skeptics could do well to read a paper by Robert Mabro, founder
of the Oxford Institute for Energy Studies who helped to broker the
1998 deal. Mabro wrote at the time: "Changes in policy are always
possible, even likely, when significant revenue losses are at
stake".
(Additional reporting by Rania El Gamal, Writing by Dmitry
Zhdannikov; Editing by Peter Millership)
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