Sweet & Sour: Opec: the end of the perfect ten as Iraq returns

It was a case of death by numbers for Opec at the last meeting held in Vienna in March. Then, the 10 ministers attending the meeting sprung a surprise on the oil market by announcing a cut in actual production while at the same time raising their overall ceiling.

There was a lot of head scratching as the perennial crop of oil analysts who attend Opec gatherings tried to make sense of the decision. Oil traders voted the meeting a failure and oil prices fell a few cents.

Put simply, the Saudi-led producer group was trying to massage numbers to legitimise some of the rampant cheating on quotas by the 10 producers bound by Opec output allocations even before Iraqi exports were cut by war.

Eleventh member Iraq remained outside the equation while it was under United Nations sanctions which barred the free sale of oil outside the UN's oil-for-food programme.

The economic sanctions that crippled Iraq for more than 12 years have been removed and Iraq's U.S.-appointed oil managers could, if they so desired, attend Opec meetings and agree to rejoin the group's quota system. But why would they?

The other 10 members, arguing the need to make up for an expected interruption in Iraqi oil supply before the U.S.-led war, opened their taps wide and ignored their Opec quotas.
A slow return to normal production in Venezuela after an oil strike and concurrent export disruptions from Nigeria because of tribal violence there helped to prevent a price crash. Supply and demand were fairly balanced as the northern hemisphere was emerging from the high demand winter season.

But the situation has changed in recent weeks. The war against Iraq has ended and Opec's second biggest oil power is poised to resume exports imminently after awarding 10 million barrels of crude oil by international tender.

Despite the ambiguity of the Opec decision, market fundamentals played their part in keeping oil prices within the groupl's preferred price band of $22-$28 per barrell.

Opec's ministers, who have repeatedly said they would make way for Iraq when it eventually restored production to its pre-Gulf War level of three-million barrels per day, will be relieved that they do not have to tackle the quota issue just now. For that is a bag of tricks that if unlocked could damage the cohesion that has allowed Opec to manage the market and keep oil prices within the preferred range.

Algeria and Nigeria want higher quotas to account for their higher production capacity, achieved at a cost of billions of dollars in investment, while Iran has said it will no longer agree to an equal quota with Iraq, whose capacity expansion plans have been on hold during more than a decade under sanctions.

So while the ministers will take account of Iraq, which aims to raise its production to 1.5 million barrels per day by the end of this month and resume exports from storage before then, the divisive issue of how to cope with its return will be shelved for now.

There has been much speculation that Iraq will quit the group under pressure from its new U.S. masters now ensconced in Baghdad, where Opec was born in 1960.

Both sides deny this and the U.S. oil executives advising the Iraqi oil team say there is no intention to flood the market with Iraqi oil in order to fund the reconstruction effort.

Iraq may actually benefit from the quasi-discipline of an Opec-managed output policy, which even its detractors admit has been successful in defending oil prices. Iraq will need to obtain the best price it can for a barrel of oil and, political considerations aside, Opec does not seem such a bad bet right now.

Iraq's U.S.-appointed oil managers were absent from the latest Opec meeting that was held in Doha. But while its seat was empty, Iraq was not far from the minds of the group's policy makers but Iraq is stirring and they'd better have their calculators ready.


The writer is the Middle East editor of energy information and pricing service, Platts, a division of McGraw-Hill Companies.