Bousso: New oil quotas system to spur spending with ROI-OPEC+
The changes OPEC+ makes to its oil production quotas will likely trigger a wave upstream investment among its members, especially in low-cost Gulf producers. This will reduce concerns about long-term shortages of supply. OPEC+ (Organization of the Petroleum Exporting Countries) and other major oil producing nations including Russia and Kazakhstan approved a new method to determine the maximum production capacity of members. This will be used from 2027 to establish baselines for output. It may appear to be a very technical issue. It could be a welcome departure from the recent turmoil in which some members exceeded production quotas while OPEC's de facto leader Saudi Arabia tried to impose discipline and confuse the oil market. Saudi Energy Minister Prince Abdulaziz bin Salman stated on Monday that the new mechanism would help stabilize markets and reward those who invested in production. According to the International Energy Agency, OPEC+ will account for almost half of the global oil supply in 2025 (106 million barrels a day).
It is crucial to first understand the new Maximum Sustainable Capacity Mechanism (MSC).
A reputable U.S. auditor will perform the capacity assessment between January and Septembre for 19 of the 22 members. The review will include a look at each country's infrastructure and oilfields to determine how much oil they can produce within 90 days.
The three countries that are subject to U.S. Sanctions will each use an auditor who is not American, while Iran has chosen to base its baseline on the average production of the last three months.
OPEC+ and its members will approve the member's capacities at a meeting in November, when they will also decide on their output quotas for 2027, which will represent a percentage of each member's capacity. MSC will now be evaluated annually.
A WAVE OF INVESTMENTS IN THE GULF
The system is likely to spur a rush of investment among members who want to boost their production and revenues. The system is still favored by wealthy members with low production and development costs, such as Saudi Arabia and the United Arab Emirates.
Gulf producers have already begun to look beyond the near-term concerns about oversupply and are downplaying future oil demand, as the world moves away from fossil fuels.
UAE aims to increase production to 5 million BPD by 2027, from the current 4.85 million BPD. However, there are rumors that it may even reach 6 million. The investments indicate that this may be the case. ADNOC, Abu Dhabi's state-owned oil company, announced on November 24 that it will invest $150 billion in the next five year to expand its operations. The UAE's conventional crude oil reserves increased by 6%, to 120 billion barrels, following the new discoveries. ADNOC is also working to unlock the so-called unconventional oil reserves that it estimates hold 22 billion barrels. Saudi Arabia is the top oil exporter in the world with a 12 million barrels per day production capacity. It also has the largest spare capacity within the group, reaching 2.2 million barrels per day (bpd) in October. This was 60% of the total OPEC+ reserve capacity. Amin Nasser, the CEO of the country's national company Aramco, recently stated that the oil is extracted at a price of $2 per barrel. This is among the lowest prices in the world.
Aramco's capital expenditure will reach between $52 and $55 billion in this year. Two new fields are expected to be operational by the end of the year, adding 550,000 barrels per day to its production capacity.
Kuwait and Iraq may also accelerate their investment plans.
Kuwait aims to raise its capacity from 2.9 to 4 million bpd in 2035, based off IEA data. Iraq is attempting to attract foreign investors such as BP and Exxon Mobil to increase its production capacity from 2.9 million bpd today to 4 million bpd in 2035.
OPEC+ MEMBERS ARE STRUGGLING
The new system puts members who are concentrated in geological structures that are more expensive or offshore (such as Nigeria and Kazakhstan) at a disadvantage, as it will take more time and more money to increase capacity.
Due to international sanctions, which severely restrict the supply of drilling equipment and Western technology and hinder access to it, Russia and Venezuela may also find it difficult to increase their investments and production capacities.
The new investments are still aimed at OPEC's goal to grow its market share. This is especially important after the recent losses in production due to increased production in Brazil, Canada, and other countries.
This will ease concerns about a possible oil supply shortage towards the end and beyond of this decade due to a decrease in global spending, and slowed production in the U.S. and other shale basins.
THE SYSTEM STILL HAS WEAKNESSES. The new capacity measurement appears to be more transparent and equitable, giving members and other market participants a clearer understanding of OPEC+ policy.
It still has some weaknesses. One thing is that members may still be able, like Kazakhstan and the UAE in recent years, to export and produce more than their quota.
In addition, due to conflict and sanctions, some countries will find it difficult to increase their production and capacity, creating tensions against other countries who will be able gain market share.
Overall, OPEC+ will encourage more investments in the oil markets that could lead an increase in supplies and maintain prices at low levels.
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(source: Reuters)
